1031 Exchange Estate Planning - Co-Investing with Heir

San Diego, CA · Member since 2017 · 105 posts · 55 votes

Does anyone know how TIC's affect 1031 exchange inheritance rules? Specifically if an heir was looking to co-invest with their parents in a 1031 exchange property, typically this would screw up the estate inheritance process and the stepping up of the tax basis to market value upon the passing of the parents.

In the situation where the parents are exchanging into a TIC in the replacement property, this seems to be a different situation since it's actually the parents LLC which is taking title to real property via the TIC, so if an heir was to invest in the property as an LP I feel the IRS may view this differently but am not sure. Any input from those who have faced a similar situation would be appreciated!

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y
@Keith Meyer The TIC interest that your parents own should receive the step up in basis. The virtue of the TIC structure is that they own a piece of real estate independent of you - it just happens to be a smaller property that is a % of a larger property that you also own some of.
In the situation you're talking about An interest in an LP or LLC also gets a step up in basis. But, especially for an LP there becomes the consideration of the successor heirs outside/inside basis in the entity. And that's a whole nuther discussion with your CA CPA. The step up is there. It is practiced. But you've got to take care with it.
If you're thinking about liabiity issues then SMLLCs owning TIC interests might be the way to go. You get the step up with fewer complications. 1031 flexibility is increased. Two liability shields is better than one - maybe?
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Keith Meyer
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San Diego, CA · Member since 2017 · 105 posts · 55 votes
7y
Thanks Dave, great input here as always. I'm coming to the realization that the hassle originally caused by the need to 1031 ownership interest into a TIC (since our replacement property will be co-owned by multiple partners), may include a blessing in disguise in that I may be able to become one of these co-owners myself and still plan to get the inheritance step-up in basis on the TIC portion owned by my parents. Whereas if we were doing a traditional 1031 exchange where they became the solo owner of a new replacement property, I would not be able to participate as a co-owner and still receive the step-up.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
7y
Originally posted by @Keith Meyer:
Thanks Dave, great input here as always. I'm coming to the realization that the hassle originally caused by the need to 1031 ownership interest into a TIC (since our replacement property will be co-owned by multiple partners), may include a blessing in disguise in that I may be able to become one of these co-owners myself and still plan to get the inheritance step-up in basis on the TIC portion owned by my parents. Whereas if we were doing a traditional 1031 exchange where they became the solo owner of a new replacement property, I would not be able to participate as a co-owner and still receive the step-up.

Remember, you are not getting step up on the portion that you co-own. So, actually your parents owing the entire portion would be much better from tax stand point as entire property gets step -up.
That statement just focuses on the tax treatment. I know there are other important aspects to the transactions.
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