Sales of individual partnership interests are specifically excluded from tax deferred treatment under Section 1031. For example, if Aaron were to sell his 25% interest in Partnership ABC to Dan.
However, similar to corporations, if a multi member LLC or a partnership is the seller of the relinquished property, such LLC or partnership may exchange the relinquished property for replacement property. TAM 9227002.
One of the attractive aspects of Partnerships for tax purposes is that Partnership may receive or distribute business property on a generally tax free basis. This flexibility permits partnerships to distribute real estate assets to their partners on a tax favorable basis.
One aspect of Section 1031 exchanges is that in order to enjoy the benefits of tax deferral, the owner of the exchanged property must be the historic owner of the property holding it for qualified business use. That is, the sale of the property and its reinvestment into new property represents a continuation of the existing business enterprise. By way of example, the purchase of a derelict property, followed by extensive improvements and its resale within a short period of time, would be considered not qualified by the IRS, because the investor was not holding the property for investment on an indefinite basis.
Secondly, characterization of whether a business relationship is deemed to be a partnership versus a tenancy in common is crucial in determining which party or parties are entitled to treat a sale and reinvestment as an exchange.
There are numerous complex issues that are involved in exchanges of property where partnership might be involved. Rely on Strategic Property Exchanges LLC and our Board Certified Tax attorneys to guide you and your professional advisors through the maze of IRS statutes and rulings for a safe and secure 1031 Exchange.