If a party owns investment real estate in a partnership and the other parties buy out one member, can that member 1031 exchange those proceeds to another "like kind" property?
Generally, an interest in an entity such as a corporation, partnership or LLC cannot be exchanged.
Section 1031 allows for the tax deferred exchange of real property…but stocks, bonds, and interests in businesses (or more specifically business entities) which cannot be exchange under Section 1031.
Consider Tenancy-in-Common
Sometimes it is possible to change or reconfigure the ownership of the property to convert a partner/member into an owner of a tenant-in-common interest (or portion) in the underlying real property. For example a partner/member may be redeemed out of the entity in exchange for a deeded tenant-in-common interest in the underlying real property…so that they may be able to later sell/exchange out of their tenant-in-common interest in the underlying real property through a 1031 exchange.
Typically, one should hold their interest in the Relinquished Property for a substantial period of time to satisfy the “holding period” for qualification under Section 1031.
The code Section states that:
No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.
Oftentimes once a reconfiguration of ownership has been accomplished to convert a former partner/member into a tenant-in-common owner there is a new tenant-in-common agreement created among the co-owners of the real estate that states the mutual co-ownership of the property is not a joint venture or partnership arrangement.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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