A co-owner on an inherited property recently posed a question about 1031 exchanges.
Regarding the property she owned; she had no title issues, no ownership disputes and a very simple and clear ownership structure. There were four owners, 1/4 ownership each. It was a SFR and there had been renters in it for some time, 20 years at least. If the property were to be sold, she wanted to use her quarter for a 1031 exchange regardless of what the other owners did with their take. Her question was whether there are restrictions to this kind of scenario?
This is a tax question, the quick answer being:
Based on the description, the property does qualify for a 1031 exchange, so long as it is being exchanged for like property. Meaning other property held for productive use or investment.
Partnerships do present a problem because many times some partners want to cash out and others want to reinvest. Any amount that is received as cash or other proceeds outside of the like kind transfer, not reinvested, is or are considered boot which is taxable.
One practical solution would be for the partnership to do the exchange and then dissolve. This requires careful planning. There isn’t enough information here to get more specific. It can be said that property other than investment property, cash, and mortgages on the exchanged property complicate things. It matters if or when the target acquisition property on the exchange is identified, it can also work as a reverse exchange in certain circumstances if the acquisition property has already been purchased.
In short it can be done, but an investor needs help from an attorney and possibly an intermediary in this type of exchange. Please consult a real estate attorney because the tax consequences can be severe.
Filed under: Tax Consequences of Real Estate Tranactions | Tagged: 1031, intermediary, investment property, like kind, partnership 1031 exchange, real estate tax
While a 1031 exchange is a powerful tool to assist in wealth preservation, it is not always suitable as people age. Many people would like to divest their real estate holdings (or other highly appreciated asset) and go their own way from their current investment partners.
Most people are not aware they can defer their capital gains and depreciation recapture tax without being forced into buying replacement property (in a 1031 exchange).
Thank you Mr. Kornfeld,
I believe you are speaking of a Deferred Sales Trust (DST). Simply stated they are a type of sale recognized by the Service that allows the investor to enjoy a return of their basis and payment of taxes on the gain recognized over time instead of a lump sum. The gain recognized may qualify for preferential capital gains treatment, be treated as ordinary income, and may entail recapture of depreciation depending on the type of asset involved in the transaction.
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