Can capital gains be rolled into another property via 1031?

12 Replies

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

Originally posted by @John Kim :

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

 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. 

So as an example, lets say its a development project.  Cost basis including improvements is $10MM and it sells for $20MM (so the project returns $10MM) and lets say via a partnership I receive half of the capital gains in $5MM, can I roll that $5MM into a property?  Additionally can I roll that $5MM into another rental property as equity?  or do I need to take down the whole purchase price for a property w the $5MM?

Thanks

@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

“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.

@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!!!

Originally posted by @Dave Foster :

@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!!!

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?

@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.

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