1031 Alternative Plan

[David F.]

I've had the good fortune of making a couple of property purchases this summer on new construction. Long story short, because of high interest rates and the new construction price slump i was able to get a couple of quadplexes for cheap. I was told I wouldn't be able to rent them out for more than $950 and they went for $1200 in a week! It's a county that's experiencing a lot of growth but new growth. The location has a cap rate of 6% within an hour's drive of a top 10 market and when you put in the NOI the properties are literally worth twice what I paid for them.

The problem is they're still not cash flowing much because I had to use commercial loans with 9% interest.  I'm thinking of selling one of the quads but wanted to run a scenario by that may avoid a big tax bill and also avoid the time requirements associated with a 1031 exchange.

It would go like this. Place the units on a LLC and find a buyer willing to buy a 50% share of the LLC for roughly the cost basis I have in the combined purchases ($1.1 mil), my understanding is there is no profit for me and no taxable event has occurred since the revenue is the same as the cost basis, correct?  I might get a step-up in basis.  The income from this sale would be enough to pay off the mortgages on the properties.

Furthermore, if the LLC were then dissolved with the buyer taking sole ownership of one of the quads and me taking sole ownership of the other quad (which would all be agreed to prior to), this also should not be a taxable event, correct? 

This would not need to be a 1031 transfer either, correct?

I'm trying to find a way to forego the 2-year hold requirement for 1031 exchanges which would slow me down from buying the 10 additional units the builders are planning on building. I'd have better leverage and less debt.

Thanks in advance.

[Ashish Acharya]

You don't need a 2-year holding period for this 1031. 

None of these might be necessary if you have losses that can offer your gain (if any).