Can You Turn a 1031 Into a Joint Venture?
Carl E. Sera, CMT
June 22, 2023
1031 exchanges offer numerous benefits for investors who want to swap one real estate investment property for another. But can you turn a 1031 exchange into a joint venture? Let’s find out.
1031 Exchanges and Their Qualifications
1031 exchanges allow investors access to exceptional tax advantages and other investment portfolio perks. Under Section 1031 of the IRC, like-kind exchanges involve exchanging real properties often used as investments for other businesses or investment properties or used for similar businesses.
1031 exchanges have specific rules and timelines investors must follow. The 45-day rule involves the sale of your property, designating a replacement property, and specifying the acquired property. As for the 180-day rule, it’s a delayed exchange action related to closing. Investors must close on their new properties within 180 days of the old property sale.
LLCs, Trusts, and Partnerships
1031 exchanges can become partnerships with LLCs, trusts, and partnerships, as these entities exchange one property for another as the same entity. As such, entities don’t become starting partnerships and end up as a trust. 1031 exchanges can occur if entities relinquishing the original property become the same entity acquiring a replacement property.
Can a 1031 Become a Joint Venture?
The main question is whether a 1031 can become a joint venture. Simply put, no, it cannot. More specifically, entities must be the same throughout the 1031 exchange processes. Joint ventures can create conflicts in partnerships and LLCs, as disagreements between entities and people can occur. As such, it can become problematic if an investor wants to pursue a 1031 exchange but others don’t.
Luckily, there are solutions to get around this problem; in an instance where a partnership includes multiple people, partnerships can convert interest into real property interest. As such, the partners own the property as a tenancy in common (TIC), each owning interest portions on the property. This concept is known as a drop and swap.
Sera Capital provides 1031 exchanges for investors who want to invest in like-kind properties for business opportunities. We aid investors with highly-appreciated assets who seek guidance and support to reach their financial goals. Our Delaware Statutory Trust 1031 specialists help investors receive tax deferment on highly appreciated investments or commercial real estate. If you have any questions about our services, contact our Sera Capital professionals today.