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Drop and Swap – Dissolution of Partnerships Prior to Exchanging

Exchange Update

When a partnership is selling property and some of the partners want to cash out and others want to reinvest, it can create complications with a 1031 exchange.  There are a couple of reasons for this.  First, under IRC § 1031(a)(2)(D), partnership interests are not exchangeable.  Second, the taxpayer that sold the relinquished property must acquire the replacement property. For example, if a partnership sells the relinquished property, that same partnership must buy the replacement property.  If individual partners buy the replacement property, it will not be a valid exchange.

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