If you effectuate 1031 exchange and then later contribute the replacement property into a land holding Partnership in return for an equity position would you lose your tax deferral?  I know partership interests do not qualify as "like kind" however, it seems the TIC strategy that has gained poplularity seems very much like an exchange for a % interest in a non-qualifying entity.  I also understand why you are not supposed to exchange property for partnership interests, but when the partnership interest that you exhanged for is a land holding partnership what is the difference?  You carry your basis with you and will pay the apporpiate capital gain taxes if and when the land holding partnership sells its assets @ some future date? 

Leslie:

If you effectuate 1031 exchange and then later contribute the replacement property into a land holding Partnership in return for an equity position would you lose your tax deferral? 

It depends on how long you wait after you have completed your 1031 exchange transaction.  If the contribution into the partnership is completed immediately after you complete your 1031 exchange your 1031 exchange would most likely be disqualified under an audit.  If you wait at least one year (the longer the better), you should be fine.  

I know partership interests do not qualify as "like kind" however, it seems the TIC strategy that has gained poplularity seems very much like an exchange for a % interest in a non-qualifying entity. 

The TIC investment strategy is very different from a partnership structure.  You own a direct interest in real estate when you acquire an interest in a TIC, so it is like-kind real property.  When you acquire an interest in a partnership you are not acquiring a direct interest in real property, but a personal property interest (not real estate interest) in a partnership entity.   

I also understand why you are not supposed to exchange property for partnership interests, but when the partnership interest that you exhanged for is a land holding partnership what is the difference? 

The difference is "what" you own.  When you own a partnership interest you have no ownership in real estate.  You own a personal property interest in the partnership.  The partnership, which is a completely separate legal entity owns the real estate.  The partnership is on recorded title when the buy real estate and not the underlying partners.  The partnership can structure a 1031 exchange, but not the underlying partners without some advanced planning.  So, the difference is "what" you own directly.    

You carry your basis with you and will pay the apporpiate capital gain taxes if and when the land holding partnership sells its assets @ some future date? 

Yes, your cost basis in the partnership interest will be the deferred cost basis from the property that you contributed.  There can be exceptions to this depending on the type of partnership and/or the type of contribution, so consult with your tax advisor before proceeding. 

Mr. Exeter,

Thank you for your quick response.  Is it possible that we could retroactively convert the partnership to a TIC arrangement whereby we would now be actual owners of the real estate instead of a partnership interest?  Do you believe this manuever would hold up in the event that we were audited?  Are there any court rulings that you could refer me to where property was purchased via a 1031 and then simulatenously contributed into a partnership?

Hi Leslie,

Maybe.  What type of partnership is it?  General partnership, limited partnership, or multiple member LLC?  I assume that the 1031 exchange was completed, the like-kind replacement property was acquired, and the replacement property was immediately contributed into the land holding partnership?  Was this in 2007 or 2008? 

We can take it from there. 

There are some long standing landmark cases.  The Magnuson case, the Bolker case, the Coca Cola Bottling Co. case.  There are a few more.  I can get you the exact citations if you like. 

Mr. Exeter -

It is a 4-member LLC and the exchange was indeed completed in the manner you assumed in 2007.  I will research the cases.....thank you so much for your help.

Leslie

Hi Leslie,

The LLC will throw a wrinkle into the mix.  The case law only revolves around general or limited partnerships.  The general partnership has unlimited liability to the partners, which is how some of the taxpayers were able to make their structure work.  The limited partnerships have liability protection and were not able to work around the issues.  The LLC is the same as a limited partnership in that it provides liability protection. 

I have not seen any case law that would help support your position. 

The acquisition of the like-kind replacement property was not acquired by the (correct) taxpayer completing the 1031 exchange within the 180 day exchange period.  I doubt that restructuring the LLC into a tenant-in-common structure after the fact and in the following income tax year will help. 

I can refer you to counsel who is an expert in tax, partnership and 1031 exchange issues.