1031 Legal/Tax Question
Mission Viejo, CA · Member since 2017 · 7 posts · 4 votes
1031 Legal/Tax Question
Most Popular Reply
MN · Member since 2025 · 107 posts · 97 votes
1yCouple key issues here and unfortunately they both complicate your situation:
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First Issue: A 1031 exchange cannot be between related parties, and the fact that your mom would acquire the new property (called the "replacement property" in 1031 terms) outright and then sell it to the LLC that she is also an owner of would disqualify the LLC from being a buyer that qualifies for a 1031 with that property as a replacement. For the property to qualify, your mom, her spouse, parents, grandparents, children, or grandchildren (lineal descendants and ancestors) would need to be less than 50% owner of the purchasing LLC. By your account, it seems like 100% of the LLC's owners would be considered descendants of your mother by the letter of the law, disqualifying the exchange.
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Second Issue: Personal use and the overall intended use of the property you are selling (called the "relinquished property" in 1031 terms) can be a significant issue if your intention is to do a 1031 exchange. There is some grey area here and more detail than I can get into in a quick reply, but if either the replacement property or the relinquished property are used for more than 14 days per year as a personal vacation home, there are additional considerations and in some cases a 1031 may be outright prohibited. In general, a 1031 exchange is only applicable for investment properties, and any personal use needs to be ancillary to the investment income it generates from rental income (I’m oversimplifying, but generally if you’re not operating this as a vacation rental and have minimal personal use, the 1031 is often off the table).
Issue 2 requires some serious consideration before you move forward, and even if you feel you have a strong case there, I still think issue 1 is going to be a huge hurdle.
Assuming you overcome the hurdles with the second issue, An alternative strategy to get around the first issue could potentially be using an EAT (exchange accommodation titleholder) instead of your mom taking title to the property. This is a third-party company that (for a fee) will essentially purchase the property on paper and hold it until you sell the TX property and can use the funds from that sale to complete the purchase of the new condo. Your mom would just act as the lender to the EAT in this scenario and would get paid back from the TX property sale like any other lender would. To keep it above board, she would just need to receive some interest (minimum legal interest rate right now is ~4-5% depending on the context).
This is obviously all high-level, so it’s important to get into the weeds with your CPA. If your current tax accountant is out of their element with this stuff, be sure to reach out to folks found here in the forums for a second opinion. Good luck!
5 Replies
- MN · Member since 2025 · 107 posts · 97 votes1y
Couple key issues here and unfortunately they both complicate your situation:
-
First Issue: A 1031 exchange cannot be between related parties, and the fact that your mom would acquire the new property (called the "replacement property" in 1031 terms) outright and then sell it to the LLC that she is also an owner of would disqualify the LLC from being a buyer that qualifies for a 1031 with that property as a replacement. For the property to qualify, your mom, her spouse, parents, grandparents, children, or grandchildren (lineal descendants and ancestors) would need to be less than 50% owner of the purchasing LLC. By your account, it seems like 100% of the LLC's owners would be considered descendants of your mother by the letter of the law, disqualifying the exchange.
-
Second Issue: Personal use and the overall intended use of the property you are selling (called the "relinquished property" in 1031 terms) can be a significant issue if your intention is to do a 1031 exchange. There is some grey area here and more detail than I can get into in a quick reply, but if either the replacement property or the relinquished property are used for more than 14 days per year as a personal vacation home, there are additional considerations and in some cases a 1031 may be outright prohibited. In general, a 1031 exchange is only applicable for investment properties, and any personal use needs to be ancillary to the investment income it generates from rental income (I’m oversimplifying, but generally if you’re not operating this as a vacation rental and have minimal personal use, the 1031 is often off the table).
Issue 2 requires some serious consideration before you move forward, and even if you feel you have a strong case there, I still think issue 1 is going to be a huge hurdle.
Assuming you overcome the hurdles with the second issue, An alternative strategy to get around the first issue could potentially be using an EAT (exchange accommodation titleholder) instead of your mom taking title to the property. This is a third-party company that (for a fee) will essentially purchase the property on paper and hold it until you sell the TX property and can use the funds from that sale to complete the purchase of the new condo. Your mom would just act as the lender to the EAT in this scenario and would get paid back from the TX property sale like any other lender would. To keep it above board, she would just need to receive some interest (minimum legal interest rate right now is ~4-5% depending on the context).
This is obviously all high-level, so it’s important to get into the weeds with your CPA. If your current tax accountant is out of their element with this stuff, be sure to reach out to folks found here in the forums for a second opinion. Good luck!
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I don’t think so. Because she can’t do a 1031 in to something she already owns,
But…
Luckily for you, you fall in the super rare, can afford to pay cash category.
It will cost more, but as long as you can sell your Texas condo within the 1031 exchange time limits, you’re golden.
You’re going to want to reach out to @Dave Foster and ask him about the procedure and cost of doing a "reverse 1031". You'll buy the new property but not own it. You'll borrow the cash required to a separate LLC not owned by you (or your mom for that matter.) to purchase it and hold it until you can pay that LLC back.
- Mission Viejo, CA · Member since 2017 · 7 posts · 4 votes1y
Thanks for the insite…I assumed it would be too good to be true.
- 1yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
Thanks for that shout out. @Bill B.. @Eric Dacierno, I don't think it's too good to be true at all. I think it would work for you.
I like @Dylan Brown's analysis of your issues. I'm not concerned so much with issue #2 that he raises since you're calling it a vacation rental. And you've got some experience in that sector.
However #1 is a potential thorn. It's not that you cannot buy and sell properties between related parties. But if you are buying from a related party with the intent of avoiding taxes then it is not allowed. And this is what has hung up many an accountant. Some say because it is not prohibited specifically we will use an arms length transaction and it is fine. Others just say no. There is not a lot of case law on this at all. So no one is really sure because not enough have been challenged.
In your case there is an additional interesting question. Your mom does not own more than 50% of the LLC. That would not make her ownership a related party. However since all. of the members are related parties I think your legal counsel might be a little skittish about having your mom buy in CA and then sell to the LLC. But maybe not.
The easiest answer is a reverse exchange. The 1031 intermediary sets up the EAT (referred to by Dylan. The EAT can hold the new property for up to 180 days while the LLC sells the old property and then does a 1031 to buy the property owned by the EAT. This is a very common scenario that would work quite nicely for you.
The 1031 Investor5140 Reviews - 1yCasey OwensPro MemberInvestor · Cleveland, OH · Member since 2025 · 7 posts · 0 votes
Hi Eric,
This is definitely a creative structure, but there are a few key hurdles to be aware of.
The biggest issue is that your mom would likely be considered a related party to the LLC (especially since she owns 50%). If she personally buys the California property now and later sells it to the LLC after the Texas condo is sold, that may be treated as a related-party transaction, which can disqualify the 1031 exchange — unless she is also doing a 1031 herself, which doesn't sound like the case here.
To be safe, I’d recommend confirming with a CPA whether she’s considered a related party in this setup.
A more viable alternative could be a reverse exchange, where the replacement property is acquired first using an exchange accommodator, and the Texas property is sold afterward — all within the 180-day window.
If you're seriously considering this route, a qualified intermediary (QI) can walk you through the process.
Also, a quick reminder: if the new property is going to see any personal use, you’ll want to be cautious about use in the first two years. Excessive personal use can also jeopardize the 1031 treatment.
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