Can I do a 1031 exchange with my portion of a deal?

Question

I recently purchased a house at the court house steps in Baldwin county Alabama. I purchased it with a 50% partner. After we sell the house can I put my portion of the money into a 1031 exchange for the next deal? and if I can, can I partner with another person on the next deal? also if anyone has any recommendations for a good real estate attorney in Baldwin or Mobile county Alabama that would be great. the one I am using right now is not terrible she just does not communicate with me very well. hardly at all really.  we are trying to evict the prior home owner and the lawyer has really dropped the ball on the whole process and cost us two months so far of not being able to even get in the house. I would like to find an attorney that can handle a 1031 exchange and anything else to do with real estate.

Natalie Kolodij · Answer

I don't believe you can do a 1031 for a flipped property- only an investment property which generally involves showing that your intent was to hold it longer term to appreciate in value.

Dave Foster · Answer

@Joshua Thompson You can 1031 on a tenant in common interest of a piece of property.  That's no problem.  You can partner with some one as tenants in common on your 1031 replacement as long as you are taking title to at least as much as you sold.  That's no problem.

@Natalie Kolodij is absolutely right.  It's your intent in purchasing this house that is going to disqualify the 1031.  If you bought it with the primary intent of reselling then your exchange will fail under audit.  1031 is used for property you intend to hold for productive use in trade business or for investment.  If you want to 1031 slow down.  Get the tenant out.  Fix it, Rent it.  And then evaluate whether to sell or hold.

Your looking for an experienced attorney to be on your team and that's an awesome move.  However if the attorney on your team is handling your evictions, liability, and other legal needs they cannot intermediate your 1031.  The qualified intermediary for the 1031 must be a disinterested 3rd party who cannot have any family or business ties with you.  You're going to want an separate intermediary for your 1031s.

Natalie Kolodij · Answer

They actually can do back further than 6 years for something substantial.  It's just not as likely.

Joshua Thompson · Answer

ok so for this house I will probably not do a 1031 exchange sense my intent the whole time was to flip. thank you all for the advice.

Jessica Zolotorofe · Answer

The IRS regulations don't actually have a time limit, although advisory opinions have said at least a year and not just to hold it in order to meet the threshold, but with the intent to keep it. You can do a 1031 with a fixer-upper, no problem, but the intent has to be that you purchased it to lease it out and have the income, not to flip it. It's called the "safe harbor period" if you want to google it.

Dave Foster · Answer

It's known as the magical "we need a new rule and we're the IRS" rule :)

Dave Toelkes · Answer

the answer to your audit timeline question is 3 years from the due date of the return or from the date the return is actually filed whichever is later.  This is just for random audits.  However, if the IRS finds a substantial error, then they may audit the previous six years of tax returns.

Dave Foster · Answer

@Joshua Thompson, there's no statutory holding period required.  The test is intent (which yes is incredibly messy vague and gray).  But intent will be demonstrable by action.  Most conservative folks will say that if you hold at least a year you are in safe territory.  But there's always situations where that might not be long enough to establish your intent.  Or other situations where you had the intent to hold but circumstances changed and you had to change your intent in less than that time.

You're starting off at a disadvantage because your main gig you want to be flips.  But inside those flips there may be properties that you buy thinking that they may make good long term holds or you're not sure if you'll sell or not and want to evaluate for a bit.  I would urge you to do everything in those situations to document your intent - emails and other correspondence with your realtor, acct, atty etc.  Act like you're going to hold - put it up for rent, Actually rent it, etc.  For you it may even be helpful to set up one business entity for your flipping and one entity for your holds.

Adam Nishikawa · Answer

Several methods may be used for your current situation.  It is very common for investors to end up going in different directions and this is why I will share a couple "do's and dont's".  You cannot purchase the interest of your partner or sell the property for cash and an installment note because it will cause a technical termination of your partnership and therefore disqualify you from the time period necessary to satisfy the "held-for Investment" status. If you are on good terms with your partner you have several options. The first method would be to divide the partnership with IRC Section 708(b)(2) providing for a lengthy but possible solution.  You could also exchange into 2 replacement properties and keep the partnership intact.  I would advise consulting your tax expert and looking at other options.  Also best of luck finding a solution for your tenant!

Can I do a 1031 exchange with my portion of a deal?

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