1035 Exchange propery that was a gift and now a rental

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1035 Exchange propery that was a gift and now a rental

Daniel Forte
Member since 2018 · 13 posts · 3 votes
Hi guys, I have a single family property that has been and is currently used as a rental, but was gifted to me by a close family friend years ago. It currently cash flows $200.00/month, but that is without a mortgage(it's paid off). I'm wondering if I could 1035 Exchange it with a more suitable property. Is there an issue cause it was originally gifted to me, and wasn't purchased by me for investment purposes? I really am trying to get around the capital gains on a 80K house. Thanks for any help. Dan F. NewB. Rochester Ny
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
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@Daniel Forte, There are some ways to let her use a gift limits exclusion to get it into your name without incurring a taxable event.  But from a 1031 perspective if you want to sell quickly you'll want her to do the exchange while in her name. 

The IRS specifies that property you sell in a 1031 must be property you purchased with the intent of holding for productive use.  If she transfers to you and you immediately sell then you have a problem because your intent was obviously not to hold for productive use.  So I would have her sell and buy and then transfer to you in a gift exemption manner that doesn't trigger the tax.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Daniel Forte:
    Hi guys, I have a single family property that has been and is currently used as a rental, but was gifted to me by a close family friend years ago. It currently cash flows $200.00/month, but that is without a mortgage(it's paid off).

    I'm wondering if I could 1035 Exchange it with a more suitable property.

    Is there an issue cause it was originally gifted to me, and wasn't purchased by me for investment purposes?

    I really am trying to get around the capital gains on a 80K house.

    Thanks for any help.

    Dan F. NewB. Rochester Ny

    Yes you can 1031 this property. 

    The past gift is just going to determine what is your basis on this property. The basis would be carryover basis of whoever gifted you this property. 

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  • Lance LvovskyPro Member
    Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
    7y

    @Daniel Forte

    FYI 1035 exchange is for insurance contracts. You can 1031. You need a CPA and a qualified intermediary.

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  • Daniel Forte
    OP
    Member since 2018 · 13 posts · 3 votes
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    @Lance Lvovsky Riiight. Thanks Lance
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  • Daniel Forte
    OP
    Member since 2018 · 13 posts · 3 votes
    7y
    @Ashish Acharya that is helpful, thanks for clarifying. Appreciate it.
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  • James Rainwater
    CPA & Tax Planner · Member since 2018 · 8 posts · 5 votes
    7y

    Agree with previous answers. You can 1031 the property, the gift doesn't preclude it from 1031. But, you need to plan with intermediary & CPA prior to the sale. I can't emphasize that enough, don't wait until after the sale or you'll lose the benefit of a 1031.

    You could also take advantage of opportunity zone if the new property is in one. OZ has the potential to defer and possibly eliminate the gain if held long enough.

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  • Daniel Forte
    OP
    Member since 2018 · 13 posts · 3 votes
    7y
    @James Rainwater Amazing. Didn't realize about the opportunity zones. Theres one in the area I'm looking besides. Thank you
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  • John FortesPro Member
    Multi-Family Syndicator · Abington, MA · Member since 2017 · 603 posts · 347 votes
    7y
    @Daniel Forte With the OZ opportunity, make sure you can develop more units if there is already a multifamily component already established. It's very hard to put X amount of rehab and renovation into a complex without the development component minus the price of the land. So if there is room on the parcel to build a few more units go for it. Other than that, development on a zoned land is a good way to tackle the OZ. Very hard if there isn't much development play.
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  • Daniel Forte
    OP
    Member since 2018 · 13 posts · 3 votes
    7y
    Found out this property is actually in my mother's name, not mine.(shes still living) It was left to us when I was a child. Is there a way to get it in my name while avoiding capital gains tax? Would it be easier to do a 1031 exchange before or after getting it in my name? Thanks, Dan
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Daniel Forte, There are some ways to let her use a gift limits exclusion to get it into your name without incurring a taxable event.  But from a 1031 perspective if you want to sell quickly you'll want her to do the exchange while in her name. 

    The IRS specifies that property you sell in a 1031 must be property you purchased with the intent of holding for productive use.  If she transfers to you and you immediately sell then you have a problem because your intent was obviously not to hold for productive use.  So I would have her sell and buy and then transfer to you in a gift exemption manner that doesn't trigger the tax.

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  • Daniel Forte
    OP
    Member since 2018 · 13 posts · 3 votes
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    @Dave Foster that makes sense, thank you. By the way, any recommendations for an Exchange qualified intermediary here in Rochester Ny? Should they generally be investor friendly?
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  • Daniel Forte
    OP
    Member since 2018 · 13 posts · 3 votes
    7y
    @Dave Foster Also, I think I understand about the gift tax, but does that still leave me paying capital gains tax in the end? Thanks for help Dan
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Daniel Forte,  Yes if you inherit there could still be some capital gain tax for you or your mom from a transferred basis.  Someone like @Ashish Acharya can guide you better on that front.  The most tax effective method would be for your mom to retain title until her death and then you inherit it.  That would give you a step up in basis so that the tax and depreciation recapture are entirely wiped out.

    Regarding a Rochester QI the location is not going to be of paramount importance.  There are many national footprint QI's that can help you since 1031 is a federal statute applied the same way nationwide with a couple of little state additions.  Many of our clients start their exchanges in one state and end in another anyway.

    But any QI you work with better be investor friendly because that's their only client - investors :)

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