Can I use a 1031 to buy the rest of a bldg. I partially own?

[Jorge Jimenez]

Hi all!

this is my first time posting so if I goof on etiquete or post something in the wrong place let me know! Thanks. 

I own a 8 unit apartment building with my sister as tenants in common. I would like to buy her out and own the whole building. Can I sell a duplex and use a 1031 exchange to buy my sisters ownership?

Thanks 

Jorge

[Dave Foster]

@Jorge Jimenez, I appreciate what @Dee Cole is saying and from an accounting perspective he is correct.  Doing a 1031 exchange to buy the outstanding tenant in common % of an asset is perfectly acceptable.   But you are buying from your sister and that is not acceptable.  

What is being left out of the equation is that the other tenant-in-common is your sister.  And your sister is a related party to you and the IRS has some very specific guidance regarding 1031 exchanges when buying from and selling to related parties.  Most of this guidance stems from years of the practice of basis shifting and the opportunities for tax evasion from non-arms length transactions.

there are some very specific cases where exchanges have been disallowed where the replacement property was purchased from a related party.  

the only potential option that has withstood muster in this situation would be if you used your 1031 exchange to purchase the outstanding TIC interest from her and then she did her own 1031 exchange to purchase another investment property. Even then there's pitfalls you need to watch out for.

A better option might be to work with your accountant and explore some gifting scenarios or contribution of assets to a 3rd party corporate entity which ends up being in your sole possession.