1031 Exchange into a Partnership/LLC/etc..

[Brian Batista]

Hi All,

I have a question about the 1031 process. My brother-in-law is under contract to sell his single-family investment property, and will be netting about 225k. He is interested in partnering with me and using the proceeds to 1031 into a down payment on a large multi-family property, the situation would be one where he is funding it with his 1031 proceeds and I am doing all of the leg work and we will split equity and profits 50/50.

From a legal perspective, how would this work? Would he need to buy the property initially under his name, and then at a later date and after a seasoning period transfer it to an LLC that we are both members of? Is this even allowed? I am assuming we can't create the LLC and do the purchase under that because it has to be the same entity that is both relinquishing and purchasing.

Would it be easier to just have it all in his name and we split the profits "behind the scenes"? Or is it possible for him to add me to the title after that fact?

Any advice would be greatly appreciated! Thanks in advance!

[Dave Foster]

@Brian Batista, He needs to take title to the new property as the same taxpayer who sells the old property. If the current property is in his name then he needs to take title to at least as much property as he sold and also in his name. He would not be able to sell as himself and buy as an LLC where both of you are members.

If the property is larger than that then you can take title to any extra %.

For instance, if he sells for $500K and the replacement property is $1 mil.  Then he has to take title to 50%.  But you could take title to the other 50%.  And the two of you would be tenants in common.  That would work.

Putting the property in his name and giving you an unrecorded interest might simplify some things.  But complicate others.  Much depends on  his reinvestment requirements.

[Brian Batista]

@Dave Foster Thanks for the helpful feedback, Dave! Youre example for selling @500 and buying @1 Mil, would the same logic apply if the proceeds go towards a down payment? I'm guessing your example assumes I would come in with the other 500k, correct?

Using the estimated actual numbers, his proceeds will be about 250k to 1031 and I have about $50k of my own money to put in on the down payment for, let's say, a $2 mil property. Does he then take title to 12.5% and I get 2.5%, since the remaining 85% would be financed? Or does he need to take a *minimum* percent equal to his equity, therefore we would be able to split it 50/50 when the title is transferred in a TIC situation?

Sorry if this is confusing, just want to know we will have a clear path before getting too far down the rabbit hole or getting anyone's hopes up, but it sounds like it is possible.

[Dave Foster]

@Brian Batista, Yep.  The ratio between cash in and loan assumption would probably be the same.

A $1 mil purchase where you put down $250K and assumed $250K of loan would be purchasing 50% of the property.

He needs to take title to at least as much real estate as he sold.  And he needs to use all of his net cash to do that.

[Dylan Speer]

Has he considered investing into a multifamily DST?