Looking to get further detail and advice regarding selling a rental property and a 1031 exchange.
My father owns an apartment for over 25 years but has not lived in it and has rented it for the past 5. He is looking to sell it and use the proceeds to help my buy a house. It seems like he is not exempt from capital gains tax so trying to find what would be the best solution to this.
My questions are:
1. If he sells and uses the proceeds as a 1031 exchange, can we both go into a purchase together as in mortgage/deed? Or since it is a 1031 would he have to buy the property on his own? Asking this because isnce the property will be a much larger price, don't believe he would be approved as a lone buyer.
2. Would it be a better idea to transfer the property to my name and sell/1031 exchange it that way? Or would there be further taxes/penalties in doing so?
Thank you for your help and look forward to your responses.
If he sells the apartment and enters into a 1031 - he can purchase a tenant in common (TIC) interest in the house with you- as long as he rents his interest to you in an arms length lease. The first hurdle for a 1031 is that it must be for trade or business or investment purposes. If he is just buying you a home, that would not qualify. If he buys lets say 50% of the home, and rents you the other 50% that should work as a good 1031.
If he transferred you the property (ignoring any gift tax ramifications here) you would not be able to 1031 it into your own home, nor would you likely have the requisite holding for investment on the front end.
I think if 1031 is really your desire here, then having you and your father buy TIC interests and having a true arms length lease with him. This may be the best way to do it for gift tax purposes as well.
Thank you for replying Michael.
Your post leads to my next questions:
- Do you only have to use the capital gain amount in the 1031? For example, if the amount of the unit sold could only cover the down payment amount/closing costs, but there's still some money leftover, let's say another 20k which is less than the original purchase cost, would that be ok?
- Regarding the TIC, if his sold proceeds just covers the down payment/closing costs, can a TIC still be done? And later on down the road, would it be possible to transfer over the house to me completely?
- Lastly, is the time frame of a 1031 exchange really only 60 days to be completed?
No Problem Mark - Happy to help.
1. In a 1031 in order to avoid any taxable "boot" your father will have to use all the proceeds- he could use that $20k on another investment property though.
2. A TIC can be done in any amount. A transfer can happen later on down the road. But his intent must be to hold for investment purposes for the time being.
3. With a 1031 - after the sale of the apartment - your dad has 45 days to identify a property and 180 days to close.
However, the 1031 MUST be arranged prior to closing on the sale of the apartment.
Hmm from this I'm gathering a 1031 might be a little difficult to achieve for our situation. Since we would be looking for a long term home to grow a family in, finding a property especially in NY is tough to identify and agree on within 45 days.
Would you have any further advice or recommendations in regards to tax saving for the selling of this apartment?
Thank you very much again.
@Mark Y. , Reverse the thought process and you might find it easier - NYC is an incredible sellers market. How marketable is your fathers apt? Think about selling the apt with a closing date contingent on your finding the new property.
You may also want to locate your new property first and get it under contract with as long a due diligence period as possible. Then put your fathers apt on the market if it will sell quickly. One of four options will occur
1. The apt will sell quickly and the 1031 happens - all tax and depreciation recapture avoided.
2. The apt doesn't sell but you cancel the contract on the new property within the due diligence time period - No harm no foul
3. The apt doesn't sell but you go ahead and buy it and then when the apt sells you don't do a 1031. You pay the tax and pay down the mortgage on the house. In this scenario your father pays the tax.
4. The apt doesn't sell buy you go ahead and buy the house using a reverse exchange. In this scenario the QI for the 1031 takes title to the new house and can hold it for up to 180 days which should give you plenty of time to complete the apt sale. All tax deferred.
To successfully complete the 1031 exchange your father must take title to at least as much real estate as he sells. You could take title to any remaining %. You would need to rent your fathers portion and actually have a lease and pay rent if you want to be safe. But your father can gift you that rent back ever year within the legal limits and he can also gift you some of the interest in the property each year as well.
Not a bad plan at all.
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