1031 and letting child take over investing - best options?

Question

My husband and I are trying to set up a 1031 exchange for the sale of our house which is free and clear. But because we are older and nearing retirement, we want our son to use this 1031 money to continue investing in real estate for our family while my husband and I take a much needed break. From what I’ve read, once you start a 1031 you can’t change the names. So we’re wondering if we need to add his name to the deed before selling the property? Or perhaps another idea is to put it under an LLC with all our names in there? Does anyone have any recommendations? Thanks!

Dave Foster · Answer

@Debbie Cost, do not change the title on that property right before a sale. The IRS has made it a habit of disallowing such exchanges. It looks like an opportunity to dispose of property in order to avoid paying tax and the new owner looks like they did not purchase the property to hold. they purchased the property to sell and that disallows it for 1031.

The more proper way to do this would be to sell as yourselves and buy the replacement property as yourselves (letting your son help direct what you buy). then after the 1031 is complete you have a couple of options.

1. You could use gift exemptions to gift him some or all of the real estate.

2. You could set up an LLC and contribute the Real Estate into that LLC and then add him as a member of the LLC.

But.... I'd think long and hard before doing anything that transfers ownership to him now because it could short circuit the greatest gift you can give him - the step up in basis when you pass away. When you die the property goes to your heirs as if they paid market value on the day you die. So all of the tax and depreciation recapture over the years is gone and your heirs now have property with fresh depreciation clocks and no deferred gain or tax. That's a massive way to build intergenerational wealth.

To do that you may want to keep everything in your name but have an operating agreement with him so he manages and runs the real estate without owning it. As long as you're not dealing in debt that's not a difficult scenario to set up.

Lance Lvovsky · Answer

@Debbie Cost

If you gift the house to your son, even a partial interest, you may need to file a gift tax return. Doesn’t mean you will owe gift tax.

Could still be a good route for you to take.

1031 and letting child take over investing - best options?

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