Article
Partnership structuring options: Like-kind exchange of real property
Aug. 29, 2023 · Authored by Laura Theiss
A version of this article was published in the October 2023 edition of the Colorado Real Estate Journal.
For property owners looking to build and enhance wealth, compounding internal rates of return on the tax deferral of real property assets can be a powerful tool.
Upon the proposed sale of a real estate asset, organizers of real estate partnerships frequently find that there are two types of investor groups, one that prefers liquidity in a cash out transaction, and another that would rather engage in a like-kind exchange.
Each investor group type has different financial goals, and satisfying both, while simultaneously navigating the complexity and potential obstacles of like-kind exchange rules can be challenging. Below are some solutions and considerations.
Common like-kind exchange obstacles
Obstacles within the like-kind exchange rules typically include the following.
Continuity of taxpayer rule
The taxpayer who sells the relinquished property must also be the taxpayer that acquires the replacement property. Partnerships are considered taxpayers for purposes of this rule.
Qualified Use/Held for requirement
Both the relinquished and the acquired real property must be either held for productive use in a trade or business or held for investment in real property.
Common questions related to this requirement typically include the required length of the holding period after acquisition. This is because the held for requirement isn’t clearly defined in Internal Revenue Code (IRC) and therefore has been subject to IRS litigation.
Some like-kind exchange practitioners declared the held for challenges dead after favorable taxpayer rulings, including Magneson v. Commissioner, 81 T.C. 767 (1983) and Bolker v. Commissioner, 81 T.C. 782 (1983). However, the codification of the economic substance doctrine, combined with potential accuracy or disclosure-related penalties, are incentives for taxpayers to remain conservative about the duration of the holding period.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.