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1031 Exchanges

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Adam Ward
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  • Raleigh, NC
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1031 Exchange into Tenants in Common

Adam Ward
  • Investor
  • Raleigh, NC
Posted May 26 2023, 16:20

I'm interested in doing a 1031 exchange out of a couple SFRs and plan to use 100% of the proceeds to purchase a 50% TIC interest in a larger commercial deal that will have a mortgage. The SFRs are free & clear. My question is regarding whether the debt on the replacement property will cause a portion of the 1031 exchange to be taxable.

Using hypothetical numbers for simplicity:

Proceeds from relinquished properties = $250K

Replacement property purchase price = $1M

25% down payment on replacement property = $250K (all of which come from relinquished property proceeds)

The replacement property would have a $750K mortgage, and ownership of the property would be 50/50 tenants in common.

From a tax standpoint, is my 50% interest treated as $125K equity + $375K debt (in which case I believe a portion of the sale would be taxable)?  Or would it be completely tax deferred since I used 100% of the proceeds for the down payment?

Open to any and all thoughts/suggestions.  Thank you!

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Bill Brandt#2 Creative Real Estate Financing Contributor
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Bill Brandt#2 Creative Real Estate Financing Contributor
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Replied May 26 2023, 18:36

Unless you get a loan for $250k and your partner gets a loan for $500k. Or they put in $250k and you both get loans for $250k you have given your partner $250k and have a taxable sale. IMHO. (After all you own 1/2 of a million dollar property  with a debt of $750k, so you owe $375k after putting down $250k.) there might be a paperwork way of having your partner owe you money. But I doubt you’re really taking on a partner who puts nothing in to the deal. So maybe some more info would help. 

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Whitney Nash
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#5 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • McKinney, TX
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Whitney Nash
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#5 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • McKinney, TX
Replied May 29 2023, 06:15

Hello @Adam Ward

You'll want to think of this as if you are buying a $500k property since you are looking to by 50% of the $1m property as a TIC. Using your numbers, the sales prices, less allowable closing costs, of all your SFRs combined should be less than $500 if you want full tax deferral so that you are 'exchanging up'. You will also want to use all proceeds from all the sales. Any difference would be taxable. Your proceeds would go towards your 50% portion. The other person would be responsible for their down payment. Since you don't have any debt on them, you don't have to worry about debt offset. Acquiring dept on at replacement property is OK even if you didn't have debt on what was sold. I would assume that the mortgage would be 50/50 as well, or you'll get a loan for 375k and they get one for $375k, for the TIC, so that wouldn't cause an issue.

This is hard to answer without your actual numbers, but if they are indicative and proportionate to your situation, you should be fine and have full tax deferral. 

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Dave Foster
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Dave Foster
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Replied May 30 2023, 09:26

@Adam Ward, The two questions to ask are - Did you purchase at least as much as your net sale? - Yes 

Did you use all of your cash proceeds to do so? - Yes.  

So theoretically you do indeed meet the requirements of 1031. But the reality is that you are purchasing $500K of real estate for $625K. You put in $250 of cash and are assuming $375K of loan. The partnership may be smoothing this over. And generally TIC partners are jointly and severally liabile anyway. But you want to be careful that you don't leave yourself open to negative repercussions if something starts heading south.

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Dylan Speer
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Dylan Speer
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Replied May 30 2023, 12:56

Hey Adam,

Have you considered just exchanging into a DST instead?

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Adam Ward
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Adam Ward
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Replied May 30 2023, 15:18

@Bill Brandt, @Whitney Nash, @Dave Foster

Thank you for the feedback.  Ultimately, the two objectives are to defer tax on the sale, and participate in 50% of the profit/loss and appreciation of the new property.

Perhaps a better way would be to use the $250K proceeds to purchase a 25% interest in the $1M property and have my parter get 75% interest while being solely liable for the $750K mortgage? I imagine we could write up a separate JV agreement stating that NOI/appreciation would be split 50/50 and that capital contributions would be recouped before proceeds were paid out.

@Dylan Speer - I like the idea of being hands on and having the ability to influence the outcome of the deal. I assume I would be giving this up with a DST?

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Bill Brandt#2 Creative Real Estate Financing Contributor
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Bill Brandt#2 Creative Real Estate Financing Contributor
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Replied May 30 2023, 16:40

You could buy 62.5% of the deal. Your $250k plus 1/2 the debt. After all if your partner is putting nothing in to the deal should they have half or more? I assume the plan is for the property to pay the debt? If so, 37.5% of a deal for free is pretty good. You could pry talk me or most people here in to taking that deal. If you can’t, it’s a really bad deal. 

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Alex Stariha
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  • Chicago, IL
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Alex Stariha
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  • Chicago, IL
Replied May 31 2023, 07:00

@Adam Ward

I just did this on a property here in Indiana with almost the exact same scenario. 

I disposed of a 4 unit building original purchase price was $262,000 Sales price $502,000.00 total proceeds to 1031 intermediary was $240k. Owned just by my entity. 

My partner and I purchased a property at $1,137,000 with 20% down. It was purchased as a TIC 50/50 owners. Even if I put the full down payment myself the ownership will look as if I purchased a $568,500 building because of the TIC so there would be a taxable event there.

Make sure on your 1031 election sheet you clarify that it will be a % ownership. 

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Adam Ward
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Adam Ward
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Replied May 31 2023, 12:09

@Bill Brandt I think you hit the nail on the head here.  62.5% would keep things straightforward and allow the purchase to be fully tax deferred.  Also appreciate you continuing to push the skin in the game issue.  I'm currently learning first hand how important it is.

@Alex Stariha Thanks for chiming in.  So it appears a portion of your purchase was taxable.  Not the end of the world by any means, especially if it was a good buy.  Good luck with the new acquisition!

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Dylan Speer
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Dylan Speer
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Replied Jun 2 2023, 11:57
Quote from @Adam Ward:

@Bill Brandt, @Whitney Nash, @Dave Foster

Thank you for the feedback.  Ultimately, the two objectives are to defer tax on the sale, and participate in 50% of the profit/loss and appreciation of the new property.

Perhaps a better way would be to use the $250K proceeds to purchase a 25% interest in the $1M property and have my parter get 75% interest while being solely liable for the $750K mortgage? I imagine we could write up a separate JV agreement stating that NOI/appreciation would be split 50/50 and that capital contributions would be recouped before proceeds were paid out.

@Dylan Speer - I like the idea of being hands on and having the ability to influence the outcome of the deal. I assume I would be giving this up with a DST?


 I'm out of colleague requests. Shoot me a private message. 

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Alex Stariha
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Alex Stariha
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Replied Jun 3 2023, 07:44
Quote from @Adam Ward:

@Bill Brandt I think you hit the nail on the head here.  62.5% would keep things straightforward and allow the purchase to be fully tax deferred.  Also appreciate you continuing to push the skin in the game issue.  I'm currently learning first hand how important it is.

@Alex Stariha Thanks for chiming in.  So it appears a portion of your purchase was taxable.  Not the end of the world by any means, especially if it was a good buy.  Good luck with the new acquisition!


 Yes part of it was taxable. My mindset is I'll take any amount of tax deferment over zero and it was the right deal for the time so it worked out well.