Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Problem Number 3

What are the consequences if, in connection with the sale of the Bell Center, John, Bill, and all of the other investors except Fred elect to trade the Bell Commerce Center under Section 1031 of the IRC rather than contracting for an outright sale?

First of all, the trade must occur on the Bell Center, LLC, level. In other words, Bell Center, LLC, must be the party that enters into the exchange. It would not be permissible for individuals within the LLC to trade their interest separate and apart from the LLC and qualify for a Section 1031 exemption. You may not trade a fractional interest. It is the entity, Bell Center, LLC, that owns Bell Center and therefore you must trade on this entity level.

If one or more of the members of Bell Center, LLC, desires to cash out, does that disqualify the exchange? No, but care should be taken. An attorney that specializes in 1031 exchanges should be consulted so as to ensure that the cashed-out partner's distribution does not disqualify the exchange and does not result in undue gain to the remaining partners. Fred will recognize a gain. He is in essence selling his partnership interest.

The buyer, Let's Negotiate, and the managing members of the selling entity, John, Bill, and Fred, have a meeting to discuss structuring the sale of the Center. The parties agree that the sales price will remain at $15,000,000, but Let's Negotiate points out that it is very difficult to secure financing at this point in time, and that even if ...