minimum equity requirements on a 1031 exchange

[Jacob Sharp]

Hello BPers!

I have a deal I am attempting to structure and I would like to be able to provide some guidance to the other party in order to make the transition easier for him.  He is a family friend and this is the first of what I hope are many deals as he unwinds his RE portfolio over the coming years.

He is selling me a small 6 unit apartment complex.  He doesn't need the money from the sale and wants to avoid the tax hit of realizing the sale by doing a 1031 exchange.  I have a commercial building that I would like to purchase and proposed to him that he roll the proceeds from the sale of the apartment building into the commercial building.  

The value of the commercial building is $1M.

The value of the apartment building is $140,000.

Is there a way for him to roll the $140,00 into the commercial building and avoid taxes under at 1031?  To clarify, I would want to structure the deal so that myself and another person were also equity owners in the commercial building.  Essentially he would be swapping his 100% owned apartment unit worth $140k for partial ownership of a $1M commercial building.

Is this possible?  What do I need to know and beware of to make this transaction go smoothly?

Any help would be appreciated!  Thank you!

@Bill Exeter I was hoping you might be able to weigh in on this!

[Dave Foster]

@Jacob Sharp, It's very easy to do this using the 1031 exchange and tennants in common ownership.  Whatever entity owns the Apartment will sell for 140K, do a 1031, and purchse at least 14% of the 1mm commercial building as a tennant in common.  You or an entity you set up would purchase and own the other 86% also as a tennant in common.  This is a very common scenario.  Make sure and set up  a solid management and operations agreement for you to manage the building so he can remain passive.  

The lender may want some ownership structural work or additional guarantees depending on the structure  but these can be worked around.

The beautiful thing about this approach is that he can remain in that position forever and ultimately his heirs get it at a stepped up basis and sell remaining interest to you tax free.  Or he can sell to you at a later date and do another 1031 into something else.  Options abound.