1031 exchange into TIC question

[Chris Mitch]

Hi everyone,

I have a question regarding structuring proceeds from a 1031 exchange into a TIC for a specific property. I included some background below:

Sold a property for $950k that resulted in $600k in 1031 exchange proceeds. Identified 3 properties as part of the 1031 exchange within the 45 day window.

Purchased property #1 in March for $1.5mm and used $250k of 1031 proceeds (this satisfied the replacement property being equal or greater than the relinquished property) .

Scheduled to close on property #2 in July for $1mm using $150k of 1031 funds (this will be within the 180 day period).

The question is around property #3, which was identified within the 45 day window. The property is being purchased by a friend for $3mm, financed 65% debt, 35% equity. He will put down some of the equity, but plans to have 10-15 investors for the remaining balance of the equity (none of them are using 1031 funds, other than myself). Could I use $105k from 1031 exchange funds balance to do TIC as part of the broader syndication? The investment would equate to around 10% ownership in the asset. Are there any structuring headwinds that we need to be aware of?

Thank you.

[Conner Jackson]

@Chris Mitch If I'm understanding correctly, you sold a property for $950K with $600K in cash proceeds after closing costs and debt payoff. If this is the case - and you want a complete tax deferral - you would want to not only purchase one or more replacement properties that are equal or great in value than the relinquished property, but you would want to use all of your cash proceeds. Any leftover cash proceeds at the end of the exchange is considered cash boot and is taxed. 

In your case, you have purchased replacement property at a higher value, but you've only used up $400K of your $600K in exchange proceeds held at the QI. If you want a complete tax deferral, I'd suggest using more cash for property #2 that hasn't closed yet - especially since you only plan to put $105K toward property #3.

As far as property #3 goes, this would be allowable as long as you make sure you are on the title/deed as a tenants-in-common owner. If the property were to be purchased by the larger entity and you paid for ownership of that entity, it would not qualify for the 1031 exchange since you aren't directly purchasing real estate ownership in that case.