How does JV and/or Seller Carry affect a 1031 exchange?

Question

So I'm talking to a owner of a couple duplexes in Carmichael California. He no longer lives in the Sacramento area and wants to sell what he has here and 1031 into properties closer to the Santa Cruz area where he currently lives. He owns them free and clear so the idea of either doing a JV or a seller carry is something that was brought up.

My question is, how does a JV partnership or a seller carry deal affect his ability to 1031 into other properties?

Dave Foster · Answer

@Logan Vierstra, Both can be made to work.  But there's some bumps.

1. If he wants to JV then he can either sell part of his interest in the real estate  to you (which would then necessitate a 1031).  And then moving forward together as tenants in common.

Or an entity could be created and he contributes the properties and you contribute cash or something.  This is not a 1031 opportunity because there is not a sale of real estate.  And it will end up tying the two of you together as that entity would become the tax payer fo the property.  And the two of you would have to go together.

2. If an owner carry is anticipated then he needs to understand that if he wants to defer all tax he will need to have an amount of cash accessible to him to replace the note with in his exchange account.  If he is willing to simply take the note without 1031ing and pay the tax but pay it over time then he can do that.  But there is a special way he has to handle it if he wants to do a 1031 and indefinitely defer.