Can I use a 1031 exchange to buy siblings part of inherited home

[Karen Bruck]

Hello everyone.

First time question but have been helped many times with the great advice found on this website.

My Mother's house is located in San Diego, CA. When she passes, the house will be left to 4 adult children, but with the passing of Prop 19 on April 1, 2021, 1 of the 4 children will have to claim it as their primary residence to keep my mother's tax basis. We have always figured that we would keep the house and eventually turn it into a rental, splitting it 4 ways, but now with Prop 19, my brother would be the one claiming it as his residence. (Still not exactly sure where that leaves the other sibling's inheritance, and honestly, I'm not too sure that there is a clear answer for that.) My question is, if I wanted to invest in the house when it becomes a rental, assuming that my brother would need to live in it for 2 years, could I then use a 1031 exchange to do so? I would be buying out 2 of my sibling's portions, leaving me with 3/4 ownership. I would be using the full amount of the exchange plus adding cash to cover the amount owed. 

Thank you in advance for your vast helpful and vast knowledge.

[Dave Foster]

@Karen Bruck, There is an inherent risk when buying from related parties to complete your 1031 exchange.  It is not prohibited by statute.  But the prohibition is that you cannot buy from related parties when the intent is to lessen your tax burden.  And since that's what the 1031 is designed to do this makes it a little problematic.  There are accountants out there insist that as long as it is a business like arms length transaction that it can be done.  I would see how your accountant feels.  But as far as the mechanics go - a 1031 might be available.