1031 Exchange % Interest

17 Replies

Hello BP,

I am in need of your infamous brilliance. I am currently going through a 1031 exchange and wanted to ask a few questions about 1031 to understand the scenarios better. Thank you for any help you can provide!

1. I sold the home in my personal name (no one else was in the sale) and the funds were transferred into an exchange escrow account. Would it be possible to team up with another investor and do the exchange? Where the other investor is adding the additional down payment.

2. If the FMV equate to what was sold or greater because of the other investor, would I be subjected to any taxation?

Thank you for your help!

Tony

Hi Tony,

(1) Yes, it is possible to bring on another investor. However, for your 1031 Exchange to qualify, you must acquire a direct interest in the real estate as a tenant-in-common.

(2) Your interest (percentage) of the replacement property that you buy must have a value that is equal to or greater than the net sale price of your relinquished property. So, to answer your question, if you buy a replacement property that has a purchase value equal to the property you sold, and you bring on a co-investor, yes you will recognize some or all of your tax liabilities because you have not exchanged equal or up in value.

So, for example, let's say that you sold your relinquished property for $525,000 and your routine selling expenses were $25,000 so that you have a net sale price of $500,000. In order to defer all of your taxes, you must acquire replacement property worth at least $500,000 (your net sale price). If you buy a property for $500,000 and bring on a 50/50 partner, then you have only bought 50% of the property, or $250,000, and would have "traded down" in value by $250,000. The amount that you have traded down by, or $250,000, is taxable, and likely will trigger most if not all of your tax consequences.

Hi Bill,

Thank you for your quick response. This makes a lot of sense now. No matter the situation, I must meet the same amount as the relinquished property.

Is it true replacement amount can be an aggregate of multiple replacement properties?

Thank you,

Tony

@Tony Tran - yes you can exchange one relinquished property for multiple replacement properties; and you can also exchange multiple relinquished properties for one replacement property. You will have to comply with the timeline and other 1031 exchange rules in any case in order to defer capital gains taxes.

@Steve Babiak ,

Thank you. Just to provide clarity in the matter. Having multiple properties to meet the aggregate replacement amount and doing the exchange with other investors simultaneously is not an issue.

Is this correct?

Thank you,

Tony

@Tony Tran

As long as the value of your interest in the replacement property/properties (aggregate) is equal to or greater than (minus closing costs) the value of property you relinquished you will get full deferral, assuming you spend of of the net cash proceeds.

For example:

You sell for $1,100,000 and have $100,000 in closing costs. Your target for full deferral is $1,000,000.

You purchase as a tenant in common with another investor, 50/50.

Property 1 - Total purchase price $500,000, 1/2 is $250,000

Property 2 - Total purchase price $500,000, 1/2 is $250,000

Property 3 - Total purchase price $500,000, 1/2 is $250,000

Property 4 - Total purchase price $500,000, 1/2 is $250,000

In this scenario, you aquired $1,000,000 in replacement property. As long as you spend all of your net proceeds from your sale, you would have full deferral.

@Ryan,

That resolved my question.

Thank you,

Tony

Originally posted by @Tony Tran :
Hi Bill,

Thank you for your quick response. This makes a lot of sense now. No matter the situation, I must meet the same amount as the relinquished property.

Is it true replacement amount can be an aggregate of multiple replacement properties?

Thank you,

Tony

Hi Tony,

Yes, it is the aggregate of all the properties that you acquire.

@Bill,

That resolved my question.

Thank you,

Tony

@Bill Exeter and @Ryan Thomas

Does the above example also work in the other direction?

For example:

Home is owned TIC by two owners. Can one owner 1031 exchange for something of greater than or equal value than 50% of the sales price and the other pay the capital gains on their 50%?

Thanks, Jake

I have a question on the subject....

what if you sell the property for less then what you paid? Say you bought for 70K and sold for 50K your replacement value or your tax consequences would only be 50K correct....

Just remember that you can go into multiple properties however it can be a logistical nightmare sometimes on the 1031.

Unless you can put all the properties in a package loan you will be dealing with multiple sets of closing costs, loan fees, possibly different legal for each one, different loans with ltv values and underwriting, net worth, and liquidity requirements, etc.

@Joe D'Occhio

That would be considered a partial exchange and simply the difference between what you sold for and bought for would be considered boot and could be taxable to you.

Keep in mind though, you can account for certain closing costs which reduce what you need to spend in order to get full tax deferral. So if you sold for $70K and had acceptable closing costs of $5K (real estate commissions, legal fees, transfer tax, etc), then you would need to purchase for equal to or greater than $65K and spend all of you cash from your sale to get full deferral. ZIn this scenario, if you purchased for $50K your potenial tax liability would be $15K.

Hope that helps.

Originally posted by @Jake Weir :
@Bill Exeter and @Ryan Thomas

Does the above example also work in the other direction?

For example:

Home is owned TIC by two owners. Can one owner 1031 exchange for something of greater than or equal value than 50% of the sales price and the other pay the capital gains on their 50%?

Thanks, Jake

Yes, since each of the investors own an undivided 50% interest as tenants-in-common (TICs), they can each go their separate ways. One of them could do a 1031 Exchange and one of them could cash out and pay their taxes, etc.

Originally posted by @Joe D'Occhio :
I have a question on the subject....

what if you sell the property for less then what you paid? Say you bought for 70K and sold for 50K your replacement value or your tax consequences would only be 50K correct....

If you sell the property for less than what you paid for it, then you would have a capital loss and likely not need to complete a 1031 Exchange. You should also look into whether you have any depreciation recapture issues before you just sell and cash out. If you bought the subject property through a prior 1031 Exchange, make sure that the deferred gain is not a problem. In order words, did the property fall sufficiently in value to off set ALL gains.

Originally posted by @Ryan Thomas :
@Joe D'Occhio

That would be considered a partial exchange and simply the difference between what you sold for and bought for would be considered boot and could be taxable to you.

Keep in mind though, you can account for certain closing costs which reduce what you need to spend in order to get full tax deferral. So if you sold for $70K and had acceptable closing costs of $5K (real estate commissions, legal fees, transfer tax, etc), then you would need to purchase for equal to or greater than $65K and spend all of you cash from your sale to get full deferral. ZIn this scenario, if you purchased for $50K your potenial tax liability would be $15K.

Hope that helps.

Hi Ryan, I think he is talking about selling the property for less than what he paid for it (his cost basis) so that he has a loss on the sale. I don't think he is talking about purchasing a replacement property worth less than what he sold his relinquished property for.

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