1031 Exchange % Interest

[Tony Tran]

Hello BP,

I am in need of your infamous brilliance. I am currently going through a 1031 exchange and wanted to ask a few questions about 1031 to understand the scenarios better. Thank you for any help you can provide!

1. I sold the home in my personal name (no one else was in the sale) and the funds were transferred into an exchange escrow account. Would it be possible to team up with another investor and do the exchange? Where the other investor is adding the additional down payment.

2. If the FMV equate to what was sold or greater because of the other investor, would I be subjected to any taxation?

Thank you for your help!

Tony

[Bill Exeter]

Hi Tony,

(1) Yes, it is possible to bring on another investor. However, for your 1031 Exchange to qualify, you must acquire a direct interest in the real estate as a tenant-in-common.

(2) Your interest (percentage) of the replacement property that you buy must have a value that is equal to or greater than the net sale price of your relinquished property. So, to answer your question, if you buy a replacement property that has a purchase value equal to the property you sold, and you bring on a co-investor, yes you will recognize some or all of your tax liabilities because you have not exchanged equal or up in value.

So, for example, let's say that you sold your relinquished property for $525,000 and your routine selling expenses were $25,000 so that you have a net sale price of $500,000. In order to defer all of your taxes, you must acquire replacement property worth at least $500,000 (your net sale price). If you buy a property for $500,000 and bring on a 50/50 partner, then you have only bought 50% of the property, or $250,000, and would have "traded down" in value by $250,000. The amount that you have traded down by, or $250,000, is taxable, and likely will trigger most if not all of your tax consequences.