When doing a 1031 exchange, sometimes it's beneficial to own the property in a tenancy-in-common, rather than a partnership or LLC. Here is a convenient checklist for converting from a partnership or LLC (that is taxed as a partnership) to tenants-in-common:
- Redemption agreement or split-up agreement;
- Deed to tenants-in-common;
- Written tenant-in-common agreement (rather than a partnership operating agreement for governance between the co-owners);
- Management agreement to a separate LLC management entity to collect rents, pay bills and distribute incomes to the Tenants-in-Common;
- Stub tax return for the remainder of 2017 (stop filing partnership returns as to this property);
- Negotiate consent to the transfer/deed with lender (may be a nominal fee depending on the lender);
- Each tenants-in-common owner should join in and sign the sale contract with the eventual buyer as co-sellers;
- Each tenants-in-common owner (the co-sellers) should be issued separate 1099-S for their proportionate percentage of the proceeds by the title company at the time of closing in 2018;
You want to do this change of ownership early, not just prior to the sale…if you can help it, because the property must have been held by the sellers (for business/investment purposes) to qualify for 1031. A short holding period may be problematic. The longer that the co-owners hold the property for business/investment purposes before selling, the better. Coordinate with your CPA or tax preparer so everything is done consistently;
- 1031 Hotline: If you have questions about tenants-in-common vs. partnerships, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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