1031 exchange ideas

[Mahesh K.]

Folks,

I purchased a cashflow property in a partnership back in 2010 which has performed pretty well (11 cap at purchase and 75% appreciation since purchase).

My partner now wants out (I would prefer to let it ride).  If I had the resources to buy my partner out, I would be looking at a property of about 5.8 cap. 

Another option is to use my capital to 1031 into another property. However, since  the property values in San Diego have appreciated significantly, income properties  are hard to find.   

Any suggestions on other RE investments that my capital can be easily 1031 exchanged into with a  8%+ cap?

Thanks.

[Ryan Thomas]

Hi Mahesh,

When you say partnership, is it an actual partnership / multi-member LLC? If so, then you have an issue here. When performing an exchange, the underlying taxable entity from the sale must remain the underlying taxable entity on the purchase, so the partnership/LLC would need to perform the exchange and acquire the replacement property. Since your partner doesn't want to exchange, then you may have to consider a "drop and swap" transaction, where you deed the property out from the partnership/LLC and into tenant in common ownership. The main issue that comes up here is a holding period issue. The partnership/LLC has most likely held the property long term as an investment, but once you drop out of the partnership/LLC and into tenant in common ownership and perform the exchange, there is a good chance the California Franchise Tax Board could audit you and disallow the exchange. I work for a QI out of NY, but our headquarters are in California, and I have heard the California FTB is very aggressive in going after these "drop and swap" type transactions and disallowing them. You will need to speak with your own tax/legal advisor to see if this is something worth considering.

As to your other point, I'm not sure where you will be able to find an 8+ cap. If you are looking to be active, I'm sure it's possible in some places, if you are looking to be passive, I know most DST's are probably more in the 5%-6.5% range.

If you want to keep the property, why not find a new partner to buy your current partner out?

I hope this helps.