Selling to a partner and 1031 exchange

6 Replies

We have an interesting (complicated?) partnership structure so wanted to get some opinions from the biggerpockets experts!

Partnership structure
: 4 partners - 2 American, 2 Canadian
Property: SFR in Michigan, bought and rehabbed last year, currently rented out, deed has the names of the 2 Canadian partners
Goal: cash out refinance current property, buy/rehab/rent property #2

The Canadians are not eligible for a mortgage so it needs to be somehow transferred to the US partners. 

Idea: The current joint owners (2 Canadians) sell the house to the American partners. The buyers will get a mortgage on this house and continue to rent it out. The sellers (Canadians) will do a 1031 exchange to get another property and defer taxes. Not sure if it matters but the cap gains on the current property are likely around 20-30k.

The idea is definitely not fleshed out and mostly just me thinking out loud. I would love to hear some opinions both on this approach and any other alternative options (something we've thought about - Canadians quitclaim to Americans but the lawyers had mixed opinions on this approach due to confusing tax implications).

Thanks, appreciate any insight!

@Jason Bajaj , Based on your description of ownership length and use the property certainly qualifies for 1031 treatment.  So far so good.

If by "partners" you mean that each of you own a tenant in common interest in the property (25% each??) then that would allow each individual to either combine with the others in a sale or to do their own 1031 exchange.  Since no individual owns more than 50% of the property they are not related parties by the ownership.  Again so far so good.

So what that leaves is the question of the Canadians doing a 1031.  And again there's good news here.  When a foreign investor sells a property in the US normally 15% of the sales price is withheld under FIRPTA against future tax on the gain.  Successful completion of a 1031 exchange exempts the foreign investor from the FIRPTA withholding.  Good news again

There are some catches to the 1031 by a foreign investor.  They have to either apply for a certificate of non-withholding 3-4 months ahead of the sale.  Or they have to complete a "simultaneous" 1031 exchange (where the sale and purchase occur within 2-3 days of each other).  Since you are all on good terms it would be relatively easy for the Canadian duo to find a good replacement and then you would schedule the sale around that.

Good idea.  

Thanks @Dave Foster !! Should have clarified what I meant by partners - the two Canadians on the deed are JTWROS. For the 1031 exchange, is the idea that they'll both end up being joint tenants on the new property as well?

This is super helpful by the way, thanks for your detailed response! 

@Jason Bajaj  In addition to Dave's comments above, your Canadian partners should obtain tax advice from a Canadian accountant or attorney specializing in cross-border business as their is no equivalent Like-kind deferral under Canadian tax law,  CRA is going to see capital gains as being due on the disposition.

@Michael Skoczylas good question - as far as the deed on the house is concerned, the Americans are not on it in any way. The deed only has the names of the two Canadians as joint tenants.

We do have a LLC with 4 members and split up all the income/expenses there (25% even split of everything amongst the 4 of us).