1031 out of a shared investment.

5 Replies

A family member owns a 1.5% in a hotel that just sold for 9 M, cashing out at roughly 110k. I'm wondering if a 1031 exchange would be applicable in this situation. It is my understanding that in a 1031 exchange the property being traded up to must exceed the value entire asset sold, requiring a purchase of 9 M+. Is this a correct interpretation?

@Ryan Heywood , There was some possibility that a 1031 would have been appropriate.  if the individual owned a tenant in common interest in that property they could have exchanged for their % only so their reinvestment target would have been 110K.  

If they owned a percentage of an entity that owned the hotel then that entity would have needed to do the 1031 and would had had a reinvestment target of 9 milish.

But it sounds like it is a moot point since they have cashed out.  It sounds like the sale has happened.  The 1031 has to begin prior to closing of the sale with an agreement with a qualified intermediary.

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That was my fear, the asset was owned by and entity that she had a stake in. I believe she recieved payment today. Well, you live and learn.

Thanks @Dave Foster for you response

Originally posted by @Ryan Heywood :

A family member owns a 1.5% in a hotel that just sold for 9 M, cashing out at roughly 110k. I'm wondering if a 1031 exchange would be applicable in this situation. It is my understanding that in a 1031 exchange the property being traded up to must exceed the value entire asset sold, requiring a purchase of 9 M+. Is this a correct interpretation?

Hi Ryan,

There are a number of moving parts here. 

The family member could have structured a 1031 Exchange if he/she owned a direct interest in the real estate such as through a Tenant-In-Common (TIC), Delaware Statutory Trust (DST), Living Trust or Land Trust structure. They would have only had to acquire a Replacement Property that is equal to or greater in value based on their 1.5% interest. The reinvestment requirement is based upon their specific interest in the property and not the entire property value.

However, if he/she owned the interest in a multiple member LLC, partnership or corporation it gets more complicated since the actual owner/investor is the entity and not the individual. The entity could have structured a 1031 Exchange and acquired a Replacement Property for $9.0 million or more and deferred the taxes, but that would have required the entity to stay together. There are many potential solutions to this issue when the partners want to go different ways upon the closing of the sale.

In this case, it sounds like it has already closed and the funds have been distributed and received by the family member, so it is too late to structure the 1031 Exchange at this point in time.