A friend and I own a rental property at a resort area.  When we purchased the property 25 years ago we formed a Partnership with each of us a 50% partner.  Rentals are short term, usually 2- or 3-day weekends or a week maximum.  The mortgage will be paid off at the end of this year and we are considering selling the property and eventually dissolving the Partnership and reinvesting individually with one or both of us reinvesting in rental property.  We would like to minimize or delay our tax burden.  The current property has been depreciated and the cost basis is close to zero.

Can we dissolve our Partnership and turn our current property into joint ownership then one or both of us do a 1031 Exchange of our half of the property?  If so, do we need to wait a minimum amount of time between ending the Partnership and the 1031 Exchange?  If the replacement property is long-term rental (yearly lease) is this “like kind”?

Would it be better to maintain the Partnership, sell the existing property and buy two new rental properties as 1031 Exchanges then dissolve the Partnership with one of the properties going to each of us a year or two down the road?

In either case, can I turn my rental property to my personal residence a couple of years down the road without paying Capital Gains?

This is all a bit complicated.  I figure if we are going to do this there are a few steps we need to take in the proper order and time sequence and it will probably take a few years but we are in no rush

Great question.

You are right on the money.  You can do what is called drop and swap.  You would drop the property (deed the property) out of the partnership into each of your names as to an undivided 50% interest as tenants in common.  You should also have a tenant-in-common agreement drafted that covers the management of the property. 

Ideally you should hold the property for at least 12 months as tenants in common before you list and sell your property in order to be safe for tax-deferred exchange treatment. If you want to sell sooner, there are other structures that can be implemented.  We would be happy to discuss these with you. 

Any kind of real estate that is held as rental (short or long rental doesn't matter) are considered like-kind property.  You should hold the property as investment property for 24 months and then you can absolutely convert it to your primary residence without incuring any capital gain taxes.  There would be no taxes until you ultimately sold it. 

Would you like to set-up a time to talk by phone or in person? 

Thanks for the quick response.  Sounds like we have a path forward. I'll check with my Partner to see if we are ready to proceed.  We'll definitly be in touch.  Sounds like something we'll need professional assistance with to keep out of trouble.