We are a Limited Partnership that sold a property to a unrelated party and did a 1031 exchange purchasing the replacement property from the sister-in-law of one of the partners.  The sister-in-law received cash for the property and we now own the property.  All provision of the 1031 exchange concerning dates have been satisfied.  Our question is:  Is the sister-in-law considered a related party under the attribution rules? 

It depends.  She would not be a related party unless the partner owns MORE than 50% (i.e. 50.1% or more) of the limited partnership interest. 

You would have to determine if there was any "basis swapping" involved if the partner does own more than 50%.

 He owns about 12.5%.  He has three children in the partnership, each of which own about 15% each.  Then, his sister owns 12.5% and me and my sister own about 15% each.  As a note, the sister-in-law cashed out about $350K in the deal, but if she is not related, then this should not matter.  YOUR HELP IS GREATLY APPRECIATED!!  Please respond.  Thanks.

You are in great shape!  The 12.5% interest is less than 50%, so there is no related party issues to worry about.  Please keep us in mind as your qualified intermediary for your next 1031 exchange transaction.  We look forward to working with you in the future.

 We are looking good!  (i hope)  Let me make sure i've given you ALL of the information.  I will layout the LTD partnership structure from my Uncle's perspective as it was his wife's sister which whom we purchased the property from.

Uncle            12.5% General Partner

Daughter #1   15%

Daughter #2   15%

Son               15%  

Sister            12.5% General Partner

Nephew (me)  15%

Niece             15%

The reason i wanted to clarify this is because of what we've read about ownership and family relationships.  Does my uncle "OWN" his children's stock in the partnership which puts him over the 50% level?  Would his wife who is NOT a partner have any ownership which would carry the "Related Party" rules to her sister?  

The Sister-in-law did not  take  part in  a 1031.   She simply sold the property and and receive some cash in the deal.  She is now our tenant and pays us monthly rent.  We have a lease.

The person that we sold the building to did not take part in a 1031.  He simply took ownership.

The weirdest thing in the transaction is this.  When we purchased the building from the sister-in-law (A) there was another party involved.  There was an original owner (lets call him B) and us (we will be C).  B owned the building and had an agreement to sell to A for $800K.  The market value was closer to $1,100,000.  A did not have the money to make the purchase so we had a 3 party closing where we brought the $1,100,000 to the table from the 1031 building sale.  B received $800K in the settlement (her deal with A).  A received $300K and we received the building. (as a note - the dollars are +/- and not exact)

All of this was coordinated and arranged with our real estate attorney who feels we are ok.  The problem is our tax accountant is claiming we violated some rule.  I'm thinking his claim has something to do with the 50% ownership rule and that the sister-in-law is related to my uncle through the rules of "related parties".

This could cost us about $150,000 in taxes that we were hoping to avoid.  I know you have already answered, but i wanted to make sure you had as much info as possible to evaluate our particular situation.

It is very possible we may do another 1031 with this property in the distant future and we would gladly use your services as it appears you know what you are talking about.

Thanks again!!!!

Drew Manning
 

Hi Drew,

I am so sorry.  I just noticed that this post went unanswered.  I reviewed the detailed post regarding all of the parties.  You do not have a related party issue.  I can see where it might be aggregated into a 25% interest, but not any where near the more than 50% requirement to constitute a related party issue. 

Please keep us in mind as your 1031 exchange qualified intermediary for your next 1031 exchange.