Can capital gains be rolled into another property via 1031?

Question

Wondering if capital gains from a sale (and capital gains only) could be taken and rolled into a different property via 1031 exchange to avoid the tax hit. Or does one have to take all the proceeds and roll them into a property(s)?

Thanks

Wayne Brooks · Answer

“Developing profits” do not qualify for a 1031.....Only properties held for investment. Having partners complicates things as the buying entity for the replaxememt property typically has to be the same as the selling entity.

Two basic rules for the 1031....

ALL proceeds must be reinvested

The purchase price of the replacement property must be equal to or greater than the sale price of the initial property(less actual selling costs)

@Dave Foster knows all this stuff, and any possible exemptions.

Dave Foster · Answer

@John Kim I just hit vote on everyone. They've all nailed it.

1. If your project is a partnership then the partnership has to do the exchange you cannot just exchange your 50% because the 1031 has to be the sale of real estate by the tax payer. And in this case the tax payer is the partnership.

2. If it was a true development deal then the property was not purchased to hold for productive use and it would be taxed at ordinary income (no 1031 possibility).

3. You have to purchase at least as much real estate as you sell and use all of the net proceeds if you want to fully defer all tax.

Within all of this could be a hundred variations or possibilities depending on your specific situation. But you're getting very solid BP advise!!!

Ashish Acharya · Answer

Agreed with @Kyle Kadish. You are not allowed to receive any cash from the transaction. If you do, you will be taxed to the extent of your cash received or gain, which ever is less.

Opportunity zones are much better if you are just looking to defer taxes and keep the non taxable basis. It comes with other tax benefit such as potentially avoiding 15% of your initial cap gain and 100% of future appreciation.

Peter Lee · Answer

@Dave Foster Thanks Dave, I'll take a harder look at TIC. Appreciate all your sage advice.

Mark Creason · Answer

@John Kim

In your example, if the development deal was structured as a limited partnership, you would not be able to 1031 exchange proceeds. You might be able to participate in an opportunity zone fund. Feel free to PM me.

Mark

Lien Vuong · Answer

All proceeds have to go into the next property, must be income producing and you cannot live in it.

Kyle Kadish · Answer

@John Kim for a 1031 exchange, any net proceeds from the sale not reinvested is taxed. Opportunity Zone investments allow for only gains to be invested to defer taxes.

Dave Foster · Answer

@John Kim, If the property is structured as a TIC then it is a very easy process. When the property sells each owner can decide whether or not they want to 1031 their TIC % of the property or take cash and pay tax on their %.

Strictly from a 1031 perspective, TIC with a good management agreement is the absolute easiest way to go into partnership relationships and exit them.

Peter Lee · Answer

Dave, if the partnership was structured as a TIC instead of an LLC, would that allow me to exit my half and utilize my proceeds for a 1031?

Peter Lee · Answer

Thanks everyone for the comments. Guess I will have to give this some thought regarding the restrictions created by having the assets held in LLC.

Can capital gains be rolled into another property via 1031?

Can capital gains be rolled into another property via 1031?

Most Popular Reply

12 Replies