Sell % of property + 1031? (first question)

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Sell % of property + 1031? (first question)

Account Closed
Member since 2018 · 3 posts · 1 vote

Hi. Just joined. Here's my situation (using rough numbers)

Bought house in 2007 as part of a 1031

Lived in house for 3 years

Rented house in 2010

Want to sell, tenants want to buy

House worth 1.5M, I owe 200k, tenants can afford 1.2M

I want to sell and somehow not exit the 1031. I've read up on MIS, CRT, NNN, owner finance.... I'm not sure yet what way I'll go

But my question is, is there any way for me to somehow "sell" the property to my tenants who can only afford 1.2M? If I could apply (1M = 1.2M - 200k) to my next venture and not lose the 1031, that could work for me. But what happens to the other 300k? I could also be interested in somehow selling them 80% (1.2M/1.5M) and somehow hanging on to 20% (300k/1.5M) as a long term investment.

Bottom line is I am trying to find a solution whereby

1. tenants pay 1.2M get to stay there long term

2. I get a min of 1M to invest elsewhere and not pay capital gains

3. somehow the 300k remainder also doesn't trigger capital gain

I hope that makes sense! I'd welcome any creative ideas....

Thanks.

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  • Bob B.
    Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Account Closed will be along shortly to make sure you do it correctly.

    3Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Account Closed, Some interesting possibilities here.  First remember your requirements to fully defer all tax - First you must purchase at least 1.5mil of replacement real estate.  Second you have to use all the proceeds from the sale.  If you include the note from the buyer for the 300K then you must spend the note for $300K and the $ 1 mil of cash.

    If you don't put the note into the exchange and use it (or a corresponding amount of cash) in the next purchase you will pay tax on the value of the note.  But you will shelter whatever other gain is in there including from the previous 1031.

    Option 1 - Sell to them for 1.5 and carry back a $300K note outside the exchange.  Tax is paid as cash comes in from the note.  Do a 1031 with the rest of the sale.  This fits your dream list of requirements except that the note is taxable.  But it is delayed and only paid as the payments come in.

    Option 1 - Sell to them for 1.5 and carry back a $300K note but leave it inside the exchange.  When you do this your exchange account will have $1 mil in cash, and a note for $300K.  And you have the responsibility to purchase at least 1.5 in new real estate.

    Sometime before your exchange is over you bring in $300K from somewhere, anywhere it doesn't matter.  It could be cash you have on hand.  It could be a loan from a friend, or a refi of another property.  Or it could even be a refi of a property you have just purchased as part of the exchange.  But you take that $300K of cash and exchange it for the note of $300K.  

    Now your exchange acct has 1.3 mil and the responsibility to use that 1.3 to purchase 1.5 and defer all tax - that works fine.  But also now you have a note for $300K that is outside your exchange.   You "paid" $300K for it so there is now no profit inherent in the note.  And the only tax associated with the note would be on the interest portion as it comes in.

    Option 2 gets you everything you want.  But it takes some maneuvering.  

    Option 3 - You could indeed sell them 80% of the property and do a 1031 on that 80% .  You'd be selling 1.2 in real estate and generating 1 mil in cash.  So your requirements would be to purchase 1.2 using all 1 mil.  And you would still own 20% of the property as a tenant in common with the other party.  This too gets you where you want to go.  But it's awfully messy because you'd now need a whole level of operating agreements etc.  And financing becomes trickier etc.

    Regarding replacements there's a whole heap of things you could do and stay compliant with your 1031.  It all depends on your preference.  

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  • Account Closed
    OP
    Member since 2018 · 3 posts · 1 vote
    7y

    @Dave Foster many thanks. I think I get what you are saying but I'll need some time to digest properly. I may be back with some more questions. Thanks again.

    1Reply
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