Will this work for 1031?

Question

I have one rental property in California and would like to do a 1031 exchange in the near future to co-buy 2 homes with my two children.

For example, suppose I sold my house for $500k and put $250k as a down payment whereas my son has no downpayment. He and I co-purchased a house for $600K as tenants-in-common (TIC), and he lives there and will take out a $350K loan on his own. Because I hold 250/600 = 41.67% of the property under TIC, I will receive 41.67% of the Fair Market Rental (FMR) income from him.  Both of us will be listed on the loan application, but I will be the non-owner occupied and he will be the owner occupied.

My daughter and I co-purchased a house as tenants-in-common for $500k, and she lives there and takes out $250K on her own to pay for the price difference. My percentage interest is 250/500=50%, which means I will receive 50% of the FMR income from her. Same loan scenario and title ownership as above.

Two questions:

1. In the case of a 1031 exchange, is it permissible to have only my name on the relinquished property and both of our names, my daughter's/my son's and mine, on the replacement property when the property's title is held under TIC?

2. Generally under TIC, each co-tenant receives an interest proportionate to share of CASH money contributed for the purchase. If one person contributes $1 and another co purchaser contributes $9, then the ratios of ownership are 10%/90% notwithstanding any debt that may blanket the whole property. How does this work for 1031 exchange?

Dave Foster · Answer

LOL. Thanks for that shout out @Bill Brandt.  Am I always the debbie downer ?? :)

@Jennifer Bui, The key is going to be that you purchase (take title) to at least as much real estate as your net sale ($500K ish).  And that you use all of your cash proceeds (Also $500K ish it sounds).  As long as you do that you will have deferred all tax.  And the rest of the % of the property can be taken by you or anyone.

As far as the TIC part it's important to think of the replacement property as two distinct properties that just happen to be a smaller piece of one larger property.  You own a property for $250K that happens to be 50% of a larger property worth $500K.  Your son or daughter could own the rest just fine.  And it's important to note that ownership %s do not have to be allocated strictly along dollars invested.  You and another person can structure a TIC however you feel is a fair allocation.  You just have to be mindful of the 1031 reinvestment requirements.

The only hiccup is that you have to have an investment motive in buying that property and not just to help your child.  So you would be best served to rent your share of the property to them.  Do it as arm's length.  Have a market lease.  Charge them market rent.  Declare the income and take the expenses for your share.  If you want to at the end of the year you can use. appropriate annual giftng to give them. the rent back.

It's only a related parties problem if you treat them preferably as a related party in this case.l

Bill B. · Answer

The first part is ok, the TIC part. But you’re going to need @Dave Foster and probably a great cpa (unless Dave’s answer is no. :-))

The second part could be a problem. How can your child buy as an owner occupant and pay rent? A cpa might be able to pull off a “they’re renting the 2nd half argument.”

I don’t THINK you have the related parties problem, though that’s a question for the experts. You COULD simply buy those two rentals and then have your kids pay you “rent” for the entire properties. Then just leave them the homes tax free when you pass.

Dave Foster · Answer

@Jennifer Bui, to defer all tax - $607k

Jennifer Bui · Answer

I have one more question @Dave Foster.

I paid $107K for my rental many years ago. Assume I sold it for $607K and profited $500K. I need to purchase at least $607K or $500k of real estate? Thank you again!

Jennifer Bui · Answer

Thank you, @Dave Foster, for your advice.

I plan to have a “Shared Equity Agreement” with my children which spells out that we share  a certain percentage of property taxes, homeowner’s insurance, and other expenses and my son/daughter is 100% responsible for the mortgage. I'll declare the income and deduct the expenses for my portion.Could you please clarify this point "And it's important to note that ownership %s do not have to be allocated strictly along dollars invested."?

Jennifer Bui · Answer

The second part could be a problem. How can your child buy as an owner occupant and pay rent? A cpa might be able to pull off a “they’re renting the 2nd half argument.”Yes, they will pay me rent based on my percentage interest in their properties since I won't be living there (non-owner occupied)

I don’t THINK you have the related parties problem, though that’s a question for the experts. You COULD simply buy those two rentals and then have your kids pay you “rent” for the entire properties. Then just leave them the homes tax free when you pass. Because I am nearing retirement and my income is limited, I will be unable to purchase two residences as you propose and also, my children may prefer to acquire a more expensive home.

Jennifer Bui · Answer

The second part could be a problem. How can your child buy as an owner occupant and pay rent? A cpa might be able to pull off a “they’re renting the 2nd half argument.”Yes, they will pay me rent based on my percentage interest in their properties since I won't be living there (non-owner occupied)

I don’t THINK you have the related parties problem, though that’s a question for the experts. You COULD simply buy those two rentals and then have your kids pay you “rent” for the entire properties. Then just leave them the homes tax free when you pass. Because I am nearing retirement and my income is limited, I will be unable to purchase two residences as you propose and also, my children may prefer to acquire a more expensive home.

Will this work for 1031?

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