1031 Exchanges of Partnership & LLC Member Interest

Many people own property in LLCs or partnerships and they want to do a 1031 exchange on their specific interest in the partnership. That causes a lot of problems because partnership and LLC ownership interests are excluded from 1031 treatment.

Tenancy in Common

If you have a time machine you might want to go back in time and change the ownership of your relinquished property to a tenancy in common so you could own your piece of the pie as a co-tenant rather than a partner.

Some people want to convert their partnerships to a tenancy in common right before they close on the sale of their relinquished property. That can sometimes work, especially if the person that’s jumping out of the partnership isn’t the one that wants to do the 1031 exchange.

An LLC Example

For example, let’s say that 55% of the partners want to stay inside of the partnership and they’re going to conduct an exchange under the name of the old surviving partnership. But 45% of the partners want to jump out of the LLC and become tenants in common and they just want to take their cash and pay their taxes. That’s a safer way to construct a drop-and-swap because the old taxpayer (the partnership that’s owned the property all these years) is the entity that does the exchange.

The more problematic situation occurs when everyone wants to break up and the partnership is going to terminate because more than 50% of the ownership leaves in a 12 month period.

Planning and advanced thinking is the name of the game. If you’ve got clients that are in partnerships or LLCs that have property they may be selling in the near future, it’s best to get ahead of this issue. Break up the partnership way in advance. Even before you have a tacit agreement to sell, reconfigure the partnership or LLC to a tenancy in common.

• Start Your Exchange: If you have questions about 1031 exchanges of partnership or LLC membership interests, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Explaining the Swap & Drop 1031 Exchange

We have talked before about the drop and swap exchange and how it can be beneficial in certain like-kind exchange situations. In this article, we are going to explain the inverse of the drop and swap exchange – the swap and drop 1031 exchange.

What is a Swap & Drop 1031 Exchange?

A swap and drop 1031 exchange is essentially the inverse of a drop and swap exchange.

To quickly review – a drop and swap exchange is a 1031 exchange tactic often used by taxpayers in a partnership. If there are 3 partners who own a piece of real property, but only 2 of them wants to do a 1031 exchange on the property, the partners can convert their interests in the property to tenancy-in-common interests. This allows the odd partner out to cash out their share, while the remaining 2 partners conduct a 1031 exchange.

In a swap and drop exchange, the partners would conduct the 1031 exchange of their property. Then at some point down the line, the partner who wants out would exit the partnership and cash out. Both the drop and swap and swap and drop techniques need to be carefully constructed in order to be successful.

Qualified Intermediary Services

At CPEC1031, our intermediaries have the skills and experience to help you through the details of your 1031 exchange. We have over two decades of experience helping taxpayers throughout the state and around the country with their 1031 exchanges of real estate. If you are looking for a way to defer taxes on the sale of real estate, we can help you! Contact our qualified intermediaries today to discuss the details of your exchange. Our office is located in downtown Minneapolis but we work with clients across the United States.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

How to Determine Which Specific DSTs are Offered by Financial Institutions

Each financial institution (RBC Wealth Management, US Bank, Morgan Stanley, etc.) decides what investment products can be put onto their platform. They do their own due diligence on their properties and the sponsors. They also restrict their financial representatives to only sell those products that are approved.

A financial representative for a particular institution can introduce to their clients these approved products. You can communicate with the alternatives desk at one of these institutions to determine what DSTs are available and the details of those DSTs.

If you need help finding the right DST to use for your 1031 exchange, reach out to a qualified intermediary who can point you in the right direction.

MN Qualified Intermediaries You Can Count On

At CPEC1031, LLC you can count on our qualified intermediaries to handle all aspects of your like-kind exchange from start to finish. Our qualified intermediaries have more than two decades of experience facilitating exchanges of all types. Let us take care of all the specifics of your next 1031 exchange and make sure that you are able to defer 100% of your capital gains tax burden. You can find us at our downtown Minneapolis offices, but note that we provide 1031 exchange services throughout the United States.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

What Did Rental Car Companies Do After Personal Property Exchanges were Restricted in 2018

Prior to 2018, personal property exchanges were allowed under section 1031. Rental car companies were among the largest users of this tax-deferral tool. They would sell an aging fleet of vehicles and reinvest the net proceeds into newer vehicles while deferring their capital gains tax.

After personal property exchanges were restricted in 2018, initially rental car companies didn’t care much because they got immediate expensing. They were able to take an immediate tax deduction and write off their brand new vehicles. But that expensing is ratcheted to decrease over time. Eventually, these companies are not going to be able to take those tax-advantages write-offs and they’re going to wish they could continue to exchange their vehicle fleets under the old 1031 rules.

These companies who used to rely heavily on personal property exchanges were enticed by the immediate gratification of expensing, without thinking through the fleeting nature of that perk. When these companies are no longer able to expense a large portion of these vehicles, they may regret not pushing harder to keep personal property exchanges.

Find a 1031 Exchange Company Near You

Find a 1031 exchange company near you today to get started with your next like-kind exchange of investment real estate. Anyone who owns qualifying US real property can avail themselves of the many benefits of the 1031 exchange. If you’re curious about whether or not your property is a good fit for 1031 exchange treatment, contact a 1031 exchange company near you to learn more about the process, its benefits, and whether you can do an exchange with your property.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Protocols to Safeguard the Client’s Money

When we facilitate 1031 exchanges, we usually operate under the qualified intermediary safe harbor. Under that modality, we act as a third party administrator to facilitate 1031 exchanges. However, this is not the only safe harbor that’s allowed when conducting 1031 exchanges. Another safe harbor is known as the qualified escrow agent safe harbor.

Under that safe harbor, we have the 1031 exchange sales proceeds held by a bank acting as a fiduciary under a qualified escrow deposit agreement, wherein the bank plays the role of the qualified escrow agent. Their job is to safeguard the money and not release it without the client’s written authorization. That way the client can sleep easy at night knowing they have a reputable bank holding their money pursuant to a qualified escrow deposit agreement and they’re not allowed to release the funds without the client’s explicit authorization.

In certain circumstances, we will even introduce the client to the banker at the bank that will be holding their funds and have them create a password that’s only known to the bank and the client. Then, in order to release the funds, the bank will not only need to check for your signature authorization, but also do a callback directly to the client to confirm the password and verify the wiring instructions.

These are just a few of many protocols that we put in place to safeguard our client’s 1031 exchange funds.

1031 Exchanges for All Taxpayers

Many people don’t realize that 1031 exchanges can be utilized by any United States taxpayer who owns qualifying real estate (i.e. real estate held for investment or business purposes). A lot of the folks we work with are small, mom and pop shops who want to utilize the awesome power of section 1031 to defer their capital gains taxes and build their wealth over time. We can help you too. Contact the qualified intermediaries at CPEC1031, LLC to learn more about our services and how we can help you take your first steps on the road to tax-deferral.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved