How Tax Reform Helps Partnership Issues on 1031s

Partnership Issues in 1031s Benefit with Tax Reform

A partnership continues to exist until it is terminated. Before the Job Cuts and Tax Act, there were two ways that a partnership could be terminated. First, if no part of the business was carried on by any of its partners and second, if there was a transfer of 50% or more of its ownership within a 12 month period. The second way was commonly referred to as a “technical termination” of the partnership.

The recent tax reform which became effective on January 1, 2018 eliminated the “technical termination” provision from the statute. As a result, situations where the partners do not want to stay together and do a 1031 exchange as the partnership may be easier to resolve. There are still two requirements. After the organizational change there must be at least two partners (to be a partnership) and at least one of the partners must have been in the partnership before the ownership change.

The effect is that partners that do not want to exchange can have their partnership interest purchased irrespective of the fact that they may have owned 50% or more of the old partnership. Another application might be where an investment property is owned 50/50 by two married couples. For whatever reason, “Couple A” wants to receive their cash and pay the taxes but “Couple B” wants to do a 1031 exchange. Prior to January 1, 2018, this would have been a problem, but not now.

Couple A can receive an undivided interest in the partnership’s real property in full redemption of their partnership interest. The property will be sold with Couple A receiving cash and Couple B completing a 1031 exchange as the partnership. If Couple B lives in a community property state, they will want to continue to file taxes as a partnership.

In summary, the percentage of transfer is not relevant. Just ask two questions:

  1. Are there at least two partners;
  2. Was at least one of them in the partnership prior to the change of ownership?

IPX1031- Choose the Experts

As the nationwide leader in tax deferred exchanges, IPX1031 is here to offer you the best in service, experience and security. As your comprehensive information resource, we strive to make sure that our clients and their advisors are kept current on the latest industry information and tax law changes. When you choose IPX1031 as your Qualified Intermediary, you can be confident that your exchange will be handled expertly and that your funds will be safe, secure, and available when needed. For more information about us, additional resources, or our complimentary monthly webinars, visit our website at

©2018 Investment Property Exchange Services, Inc. — a Fidelity National Financial Company