When a partnership is involved in a 1031 exchange, one way to do the deal is a 708 spin-off. That’s where the original LLC divides like a cel in a petri dish and multiple new iterations of that LLC are produced.
Each of those new LLCs (or subsidiaries) are considered for tax purposes to be spun-off continuations of the original entity. You can then choose to weight the ownership of the new LLCs so they’re mostly on one particular taxpayer. For example, one of the spun-off subsidiaries might be 98% owned by Jim and 2% by the other owners (and vice versa) so each LLC has a 98% owner and a 2% owner. The idea is to divide the LLC under the partnership division rules so that each LLC can do a sale of its proportionate share of the underlying real estate. It’s sort of like a hybrid version of the crude drop and swap, but we don’t have to worry about the holding period as much because each spun-off subsidiary is a continuation of the predecessor. So a 708 spin-off is a great way to have a more airtight, defensible break up when you’re trying to divide up a property that’s been held in a partnership entity.
Contact the Team at CPEC1031, LLC
Thinking about a 1031 exchange of real estate? Contact the team at CPEC1031, LLC today to learn more about how to begin the process of deferring your capital gains taxes when selling investment real estate. With more than two decades of experience, our qualified intermediaries are well suited to help you through the details of your 1031 exchange, regardless of its complexity. Whether you are doing a forward exchange, a reverse exchange, or a construction exchange, we can help you defer money in capital gains taxes. Reach out to our team of intermediaries today for help with your next exchange.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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