I am wondering if a seller of an existing property, say a 4 plex, can do a 1031 into a 'new' property with the same person or entity that he sold the 'old' property to?
Think of it this way, I buy 4plex from 'Frank' for 300K, and he and I partner on a new different property(s) that cost 600K where he puts in the 300K from the sale and I come with 300 K cash or financing for my share. Would there be an issue if my share were a 'seller finance' on share of things?
Thanks, Dan Dietz
I'm sure some of the 1031 facilitators on here will correct me if I'm wrong and amplify what I say if I'm right.
I'm pretty sure that the title of the acquired property will have to be in EXACTLY the same name as the title on the sold property. The last exchange I did was a CA house that I'd bought with my first wife but had bought her out of during our divorce. I never put my new wife on the title to it, no other heirs so who cares about inheritance. When we acquired the 3 TX properties with the proceeds I took title in my own name and it never created any problems. Although I'm pretty sure the Title company required my wife to sign off on the sales because TX is a community property state.
@Daniel Dietz , I think what you're describing is just fine as long as you can do it as a TIC with "Frank". He is selling a townhouse to you for $300K. This is not a related party transaction he is simply selling a property to you and starting a 1031 exchange. You guys get along and decide to go together on a new piece of property that is worth twice as much as the 4 plex he sold to you. He takes title to 50% of it as a TIC and you take title to it as 50% TIC. His cash provides the down payment and you provide the rest of the stroke either with cash or owner financing.
I think I am making some headway :-)
Now two questions that I think I am not going to like the answers to! Assumptions if you will;
1) Frank sold me Property 1 for 300K. But he only wants to reinvest 150K of it towards the new property we are going to buy together and take the rest as 'boot' to get some cash out for spending. I assume 50% of recapture tax will be due and 50% of capital gains dues at that point?
Now on to the new place - Frank puts down the 150K as a 25% down payment on the new 600K property and we get a loan on the rest. We use a TIC agreement for his 1031 to work. We borrow the other 450K. I am detecting that with a TIC there is NOT the flexibility as in a LLC to 'assign' each of us a 50% interest in the new property?
2) I understand that the Frank and I can invest together in the new one even though *I* am the one that bought the old property from him. Could we but a different property jointly that *Frank* already owns? The thought would be that he wants to get out of the day to day but keep some of the appreciation potential. This would allow him to do that. I understand that he would ALSO have to then 1031 that sale into something else too.
I hope that makes sense. "Frank" has a lot of properties that he would like to somehow lessen the work load on :-)
Thanks, Dan Dietz
In the case of the 150 sale, would he be paying full taxes until he hits his basis. So if his basis is 150k, and he takes 150 k boot, he would pay full taxes instead of the 50% as suggested.
@Daniel Dietz , This is like Theseus' string in the labyrinth :)
Easy one first - Frank can't exchange his sale for a property he owns.
Frank can also do a partial 1031 and only reinvest $150 into the $600K building. He could take whatever% tic was appropriate. If it was a $600K building and he is putting $150K down and assuming at least $150K of the debt (jointly or severally) then he could buy 50% tic. BUT.... @Mark Creason is absolutely right - he has a $150K boot problem. And in a 1031 exchange Boot is considered all profit first. So all $150K would be taxable.
Frank could purchase something else with the remaining $150K. Maybe part of something else you own (but you'll have to watch out for a potential step transaction and profit on your end), or a passive fractional cash producer.
Keep thinking I think you're close to getting a great scenario together for Frank. And I hope other readers are paying close attention. This is a great late market strategy for dealing with tired, old landlords. Or are they like gunslingers. There are old land lords and tired land lords but few old tired landlords?
So if I am understanding you guys right @Mark Creason & @Dave Foster what you are saying is that if someone sells a 300K property that they have 150K of 'adjusted basis' in, and they want to take out 150K of 'boot', there is essentially no point in doing a 1031?
I think I *wrongly* assumed that there would only be taxes on 1/2 of the departure & capital gains, since 'half' of the money was being reinvested.
Thanks, Dan Dietz
@Daniel Dietz , I've never been more sorry to be right :(. The first dollars out as boot are taxable as profit not a proration.
Join the Largest Real Estate Investing Community
Basic membership is free, forever.