NOTE: we are not tax or legal advisors; this is just information for consideration when forming an entity to own investment property. I have come across many instances of this over the passed few weeks and with more investors looking to buy the cheap properties that are out there, this situation needs to be address at the beginning.



When dealing with 1031s, partnerships are a pain. Here is a common scenario, you have 3 people in a partnership and they want to sell a property. 2 want out and 1 wants to continue the investment, but does not have the funds to buy out the other 2 partners. The 3rd partner is out of luck and has to pay the tax on the sale of the property. We used to do what is called a Drop-n-Swap where we deed out to the partners as Tenants-in-Common, the 2 other partners get their cash/pay their taxes, and the 3rd partner does the 1031 exchange. The IRS has taken this to federal court 3 times and lost; HOWEVER, they are very persistent and are adding 2 questions to the partnership form 1065 – although a final draft has not come out yet, the questions will elude to whether or not the partnership ever did an exchange or if any of the partners have been deeded out as Tenants-in-Common. 



The easiest solution next to buying out the other partners – dissolve the partnership, create multiple single member LLCs as Tenants-in-Common (not a TIC interest through a TIC company, rather a setup of ownership) and then wait 1-year, we recommend at least 2. That way, there are 3 separate tax paying entities that can do a 1031 exchange for their share of the property and are not fully tied to a partnership. There are some other options, but this one is one of the easiest. Let me know if you are a situation like this and we can work with your attorney on the structuring and language.