Forming a joint venture after a 1031 exchange
Hi all,
I’m planning to do a 1031 exchange of a property under my name to another much expensive property that will need rehab. This new property will be also under my name but I’m planning to do a join venture with someone else to help me with the extra remodel costs. The property will still be under my name. Is this possible?
If so, what would happen if in 5 years I decide to 1031 exchange the property again.
thanks in advance
#1 1031 Exchanges Contributor
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- St. Petersburg, FL
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#1 1031 Exchanges Contributor
- Qualified Intermediary for 1031 Exchanges
- St. Petersburg, FL
@Daniel Suarez, Your plan seems to work initially. You'll 1031 from your name to your name so the tax payer will be consistent. Once that happens the 1031 is complete and you can do anything you want with that property. Most folks looking to bring on a partner will do one of these things:
1. Structure a loan from the partner so the deed doesn't change but money for the rehab is advanced as a loan on terms that the partner will be happy with.
2. Create an LLC and contribute the property into the LLC in exchange for membership interest. The partner contributes cash in exchange for membership interest. Now it is the LLC that owns the property. And the LLC has two members.
3. Even before the 1031 is complete both partners go on deed. You take title to as much real estate as you sold so this satisfies the 1031 requirement. The partner takes title to the remaining %. Now the two of you are tenants in common.
After the rehab when it's time to sell again what you choose above will become important.
1. IF you choose this scenario then the other partner can't 1031. And their income will be ordinary income. And they will get no benefit of real estate ownership during the period of ownership.
2. If two is chosen then there is a new tax payer. The LLC will have to do the 1031 exchange since it is the LLC that owns the real estate. Each of you own a membership interest in an entity that owns real estate. So a 1031 is possible but both of you have to go along together.
3. If three is chosen then each of you own a piece of real estate. It just happens to be a percentage of a larger piece. Upon sale each of you can sell and do a 1031 exchange on your own %. Or one could do a 1031 and one could pay their tax.
Thank you so much Dave. I really appreciate your answer!
