Odd Structure OK'd by IRS in 50% Partnership Reverse Exchange...

There was a partnership that had two partners: A and B. B wanted to sell his 50% interest to A. Since A already owned the other 50%, when he acquired the interest and the transaction was completed, he would own all of the partnership.

Partner A's plan was to buy B’s 50% interest in the partnership by doing a Reverse Exchange, so he requested a ruling on whether he could buy the partnership’s real estate by buying B’s partnership interest. He also wanted to know whether he could put his plan into motion early by doing a reverse exchange and having his intermediary buy B’s partnership interest.

IRS rules do not allow taxpayers to do 1031 exchanges when they acquire the new property before they’ve closed the sale of the old property. A structure called a “reverse exchange” gets around this by having the taxpayer’s qualified intermediary buy the new property and hold it until the old property is sold. In this case the 1031 intermediary would take title to B’s partnership interest and hold it until A sold the old property.

The IRS approved the request because after A sells his old property and exchanges into the partnership interest held by his intermediary, his ownership of the partnership would be 100%, making him the only owner of the partnership. Since there is no such thing as a one-partner-partnership, the partnership would automatically dissolve and A would be the sole owner of the real estate, thereby meeting the test of selling real estate and then buying real estate to complete his exchange.

As is frequently the case with these types of rulings, they raise more questions for me than answers. A private letter ruling is an answer, if you will, to the taxpayer’s question. Since the IRS does not release the original request from the taxpayer and typically only gives us enough taxpayer information to justify their ruling, we have to guess at the unstated facts.

Read the complete story, "50% Partnership Interest Purchase: ‘OK’ says IRS in a Reverse Exchange".