Technical Termination in a 1031 Exchange

Technical Termination 1031 Exchange

If a property is owned in an LLC or partnership and some of the partners want to do a 1031 exchange, while others don't want to do a 1031 exchange a lot of times people want to have the parties that don't want to do a 1031 jettisoned out of the LLC or partnership so that they become tenant-in-common owners. Then we can have those folks who want to do a 1031 remain inside of the LLC or partnership and have them conduct the exchange under the banner or umbrella of that LLC or partnership. This sounds great in theory, but there are a few important factors to take into account.

Technical Termination

A  big concern that people often have is if a large exodus of partners leave the LLC or partnership, that may trigger a technical termination of the entity and hit the reset button on the holding period for the 1031 exchange.

Drafting the Redemption Documents

When you draft the redemption documents to take these members out of the entity it’s important to articulate that their departure is part of a liquidating distribution that terminates their interest in the LLC or partnership. The technical termination rules exempt transfers that are liquidating distributions. So even if we have more than 50% of the partners leave the entity, because their departure is characterized as a liquidating distribution we don't have to concern ourselves with hitting the reset button and having a technical termination of the entity.

  • 1031 Hotline: If you have questions about technical terminations in a 1031 exchange, feel free to call me at 612-643-1031.

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