How to avoid taxes on a partnership with 1031 exchange

[Wilson Vanhook]

I have a very specific unique situation on hand. I'm doing a 1031 exchange from one property of mine to a new rental. I have somebody who would like to partner with me on the new rental property. To avoid taxes my plan was to fund the full amount of the down payment on the new property from MY 1031 exchange funds, and then have my partner pay me their half after the fact. Is there any way for my partner to pay me a large sum of money (~$50k) without me being taxed on receiving the money from them in this scenario?

[Dave Foster]

@Wilson Vanhook, I see where you're trying to go with the 1031.  In order to defer all tax you must purchase at least as much as your net sale and use all of the proceeds.  If the property you're purchasing is greater than your sale your partner can take title to any extra % as a tenant in common with you.  

There's no issue with you putting in all the down payment and having you and your partner divide the sale as tenants in common.  As long as you purchase at least as much as your net sale and use all of the proceeds in that purchase you'll be fine.

The problem comes when you want to end up with cash in your hands.  That's going to trigger a deemed sale, or possibly be classified as a taking of boot after the fact and jeopardize your exchange.

Two options to take to your accountant

1. actually sell them a % of the property after your 1031 is complete.  This will almost surely trigger some tax.  But the opportunity cost analysis will help give clarity to the situation.

2. Contribute the property into a new LLC after the 1031 is complete and give a membership interest in the LLC to the partner in exchange for cash. The cash doesn't come to you. But it does balance the books between you. And the cash goes into the capital accounts of the LLC. There could be great benefit in that.