Who makes the section 1033 election when a partnership or LLC owns the condemned property?

Section 703(b) puts the election at the entity level, and the courts have applied it to section 1033 twice

Section 703(b) lists three elections partners make separately, under sections 108, 617 and 901. Everything else that affects the computation of partnership taxable income is the partnership's election, and a decision to defer gain on the involuntary conversion of partnership property plainly affects that computation.

In Demirjian, an office building owned by two sisters-in-law as partners was condemned by the Newark Housing Authority in 1962. Each partner took roughly half the proceeds and bought similar real estate in her own name, one in 1963 and one in 1964 after obtaining an extension. The Tax Court, at 54 T.C. 1691, held the gain taxable because the partnership had neither elected nor replaced, and the Third Circuit affirmed in 1972.

McManus repeated the result in 1978. A parcel of a 36-acre industrial tract in Oakland held by a partnership was condemned by the State of California; one partner alone bought land in Fremont believing it qualified. The Ninth Circuit called Demirjian "exactly on point" and upheld the Tax Court's holding that the election "had to be made by the partnership".

What the rule means in practice: the award, the purchase and the statement all stay inside the entity

The partnership receives the award, the partnership signs the purchase contract for the replacement, and the partnership's return for the gain year reports the conversion's details and omits the gain, which is how the election is made under Reg. section 1.1033(a)-2(c)(2). The partners' Schedules K-1 then show no gain from the conversion.

Distributing the award to the partners and having each buy a property is the Demirjian pattern and it fails even if every partner reinvests every dollar. The statute asks whether the taxpayer that suffered the conversion purchased the replacement, and after a distribution the partnership has purchased nothing.

The same logic governs a multi-member LLC that has not elected corporate treatment, because it is a partnership for tax purposes. A single-member LLC that is disregarded is different: its owner is the taxpayer, so the owner elects and the owner, or the disregarded LLC, buys. Whether an LLC can do a 1031 exchange explains the same classification point on the exchange side.

Partners who want different things have to solve it before the award, not after

The usual tension is that one partner wants to reinvest and another wants cash. On the 1031 side that problem has a well-worn set of answers; a partnership exchange that distributes cash to one partner and keeping the partnership together into a DST describe them. Under section 1033 the entity-level rule makes the timing stricter.

If the partnership makes the purchase and defers, a partner who wants out is bought out of a partnership that now owns the replacement property, with the gain on that buy-out measured by the partner's own basis in the interest. If the partnership instead distributes the award, the deferral is gone for everyone. Hypothetically, a three-member LLC receives a $3,000,000 award on land with a $600,000 basis; if the LLC buys a $3,000,000 replacement the $2,400,000 gain is deferred, and the member who wants cash negotiates a redemption afterwards. If the LLC distributes $1,000,000 to each member first, the gain is recognized at the entity level and flows through to all three. Model both routes with your CPA before the award is paid.

Restructuring the partnership before the taking, for instance by dividing it so that each successor holds its own share of the condemned property, has been the subject of private letter rulings that bind only the taxpayers who obtained them and could not be opened for this page. If the members cannot agree, that planning belongs with tax counsel while the threat is still a threat; what counts as a threat of condemnation explains why that date matters.

The related-person rule has a partnership-specific trigger

Section 1033(i) denies nonrecognition where the replacement is bought from a related person. For a partnership in which more than 50% of the capital or profits interest is owned by C corporations the bar applies regardless of the size of the gain; for other partnerships it applies once the realized gain on converted property for the year exceeds $100,000, with related status tested under sections 267(b) and 707(b)(1). Publication 544 lists the same categories.

A partnership buying a replacement parcel from an entity its members control is the fact pattern to check. The exception in section 1033(i)(1) applies only to the extent the related seller itself acquired the property from an unrelated person during the replacement period. Buying replacement property from an LLC you partly own covers the related-party version of this on the 1031 side.

Where a DST interest sits in a partnership-level replacement

If the partnership, rather than the members, subscribes for a DST interest with the award, the entity-level rule is respected on its face, and the three-year period for condemned business or investment real property under section 1033(g)(4) gives time to find an offering that is still open. The interest is illiquid and its equity can be lost, and a partnership subscribing as a single accredited investor is a question for the trust's offering documents.

Whether a beneficial interest in a Delaware Statutory Trust is section 1033 replacement property at all is unresolved: no ruling, regulation or opinion addresses it. DSTs for 1033 proceeds sets out the arguments; the partnership's tax counsel should give a written view before the election is made on the basis of a trust subscription.