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?
TIC (Tenants in Common) is a form of direct ownership that is not affected by the 1031 exchange rules as long as the co-tenants are not treated as partners for income tax purposes.
So, as long as you and your sister have a direct ownership in the property, and do not share ownership through an entity such as a limited liability company you generally will be allowed to defer gain under the 1031 exchange provisions. If you two do not have direct ownership, then generally you and your sister will have to recognize gain equal to the sales price of the property less the adjusted basis of the property and depending on the depreciation method rules you may have to reclassify some of those gains out of capital gain treatment. This would be case specific and allocated to the two of you depending on the operating agreement.
There are more rules and nuances that must be considered as well, so definitely consult with you CPA before transacting. Hope this helps!
Totally answered my question.
@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.
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