Suppose you and your spouse own a rental as “Husband and Wife”. For whatever reason, when you are doing a 1031 exchange and sell that property you feel it best to put the new property in the name of your business, which is a partnership and has 11 partners. The partnership is its own taxpayer. The IRS has issues with the husband and wife doing an exchange like this. Likely, they will not consider this type of exchange valid. Do you know why? Not many Realtors know this, so listen up to get an edge on the competition.
In layman’s terms, the answer is: The same taxpayer that sold the 1031 exchange property has to buy the new 1031 exchange property. Here’s the more complete answer.
Property can be held in various forms of title including Individual, Joint Tenancy, Community Property, Corporation, Partnership, LLC, Trust, and more. Exchange rules require that the taxpayer selling the relinquished property or properties must be the same taxpayer acquiring the replacement property or properties. A husband and wife are considered a single taxpaying entity. A partnership can exchange property for new property in the name of the partnership; however, individual members are considered to be owners of shares or interests in the partnership itself and not the actual owners of the real property held by the partnership. Partnership interests are specifically excluded from tax-deferred exchanges; therefore, careful consideration must be made on how partners get in and out of partnerships that own exchangeable real estate.
If you or someone you know wants to do a 1031 exchange, but wants to change taxpayers, there are ways to get that done, but methodical planning with a Qualified Intermediary is necessary. So, don’t despair and think all hopes of doing a 1031 exchange are lost. They aren’t; you just need to get in touch with a good QI to educate you.