1031 Exchange on Land owned in a legal Partnership

1031 Exchanges
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1031 Exchange on Land owned in a legal Partnership

Caroling Lee
Austin, TX · Member since 2016 · 25 posts · 6 votes

Thirty years ago, my mom and dad purchased a 30 acre piece of land in Huffman, TX with my 2 cousins. They paid $40K for it total. My parents put down the $20K and my cousins paid off the rest in payments.

The title/deed is in my cousin's name. Over the years, my mother 'gave' the property to my brother and I and about 7 years ago, my brother created a partnership to make the ownership legal. At that time, my cousin (whose name is on the title), did a Quit Claim Deed to indicate that we all shared 25% each in the property.

We are currently under contract at $285K and I'm interested in using the 1031 Exchange to defer taxes on my portion of the proceeds (approx. 25% which would be around $60K)

  • Can I execute a 1031 Exchange if the title/deed is in my cousin's name?
  • Does the Quit Claim Deed mean that I have 'ownership' and can use the 1031 Exchange?
  • Can anyone recommend a Qualified Intermediary?

I recently put a down payment on a new construction home that won't be ready for move-in until Dec. 2017. Sale price $360. It will be my primary residence. Would this qualify as a replacement property? If not, I have my current primary residence that I plan to convert to an investment property. Could I put the proceeds to my current, but soon-to-be investment property?

I've searched all over the internet for some insight into this, but figured it was such a specific question, that the Bigger Pockets community was my best bet to finding some advice/answers!

Thanks in advance!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Caroling Lee, Hey Caroling,  I answered most of your questions in the PM.  But forgot the last couple.

    1031 exchanges are the sale of investment property and the purchase of investment property.  You cannot buy a primary residence to complete your exchange.  And you can't exchange for property you already own or use the proceeds to pay down existing mortgage.  The other problem with the new construction is that  you have 180 days from the date of the closing of the sale in a 1031 to complete your purchase.  So depending on when you sell the land, the house may not be ready yet.

    If you are set on wanting to use the proceeds as down payment on the new construction and can make the timing work you could simply change your plan and buy it as an investment.  Use it for investment for a couple of years and then move in.  that would not trigger a gain recognition and let you use the 1031 for that property;  But it does slow you down from moving in.

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  • Caroling Lee
    OP
    Austin, TX · Member since 2016 · 25 posts · 6 votes
    9y

    @Dave Foster Thanks so much for all the great information!

    Sounds like I would need to identify a completely different property outside of the new construction primary residence (already under contract) and my current primary (soon-to-be investment) property because the mortgage already exists. And the timing could be another factor with the 180 day limit. 

    I think the best way forward is to simply ID another property, which I'm fine with doing. Seems to make all things easier. 

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  • Caroling Lee
    OP
    Austin, TX · Member since 2016 · 25 posts · 6 votes
    9y

    For those of you interested, I'm copying and pasting @Dave Foster's answer here:

    The way the IRS views it is that the tax payer for the old property must be the tax payer for the new property in a 1031 exchange. Usually this is who is on title but not always because titling real estate is a state thing. Because it is raw land I doubt that it has been reported on anyones tax return. So we have to dig a little deeper.

    Your property is probably one of two ways.

    1. Either your cousin has not quit claimed and it is in his name but you have documents indicating that you are a 25% owner and have been for years. In that case you could do a quiet claim at closing to put 25% of the property into your name right before it conveys to the new buyer. This is not my favorite way to handle it because the IRS is touchy about transfers of title right before a sale. But you'd have a good defense with the argument that the title was only changed to reflect actual long term ownership.

    2. Or, the partnership your father set up is actually the owner. If it is a recorded partnership and has it's own tax ID then you probably own 25$ of the partnership not 25% of the property even though that seems like the same thing it's not in the eyes of the IRS. If you actually own the partnership then the partnership would have to do the exchange. But there are ways to work around that whether you are the only one who wants to go forward with an exchange or whether others would as well.

    So for right now it looks like you've got options but we need to flesh it out a little more. The easiest first question is to verify deeding. Did your cousin quit claim it and if so how is it titled now - in the partners names as tenants in common or in the name of the partnership.

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