IRS Says Okay for EAT to hold Partnership Interest

Under the rules of §1031, a taxpayer is required to receive real estate as replacement property for an exchange of real estate. In a recent Private Letter Ruling (PLR 200909008), the taxpayer was using the services of an Exchange Accommodation Titleholder (EAT) to take and hold title to a replacement property until his relinquished property could be sold (reverse exchange). The taxpayer's desired replacement property was real estate owned by a partnership in which the taxpayer was a 50% owner and Partner B was the other 50% owner. The only asset of the partnership was qualifying real estate. Taxpayer desired to become the 100% owner of the real estate. Ordinarily, the taxpayer would have to become the purchaser of real estate to complete a tax-deferred exchange of real estate.

In the case of this Private Letter Ruling, the EAT took ownership of the 50% interest in the partnership owned by Partner B (versus taking title to 50% of the real estate owned by the partnership). At this point, the partnership was comprised of the taxpayer and the EAT as 50/50 owners. When the taxpayer’s relinquished property was sold, the EAT transferred the 50% partnership interest to the taxpayer as replacement property for the taxpayer’s exchange. In effect, the taxpayer had acquired the 50% interest in the real estate owned by Partner B by becoming the 100% owner of the partnership.

While Section 1031(a)(c)(D) precludes the exchange of real estate for a partnership interest, under Revenue Ruling 99-6, the acquisition by a partner of all the remaining interests in a partnership is treated as the acquisition of a pro rata share of the assets of the partnership (in this case, real estate). The partnership is deemed to have made a liquidating distribution of the real estate to the taxpayer and the partnership “disappears.”

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