Partner Buying Me Out. Can I 1031 Exchange Into Other Real Estate?

Three (3) investors own an investment property together.  They own the property as tenants-in-common, or co-owners, are each individually on recorded title to the property, and each report their own individual interest in the real property on their own income tax return.

Partner To Buy Out Remaining Partners

One of the partners now wants to buy the other two (2) co-owners of the real property out so that he or she now owns all of the property.  The two (2) partners will agree to be bought out as long as they do not have any income tax liability because of the sale.

Can Remaining Partners Structure 1031 Exchange?

The question is whether the two (2) partners that are being bought out can structure and complete a 1031 Exchange in order to defer their capital gain taxes into the purchase of another property. 

Generally, the answer is yes, because they each own a tenant-in-common interest in the real estate, are each individually on recorded title and each treats and reports their interest in the real property on their own income tax returns. 

The two (2) remaining partners can each decide individually to cash out, to structure a 1031 Exchange and go their separate ways, or to 1031 Exchange into the same replacement property and remain co-investors in the new property. 

Beware Of The Partnership Interest

This was a nice clean question and answer scenario.  It was a brief discussion that I had on the phone today.  There are numerous issues here that could change the answer to the question, so you should always have your legal or tax advisor review your specific situation.

The biggest area of concern is when an individual does not own an individual interest in the real estate, but actually owns and treats their ownership as an interest in a partnership.