1031 Exchange into Tenants in Common

[Adam Ward]

I'm interested in doing a 1031 exchange out of a couple SFRs and plan to use 100% of the proceeds to purchase a 50% TIC interest in a larger commercial deal that will have a mortgage. The SFRs are free & clear. My question is regarding whether the debt on the replacement property will cause a portion of the 1031 exchange to be taxable.

Using hypothetical numbers for simplicity:

Proceeds from relinquished properties = $250K

Replacement property purchase price = $1M

25% down payment on replacement property = $250K (all of which come from relinquished property proceeds)

The replacement property would have a $750K mortgage, and ownership of the property would be 50/50 tenants in common.

From a tax standpoint, is my 50% interest treated as $125K equity + $375K debt (in which case I believe a portion of the sale would be taxable)?  Or would it be completely tax deferred since I used 100% of the proceeds for the down payment?

Open to any and all thoughts/suggestions.  Thank you!

[Whitney Nash]

Hello @Adam Ward

You'll want to think of this as if you are buying a $500k property since you are looking to by 50% of the $1m property as a TIC. Using your numbers, the sales prices, less allowable closing costs, of all your SFRs combined should be less than $500 if you want full tax deferral so that you are 'exchanging up'. You will also want to use all proceeds from all the sales. Any difference would be taxable. Your proceeds would go towards your 50% portion. The other person would be responsible for their down payment. Since you don't have any debt on them, you don't have to worry about debt offset. Acquiring dept on at replacement property is OK even if you didn't have debt on what was sold. I would assume that the mortgage would be 50/50 as well, or you'll get a loan for 375k and they get one for $375k, for the TIC, so that wouldn't cause an issue.

This is hard to answer without your actual numbers, but if they are indicative and proportionate to your situation, you should be fine and have full tax deferral.