Like Kind Exchange

[eeyore]

One of our LLC clients, a partnership, has held as its only asset a rental property for five or so years.  In 2021, they decided to sell the rental property and terminate the partnership.  Instead of receiving her sales proceeds in cash, one of the partners decided to do a 1031 exchange.  As required by the exchange rules, her proceeds were held by an intermediary agent, and when the time came, those proceeds were applied to the new property.  All the timing rules associated with a 1031 exchange were followed.

I haven't been able to figure out how logistically (and properly, of course) to handle this transaction.  Since it doesn't look like there's a way to report a like-kind exchange for part of a property at the partnership level, should I just pass the sale through to the individuals, and then somehow report the like kind exchange at the individual level?

If anyone has any experience or thoughts about this transaction, I would really appreciate your insights.

Thank You!

[qbteachmt]

Did you search the web? There are some great articles, especially on real estate since the TCJA. Example:

I googled: 1031 exchange partnership division

"Since the asset involved in this type of transaction is held by a partnership or LLC, the IRS takes the position that the same partnership or LLC must both sell the relinquished property and purchase the replacement property."

From: https://www.wardandsmith.com/articles/the-basics-of-1031-exchanges-part-two

The IRS has great references, as well.

[qbteachmt]

I thought about it further, and there is "drop and swap:"
https://1031ex.com/basics-of-the-drop-and-swap/

But it might be too late for these people that already took their action without guidance in advance.

[joshuabarksatlcs]

ONE way for many partnerships to accomplish this is a "drop down".

Look at the escrow statement of the sale.  Who were the seller(s)? 

How did the distribution of net proceeds done?   

IF a drop down was done with all T's crossed and I's dotted, the title would have been changed from the partnership to the partners at their %'s some time before the close of escrow - sometimes for a split nanosecond. 

In a "drop down", the partner who did an exchange had his/her net proceeds forwarded to the exchange facilitator.  The other partners got their shares.  If this was the scenario, the partnership had a distribution of asset (the real estate property).  Report the distribution (Basis and FMV info are required) and close the books for the partnership accordingly. 

Follow the economic substance.  Follow the money. 

If the seller was the partnership, work with the exchange company to see how the partner's  share could be exchanged.  Different localities may have different ways.   

Hope this helps.