Exchanges with Partnerships, LLC’s and other Entities, Part 2

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Exchanges with Partnerships, LLC’s and other Entities, Part 2

When partnerships, LLCs and other entities get together to do 1031 exchanges, entity exchange rules apply. These rules also tend to change over time. One example is the “drop and swap” – a process where one party in a partnership or LLC buys out another. The greedy state of California no longer permits, yet on the East Coast drop and swaps are a daily occurrence.

For those in a partnership or multiple party LLC the entity can distribute proportionately the assets to individual newly created entities and after a two-year period each upon a sale can go his separate way and avoid large capital gains taxes.

Changes in permitted entities into which one could exchange evolved from 1994 to 2002 when the IRS modified and provided clear guidance for the then common TIC structure. When the 2008 financial debacle revealed the TIC structural problems, the DST (2003 birth) with few exceptions replaced the TIC.

Neither individuals, Partnerships or LLCs or other entities can exchange properties into funds or real estate investment trusts.

Question 1:
If I sell a commercial property can I exchange into a REIT ?

Regardless of the kind of real property, you can never exchange into a REIT.

Question 2:
I am a partner in a Apt. complex that we are preparing to sell and when it is sold I will realize about a 250K capital gain. I have been in the partnership for over 25 years. Can I take the gain and invest it in a REIT and use the 1031 tax free exchange?

1. To do an exchange, you must exchange the original investment amount, the capital gain amount
and any debt.
2. You as an individual partner cannot exchange from an LLC or Partnership structure.
3. The REIT is not a vehicle into which anyone can do a 1031 exchange

About Marilee: Role of Marilee Hill, Registered Representative (RR)

With unique prior experience Marilee Hill with more than 20 years as a broker in the field of commercial real estate obtained FINRA licenses to specialize in securitized 1031 exchanges. Her first 1031 exchange 1991 was a $12M apartment acquisition before the existence of the TIC.

Marilee presents 1031 exchanges a in a straightforward way and helps clients to understand risk tolerance and financial requirements.

Laying the groundwork for 1031 exchanges means understanding people and how they work and explaining how every step of the process unfolds.

Ask Marilee about help to form a real estate strategy that will keep your plan legal and in the good favor of regulators.

1031 Exchange