Liquidating a Partnership, Latest 1031 Exchange Info, Q&A - 1031 Exchange Experts Equity Advantage

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We are taking a look at how to liquidate a partnership to move forward in an 1031 Exchange, the latest 1031 Exchange info via our latest webinar video, and out-of-state replacement properties.

To learn even more about the different investment directions that you can take, check out the Equity Advantage Video Library and subscribe to the Equity Advantage YouTube channel for more 1031 Exchange educational videos.

Steps to Effectively Liquidate a Partnership

In today’s 1031 world partnerships and “continuity of vesting” are second only to time as the biggest headache for exchangors. Partnership issues can arise from partners or a partner wishing to Exchange out of a property separately from his or her property, or simply from finance requirements. Partnership interests are specifically prohibited from 1031 treatment. The “Partnership” can do a 1031 but the members cannot.

If a partnership can be liquidated, it is important that it is liquidated in fact and the resulting tenancy in common (TIC) arrangement be respected.

Steps that should be taken to effectively liquidate a partnership:

1. Execute and record a deed transferring the partnership real property to the former partner/partners.

2. Execute an agreement to terminate the partnership and any partnership agreement.

3. Assign all leases to the former partner/partners as TIC, direct the lease payments be made to each former partner and not to the partnership, and take steps to ensure that each lease payment be deposited in each former partner/ partner’s separate bank account (unless using a property manager).

4. Renegotiate all leases so the former partner/partners are not providing any services under the lease.

5. Transfer all partnership assets to the former partner/partners, close all partnership bank accounts, contact all partnership creditors and request that payments be made by separate check to each partner (unless using a property manager).

6. Each former partner should individually pay obligations such as the payment of property taxes and mortgage payments (unless using a property manager).

7. Amend any agreement to sell the property to the names of the former partner/partners and not the name of the partnership.

8. File a final partnership tax return and check the appropriate boxes to indicate the return is the final return.

9. File an election under Section 761(a), which allows a partner/partnership to “elect out” of partnership status and requires the property owners be co-owners, that each partner have the right to take or dispose of his/her interest in the retained property, that the property be held for investment purposes and there be no active trade or business.

10. Execute a TIC agreement among all the former partners to affirm how the property will be managed. It should be drafted in such a way that it affirmatively does not create a partnership relationship between the parties.

11. If using a property manager, renegotiate the arrangement so that the property manager is not providing any non- customary services to tenants.

In Chase v. C.I.R., 92 TC 874 (1989), the partners attempted to liquidate the partnership, but failed because the deed was not recorded and the bank accounts continued to hold all the partnership income and pay all the partnership expenses. It is essential to effectively liquidate the partnership in order to have an effective 1031 Exchange that can be defended.

The State of 1031 Exchange in 2022 – It’s All Time and Money

This 1-hour webinar covers everything from when to get your money and identification rules to passive investment options and 2022 endgames for the 1031 Exchange.

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Can I take advantage of a 1031 Exchange if I want to acquire a replacement property in a different state than the relinquished property is located?

Exchanging property across state borders is a very common thing for investors to do. In fact, a great number of our clients do exactly that. It is important to recognize that the tax treatment of interstate Exchanges vary with each state and it is important to review the tax policy for the states in question as part of the decision-making process.

The Guys With All The Answers…

David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.