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The IRS has ruled in Rev. Rul. 2004-86, 2004-33 I.R.B. _, that taxpayers could exchange under §1031(a)(1), without recognizing gain or loss, directly owned real property for interests in a Delaware Statutory Trust holding other real property. This ruling should interest persons seeking to use a bankruptcy remote entity without exchanging for indirect interests excluded from like-kind exchange treatment under §1031(a)(2). However, Rev. Rul. 2004-86 and accompanying Notice 2004-53, 2004-33 I.R.B. _, also imply possibly unanticipated limitations on satisfying §1031(a)(1) by electing out of subchapter K under §761(a). Interestingly, neither Rev. Rul. 2004-86 nor Notice 2004-53 mentions Rev. Proc. 2002-22, 2002-14 I.R.B. 733, which provides ruling guidelines for tenancy-in-common (TIC) interests involved in like-kind exchanges.
Section 1031(a)(1), requiring nonrecognition of gain or loss upon exchanging certain "like-kind" property, does not apply to exchanges of (among other items) partnership interests and certificates of trust or beneficial interests. However, if a partnership has "elected out" of all of subchapter K under §761(a), then interests in the partnership are treated under §1031 as interests in the underlying assets. See §1031(a)(2). Under §761 (a) and its regulations, an unincorporated organization may elect out of all or part of subchapter K if the organization is availed of for investment purposes only and not for the active conduct of a business and if the income of the organization's members may be adequately determined without computing partnership taxable income.
Without electing out of subchapter K, co-owners of property can avoid being classified as a partnership...