1031X investment property into a partnership LLC property

[Chris Harwood]

I have an investment property worth $500K with a $150K mortgage. 

Plan to 1031X into a $1M property with a partner. Partner would bring $500K cash and thus own 50%.

1. Is this type of 1031 into partnership (LLC) possible?

Because my current property has a $150K mortgage, I would either pay cap gains on that pay off amount at closing or...

2. Can I take out a $150K note against my 50% ownership? I assume if the mortgage was taken in both our names it would mean my partner is somehow gaining from this tax avoidance?

Thank you

[Dave Foster]

@Chris Harwood, You will need to purchase real estate with your 1031. So the issue of buying into a MM LLC is first up. You can't simply buy an interest in an LLC that owns real estate. You would have to buy that property (or a % of it) and then contribute it into a new LLC.

Since you're buying the actual real estate as a tenant in common it does become a little easier to deal with the debt.   This could be solved a couple of ways.

1. You actually purchase 65% of the new property with your cash and a loan for the $150K. They take title to the remaining 35%. And then each of you contribute your % of the property into a new LLC.

2. They "loan" you $150K to purchase the property in exchange for interest in the new LLC. You have have $650K to purchase the real estate. They bring in the other $350K. And once the LLC is formed you each own 50% of the LLC.

3. You use your $500K cash. And they use their $500K cash. You each own 50% of the new property and then contribute it into a new LLC. You pay tax on the $150K you purchased less than you sold.

Just a few ways off the top of my head.