16A — March 13 - 26, 2015 — M id A tlantic

Real Estate Journal


1031 E xchange

tricky issue arises in 1031 exchanges when some partners By Stephen P. Taylor, Esq., Kaplin Stewart Meloff Reiter & Stein, PC Administrative challenges in 1031 exchanges with multiple cashing out partners A easiest way to cash out part- ners is challenging because the partners may be cashed out in several ways. ance issues, the parties will have more straightforward administrative issues in the property’s distribution and eventual sale.

obligations. With respect to the sale of the property, problems abound in the negotiation of the sale agree- ment and post-sale obliga- tions. The buyer of the re- linquished property will want to negotiate only one purchase agreement, with ongoing obligations as to the seller, such as holdbacks or indemnification and reim- bursement obligations. To incorporate the various sell- ers into a single agreement may be burdensome or delay the sale. Post-sale, all sellers must report the sale on each of their tax returns. Forming an LLC to repre- sent the leaving partners is one solution to these admin- istrative issues. The leaving partners contribute their partnership interests to the LLC in exchange for LLC membership interests. The partnership distributes a portion of the property to the LLC as a tenant-in-common. The parties complete the sale of the relinquished property. The LLC receives cash from the sale and then makes dis- tributions to its members in respect of their LLCmember- ship interests. Meanwhile, the partnership has continu- ity of title and may go on to complete the 1031 exchange. The LLC helps to simplify issues because fewer parties are involved in the owner- ship and sale of the prop- erty. Titling of the property becomes easier. Within the LLC operating agreement, members negotiate their various rights, duties and obligations with respect to each other and designate a member to represent the LLC in transactions with respect to the property. The LLC negotiates the terms of a co-tenancy agreement with the partnership, the terms of the sale agreement, and files required tax returns. Ultimately, any time part- ners desire to be cashed out on the sale of a relinquished property, a 1031 exchange be- comes more complex because of varied interests. Address- ing the complexities requires careful tax considerations and creative administrative solutions. Stephen P. Taylor, Es- quire, is an attorney in the transactional department of Kaplin Stewart Meloff Reiter & Stein, PC . n

erty and use the proceeds to complete the 1031 exchange or cash out. Similarly, if the partnership wanted to continue as an investor in the replacement property, it may distribute tenancy- in-common interests to a portion of the property to the leaving partners, and the parties proceed with the 1031 exchange or cash out. Assume that the part- nership is ongoing and so, distributes a portion of the property to leaving part- ners as tenants-in-common. Aside from tax code compli-

want to cash out on the sale of the relinquished p r o p e r t y rather than stay invest- ed in a re- p l ac ement p r o p e r t y . The i s sue

One option is for the part- nership to complete the 1031 exchange, refinance the re- placement property and then cash out partners with the proceeds. This is prob- lematic because it does not immediately address the partners’ desire for cash. Another technique is for the partnership to liquidate and distribute the property to its partners, as tenants-in-com- mon, who then sell the prop-

When the property is dis- tributed to the partners as tenants-in-common, prob- lems arise with title and co-ownership. Title must properly reflect all the var- ious tenants-in-common, with their corresponding ownership percentages. A co-tenancy agreement may be negotiated but will have to incorporate the various parties’ rights, duties and

Stephen Taylor

may be exacerbated when many partners, all with varied interests, want to be cashed out. Determining the

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A t t o r ne y s a t L aw

Contact: Stephen P. Taylor • Staylor@kaplaw.com 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-941-2520 • www.kaplaw. com Visit our Construction Blog: www.pennsylvaniaconstructionlawyer.com

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