I am a beneficiary of a 5 member family trust that owns several commercial rental properties. We are all getting up in age and looking to sell the trust assets and close the trust. An investment group wants to purchase the properties. They have offered me the opportunity to participate in their purchase (for a preferred return) by re-investing my proceeds from the trust sale back into the same properties.
So I have 2 questions:
A. Can I do this?
B. Can I avoid capital gains and depreciation recapture of the initial sale by using a 1031 exchange or another vehicle?
A. Yes, but why
A: I don't have any control over the trust and for political reasons I'll just say it is being poorly run/abused by another family member. This is an opportunity for me to get out of the investment/trust from the other family members.
Because it is a trust I don't think I can bring in another investor to buy the other members out of the trust? I believe all the assets of the trust have to be sold to close the trust thus triggering a tax event on the property that I don't necessarily want to get out of?
I have invested with the new investor before, and this is an opportunity for me to re-invest my returns into a known investment that provides a quality return. I was hoping to basically do an asset transfer from one legal entity to another without having to pay the taxes on the previous gains at this point.
B: What rules am I breaking that won't allow this type of 1031 transaction? Is there another way to do this?
Any knowledge you guys can give on this on this would be helpful. I am trying to educate myself a bit before I sit with my attorney.
@Jeremy Cart , the trust is a tax paying entity. So only the trust is able to do a 1031 exchange. You cannot 1031 your interest in the trust.