1031 exchange for partnership property

[Mohammad Mahmood]

We are planning to sell a partnership property. I own 50% stake in the partnership. 

Can I buy out my partners on a note payable just before signing a sale contract and disburse their share upon sale of the property? 

Can I then do a 1031 for myself using the same llc? How about if I want to change the Llc to buy the replacement property?

[Dave Foster]

@Mohammad Mahmood, There's a number of what ifs in your scenario. The first question is what do you mean by partnership. You mention an LLC so Ill assume that this property is owned by a multi member LLC that files a tax return and gives you and your partner K1s That means that the LLC is the tax payer for the property. So any 1031 situation is going to involve the LLC selling the property, doing the 1031 exchange and taking title to the new property.

Depending on your operating agreement you (or anyone) can buy the membership interest of the LLC and this does not affect the 1031 exchange. However, If you're doing a 1031 exchange then you must use all of the proceeds from the sale in the next purchase. So paying the departing member out of sale proceeds in a 1031 would result in taxable boot. Your agreement with them could allow for that and they accept the responsibility for the tax.

I think we already arrived at a yes on the LLC doing a 1031 after buying the partner out. Once you are the sole member that LLC is still the entity that is the tax payer for the property. You may want to amend the reporting to that of sole proprietor or take on other members.

And yes, the LLC must be the entity doing the exchange. You do not want to dissolve the LLC and distribute the property immediately before closing the sale. That never goes well with the IRS. However, once the exchange is complete you can distribute the property into a new entity and dissolve the LLC.