1031 exchange on parent's house with title under children's name

1031 Exchanges
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1031 exchange on parent's house with title under children's name

Carmen Chow
Whitestone, NY · Member since 2017 · 19 posts · 5 votes

Hello BP members!

Here's the situation,

My parents currently reside in a single family house (Title was under my parents name originally and was changed over to me + my 2 siblings 9+ years ago). My siblings and I don't live in that house anymore.  Can I do a 1031 exchange on that property? 

Any advice would be appreciated, thank you!

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

@Carmen Chow, If you've treated that like an investment property then you could 1031.  Did you receive title to hold that property for investment?  If so you might  have set up a lease with your parents and reported the income and depreciated the property and reported it as an investment property on your tax return.  

But if you simply took title and your parents just kept living there then the IRS would classify that as property for personal use not investment and the 1031 wouldn't apply.

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

    @Carmen Chow, If you've treated that like an investment property then you could 1031.  Did you receive title to hold that property for investment?  If so you might  have set up a lease with your parents and reported the income and depreciated the property and reported it as an investment property on your tax return.  

    But if you simply took title and your parents just kept living there then the IRS would classify that as property for personal use not investment and the 1031 wouldn't apply.

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  • Carmen Chow
    OP
    Whitestone, NY · Member since 2017 · 19 posts · 5 votes
    7y

    thank you for that info!

    1Reply
  • Ken Mull
    Investor · Long Beach, NY · Member since 2008 · 18 posts · 2 votes
    7y

    Dave,

    If the OP wanted to now us the property as an investment, could she restructure it going forward (renting to the parents) Create a lease, collect rent, claim rent on tax return? Thereby setting the stage to do a 1031 in the future to avoid tax issues. Then take the proceeds and reinvest tax free. If not are there other tax strategies to employ here?    

    https://www.biggerpockets.com/users/davefoster1031

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

    @Ken Mull, Yep that would be the answer.  Change the use to investment by treating it like an investment.  Have a lease, collect rent, take deductions (gift the rent back to the parents if you want but do it within the limits legally).  Now that it's an investment property and treated as such it would definitely be eligible for `1031.

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  • Carmen Chow
    OP
    Whitestone, NY · Member since 2017 · 19 posts · 5 votes
    7y

    @Dave Foster , how long would you need to hold the property to qualify for 1031 exchange suppose we restructure it going forward? 

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

    @Carmen Chow, that's a very interesting question particularly for you because you've actually owned the property for a while.  So much depends on your intent how you documented that over the time you owned it.  There is no statutory holding period.  Only that your intent must have been to hold it for productive use.  Most folks feel comfortable with anything more than a year.  It puts the property on two consec tax returns, turns the gain into a capital gain, separates the purchase and sale on tax returns, etc.   But there could always be circumstances where a shorter (or longer) hold period was appropriate.  Again the key is your intent and how you document it.

    You've certainly owned the property plenty long enough.  The question is how you could document the investment intent.  Since you're still pre April 15 I would make sure that the property was treated like an investment property for 2018 and will be treated like an investment for 2019 and then decide as you move through 2019 what it feels like to you.  

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  • Carmen Chow
    OP
    Whitestone, NY · Member since 2017 · 19 posts · 5 votes
    7y

    Lets say in 5 years, we decide to do a 1031 exchange on this property

    House was brought for 300k, say we can sell for 1 million (no mortgage) 

    We use that 1 million and buy 2 condos (all paid off)

    Condo A for parents living

    Condo B as rental property

    Would that work?

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

    @Carmen Chow, in the same way that the property you sell has be used for investment purposes you would need to use the replacement properties for investment also.  There's nothing wrong with renting to your parents and treating it as an investment property.

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  • Ken Mull
    Investor · Long Beach, NY · Member since 2008 · 18 posts · 2 votes
    7y

    Dave

    From a tax return prospective, would it need to be claimed on all of the siblings tax returns? What about the parents returns?

    Also if they were to do a 1031 in the future, how would that need to happen? Do all of the siblings need to participant?

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

    @Ken Mull, That's a conundrun.  Much depends on the nature of the ownership.  Consistency of facts and circumstances makes me want to say yes.  But I'm not sure if the siblings were not all tenants in common that each of them technically couldn't own with their own intent.  Some of them may have wanted to simply provide a place for their parents to live with their %.  Some might want to use and show it as an investment.  Off the top of my head that's technically possible.  But radar would start beeping pretty quick if they were trying to figure out how income made it to one sibling but they reported as just personal property.  Or the sibling who reported as investment but didn't declare rent.  

    Selling if all agreed that it was investment is very easy if they are TIC. Each one has the opportunity to do an exchange or not on their %. So they could all go different directions if they wanted.

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  • Carmen Chow
    OP
    Whitestone, NY · Member since 2017 · 19 posts · 5 votes
    7y

    @Dave Foster

    Thank you so much for your responses!! I really appreciate that.

    If I can just pick you brains a bit more: 
    The other side the coin,
    Lets say we decide to sell the house right now- how much would we get taxed for capital gains? Say the house was brought for 300k and sold for 1 mil.  I understand if you live in the property 2 out of the 5 years, 250k would be tax exempted and we would get taxed accordingly based on income. But since its under 3 people's name and we moved out at different times... how does that work?
    Sibling A- moved out more than 5 years ago Sibling B- moved out 2 years ago Sibling C- moved out 1 year ago
    My question is: would the capital gain be split among the 3 siblings and taxed differently? 
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Carmen Chow Oh yeah  this is getting into CPA area.  There could very easily be a different amount of tax and even tax rate for each of you.  The only person who will have that is your accountant since it is all determined on how they have treated it on past and current returns.  I'm just guessing but I think Sibling B and C and anyone still living there when it's sold would get their 121 deduction so tax would be eliminated or greatly reduced.  Sibling A is going to pay tax unless they do a 1031 exchange.  

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