Although not directly stated in the Code or Regulations, it is clear that in order to qualify under Section 1031, the taxpayer who sells must be the same taxpayer who buys. Complex rules apply to like-kind exchanges undertaken by partnerships or immediately preceded or followed by contributions to partnerships or distributions from partnerships. The law, however, is clear that a partnership interest or an interest in a limited liability company does not constitute good relinquished property or good Replacement property in a like-kind exchange.
Similar to corporations if an LLC or a partnership is the seller of the relinquished property, such LLC or partnership must be the purchaser of the replacement property. TAM 9227002. If a partnership converts to a limited liability company, typically the LLC is considered the same partnership for tax purposes after the conversion as was prior to the conversion. The conversion typically does not cause the tax year of the partnership to close, and the employer identification number does not change by virtue of the conversion. Partners in a partnership or a limited liability company, however, should be cautious of any significant change in the ownership of the partnership or LLC during the exchange period. Section 708(b)(1)(B) provides that a tax termination of a partnership occurs if 50% or more of the interest in the partnership capital and profits is sold or exchanged within a 12-month period. Such a change in the ownership of a Partnership or LLC will be deemed to be a new partnership. Therefore, the new partnership will likely not be deemed to be the same taxpayer as the partnership that initially sold the relinquished property, and the non-recognition provisions of Section 1031 will not apply. The rule regarding deemed tax terminations applies only to the sale or exchange of partnership interests and does not apply to purchases of partnership interests from the partnership nor does it apply to dispositions of a partnership interests by gift, bequest or liquidation.
Grantor trusts under Section 671 through 678 of the Code are not considered separate entities for federal tax purposes. Taxpayers typically use their own taxpayer identification numbers for grantor trusts and do not file a separate tax return for the trust. Since the grantor and not the trust is the taxpayer, an individual can use his or her grantor trust to acquire replacement property even though the individual sold the relinquished property in his or her individual capacity. See Rev. Rul. 92-105, 1992-2C. B. 2040; PRL 9116009.