1031 Exchange Structuring Questions

[Chris Mitch]

Hi everyone, this is my first post on Bigger Pockets, but have been a reader for a long time.

I have a few questions on how to best structure a 1031 and was wondering if any of the great minds from this forum may have some ideas for us. It's a long post, so really appreciate everyone taking the time to read and comment. Thank you.

Some background on the situation:

My partner and I each own 50% of the Holding Company LLC, which owns 100% of Sub LLC

Sub LLC sold property for $590k gain, 100% of the proceeds went to QI

We have identified 3 potential replacement properties:

1. First replacement property: purchase price $1.525mm, we'd like to use $229k from 1031 exchange, finance the remaining portion (85% LTV)
1. Can we purchase the property under my name (and not Sub LLC), use $229k 1031 funds as downpayment and transfer the title at closing into Sub LLC? The tax payer will remain Sub LLC as we plan to do a debt assumption agreement post closing, where Sub LLC will assume the debt for the property. In this case the borrower will technically be different than the 1031 entity, Sub LLC, however, the tax payer will remain Sub LLC.
   
2. Second replacement property: purchase price $1mm, we'd like to use $150k from 1031 exchange, finance the remaining portion (85% LTV)
1. The property is new construction that may not have CO by the time our 180 day exchange period ends. Are there any creative ways we can still use 1031 money for the transaction? We'd like to use $150k towards this purchase.
1. Could we purchase the land lot using $150k, close on it within the 180 day window and later close on the house once property is complete and we have CO using bank financing for the remaining portion of the purchase price?
2. Alternatively, could we use a construction loan with one closing in order to use the 1031 funds?
   
3. Third replacement property: purchase price $250k in cash, $211k coming from 1031 exchange and $39k new cash equity coming from us. Do we need a TIC agreement given we are mixing funds?
   
4. Separate question, if we were to purchase a furniture package from the seller by purchasing one of the properties fully furnished, will that have an impact on 1031 and how funds are used if the entire downpayment of 15% is coming form 1031 funds?
   
   

[Dave Foster]

@Chris Mitch, 

1. Technically speaking the LLC and you are not related parties. But it could be mortgage fraud if you don't get permission from your lender to this. It's quirky enough you want a legal opinion on this one. But I've seen worse. You get an A for creativity.

2. Once you close on the lot you cannot later count improvements on a property you own for the 1031.  The 180 days is non-negotiable (without an Irs disaster extension).  You can always take title to the new property as is at day 180.  And it's value might cover your reinvestment requirement.  But again you'll have to get your lender to lend money on a building without a CO.

3. The IRS doesn't care what the source of the funds are. It's probably a cleaner paper trail to lend the $39K to your LLC. No need for a TIC arrangement at all.

4. If the furnishings are broken out on the sales contract and settlement statement then they cannot count as part of the 1031 replacement.  If you're buying the house "as is" with furnishings just included.  And they're nothing outrageous  (10% of the purchase price is a rule of thumb), then the IRS calls it deminimus and you don't worry about it.

But the advantage of purchasing them separately is your ability to then depreciate them using accelerated depreciation.  So you have to weith that as well.