Hello and thank you for your question.
This issue often times comes up in real estate partnerships when property is to be sold and some of the partners want cash while some would like to purchase other property and qualify for IRC 1031 like-kind exchange treatment.
To allow all of the partners to accomplish their goals, the partnership generally must distribute the property to the partners. The partners can then sell the property and those that want cash may keep it while those that want to defer any gain using a like-kind exchange may instead purchase other property.
While it is always an option to distribute the property to the partners prior to its sale so that the partners may pursue their desired outcomes, it may not be beneficial from a tax standpoint. The primary reason that this method may not be optimal from a tax standpoint is the basis issue presented by IRC 732:
(a) Distributions other than in liquidation of a partner’s interest
(1) General rule
The basis of property (other than money) distributed by a partnership to a partner other than in liquidation of the partner’s interest shall, except as provided in paragraph (2), be its adjusted basis to the partnership immediately before such distribution.
The basis to the distributee partner of property to which paragraph (1) is applicable shall not exceed the adjusted basis of such partner’s interest in the partnership reduced by any money distributed in the same transaction.
You'll note the above limitation. For example, if a partnership has a basis in its property of $10 and distributes it to a partner whose basis in the partnership interest is only $6, then that partner must assume a $6 basis in the property distributed and reduce the basis of his or her partnership interest down to $0. Unfortunately, $4 of basis is lost in the above example.
There are some other issues that can arise in addition to the above basis limitation. Depending on how the property was acquired by the partnership, for example, gain may have to be recognized by a partner on the distribution.
To know whether you would want to implement the above strategy, you therefore need to assess the impacts of the distribution on each partner and the partnership. The first step is to take note of each partner's basis in his or her partnership interest to determine whether some basis in the property would be lost if distributed by the partnership.
I hope this is helpful.