1031 exchange to buy investment partner out?

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1031 exchange to buy investment partner out?

Margo Snow
Member since 2018 · 1 post · 0 votes

I am wondering if I can use 1031 exchange funds to buy a partner out of an existing investment property. Specifically, my brother and I are beneficiaries of a trust. The only asset in the trust is 1/3 ownership of a commercial building. I’m wondering if it is possible to sell a rental property I own and use the funds to buy my brother out of his portion of the trust asset (commercial building) so I am the sole owner of 1/3 of the building. I hope this is not too confusing and that I’ve posted it in the right place. 

Thanks so much! 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    Hi @Margo Snow, You phrased it beautifully.  Unfortunately  I don't think the 1031 will work for you in this instance.  I'm thinking that the trust is an irrevocable trust with it's own TIN and filing it's own return.  If that's the case then the trust is the taxpayer (owner) of the real estate.  The trust could sell the real estate and do a 1031.  But for you to buy your brother out you would be purchasing his interest in the trust and not actual real estate as 1031 requires.

    I'm not an estate/asset protection attorney but I'm wondering if the trust itself could simply buy out your brother in some fashion.  That would leave you as the only beneficiary and all the income would go to you.  It wouldn't do anything to provide you money to buy him out with from the sale of your other property though.  @Scott Smith, what's your take on this?

    The other option you might explore is a sale of the commercial building itself to the other TIC owners. The trust could do a 1031 into properties that might suit you and your brother better. If you could make the timing right you could even sell your other property and do a 1031 on it combining it with one or both of the Trust purchases.

    There's still some options available to you.  But they're not straightforward.

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  • Lance LvovskyPro Member
    Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
    7y
    Originally posted by @Margo Snow:

    I am wondering if I can use 1031 exchange funds to buy a partner out of an existing investment property. Specifically, my brother and I are beneficiaries of a trust. The only asset in the trust is 1/3 ownership of a commercial building. I’m wondering if it is possible to sell a rental property I own and use the funds to buy my brother out of his portion of the trust asset (commercial building) so I am the sole owner of 1/3 of the building. I hope this is not too confusing and that I’ve posted it in the right place. 

    Thanks so much! 

     Does the Trust Agreement allow for the sale of the property held in Trust? Who is the Trustee(s)? What kind of Trust is it and who is/was the grantor?

    Time to get a good CPA.

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