Section 1031 Exchanges for Partnerships and Corporations: Divisions and Conversions to TIC and DST Structures to Protect Tax Deferral

Description

Like-kind exchanges of business property have always presented unique challenges for partnerships. Section 1031 explicitly excluded partnership interests from those assets eligible for a tax-deferred exchange; however, partnerships were able to engage in exchanges of qualifying investment assets. By limiting Section 1031 deferral benefits to exchanges of real property, 2017 tax reform has complicated matters for partnership entities seeking to structure 1031 exchanges, particularly where one or more of the members wants to exit the entity or is otherwise unwilling to participate in a like-kind exchange.

Partnerships have several options for achieving nonrecognition treatment of an exchange by former partners of undivided interests in real property previously owned in partnership form. Depending on the sequence of the transactions, partnerships can make a like-kind exchange using either a "drop-and-swap" or a "swap-and-drop" exchange, converting the partnership interest in the underlying real property into a tenancy in common or Delaware statutory trust. Partners may also separate their interests in multiple real estate entities on a tax-deferred basis by first consolidating commonly owned entities into a master limited liability company and subsequently liquidating that company via a "mixing bowl" structure.

Many closely held “legacy” corporations own real property, and as the interests in the corporation changes hands through generational transfers, the members often have differing views about management of property held by the corporation. Tax advisers working with such entities and their members must be aware of planning alternatives for such entities. The panel will discuss alternatives for such arrangements to do tax-free divisions with various cash-out alternatives.

Each of these exchange structures carries significant tax risk if the transaction is not carried out correctly. Tax advisers to partnerships and other closely held businesses must grasp the complex nonrecognition rules of Section 1031 and how they apply to partnership entities.

Listen as our experienced panel provides a practical guide to the challenges of using various entity-restructuring techniques to make Section 1031 tax deferral available to members of diverse ownership arrangements.