1031 exchange: multiple parties, one property

8 Replies

Hypothesis:

Party 1 owns an investment property and would like to sell and purchase a like-kind property. Party 2 also owns an investment property and would like to purchase a like-kind property. Both parties would like to purchase the same property. Does a 1031 exchange allow for multiple, separate parties to purchase the same property together without realizing gains? The property to be purchase is a multiple-dwelling unit costing more than both owned properties. Asking for a friend.

@Andrew Aladjadjian Primary residences don’t qualify for 1031s, only property used in a trade or business of held as an investment would qualify.

If they lived there 2 out of last 5 years then they could take the 121 exclusion, which excludes $250k of Cain if single or $500k of gain if married and files jointly.

Hi @Andrew Aladjadjian

Yes, both parties can buy into the same replacement property. They would acquire the replacement property as undivided interests as tenants-in-common. The interest or percentage that each party acquires must have a value that is equal to or greater than the property value they sold as part of the 1031 Exchange (trading equal or up in value) if they want to defer all of their taxes.

The sale of the primary residence falls under Section 121 of the Internal Revenue Code.  It allows the property owner to exclude up to $250,000 in taxable gain if they are single or $500,000 in taxable gain if they are married as long as they have lived in the property for at least 24 months out of the last 60 months (2 out of the last 5 years).  

The source of the funds does not matter.  One party could structure a 1031 Exchange and the other party can use their primary residence or even out-of-pocket funds.  

It is important that the new property is treated, managed, reported and filed as a tenant-in-common investment.  You do not want to call it a tenant-in-common but actually treat it like a partnership.  Partnership interests do not qualify for 1031 Exchange treatment.  

@Andrew Aladjadjian , If one party is wanting to use the new property as a primary residence then they cannot sell their investment property and do a 1031 into a tic interest on the new property. 1031 exchanges are only for investment to investment real estate. So that idea is a non-starter.

However, If two folks wanted to get together and buy a property to be the primary residence of one and the other does a 1031 into their TIC interest that would be fine. But in this case it is critical that the party that does the 1031 treats their TIC interest as investment. They would need to create a lease for their part to the other party, collect rent, report rent (use legal gift limits if they want to return the rent to the other party). If the two parties do not treat it this way the one who 1031s is in jeopardy of having their 1031 look more like an exchange into personal use real estate and that could fail their exchange.

Reporting that new property as a partnership will create a new taxpayer for the property and again the 1031 exchange would be invalid.  It needs to be treated as tenants in common and reported as tenants in common.  That way the tenant who is living there gets the benefit of sec 121 for their share by reporting it as such.  And the tenant who has done the 1031 gets the benefit of the tax deferral of the 1031 by treating it as investment property.