1031 Exchange into a larger partnership or co ownership

[Aaron S.]

Hi, I'm new to BP but have been listening to the podcast and reading up quite a bit that past few years. I'm seeking advice and clarification on a potential 1031. The details are as follows: 

I bought and lived in a condo in SF when I was single. I now live in a different market and have been renting the unit out. I've owned it for about 15 years, therefore I have a lot of equity in it and it has appreciated like crazy. 

I'm considering doing a 1031 and buying a bigger multi family. I have a friend who has a large multi family investing company and does pretty big deals. He suggested I do a 1031 and go in on a large property with his company (as an investor).  In other words, getting into a bigger building than I could on my own. The other benefit is that I'd have an experienced, well regarded company in on the deal whereas otherwise I'd just be a no name, inexperienced investor. 

My understanding is that I can't do a 1031 from a personal ownership into an investment where I am only an investor/ partial owner, or if the new business is an LLC. Is that correct? Are there any ways around this?

A related question -- I know that some people say to identify a property you are exchanging into before you close on your current property. But in a hot market, the likelihood of a good deal staying on the market while I wait to close seems, well, unlikely. How is someone supposed to identify a property and secure it before you have the 1031 funds in escrow? Maybe I'm missing something. 

Excited to be on the forum and look forward to any help! 

I should note that the equity / potential capital gains are not insignificant: I have about 900K in equity on a property valued close to 1.2M. (Current cash flow is about $1,100/mo.)

Aaron

[Dave Foster]

@Aaron S., You're absolutely correct on a couple of things - In order to be valid you must be selling real estate and buying real estate.  You cannot 1031 into a membership interest in an entity.  So most syndications will not work for you.  But you could buy a tenant in common interest in a larger property with other investors.  I would check with you friend to see how his syndication is structured.  

You're also right that identification within the 45 day period is tough. The Closing of your sale must happen before the closing of your purchase but the dates of going into contract do not matter.  So yes it is a very good idea if possible to go into contract before you even close your sale.  It can be a tougher convincing a seller to accept a contingency in a hot market.  But it still happens.  The other thing you can do is go the opposite direction.  Sell your property contingent on finding the right replacement.  Remember you're the seller too!

You do not have to purchase as much as you sell in order to do the 1031 but @Jaysen Medhurst, it's not quite the way you're thinking of it.  In order to defer all tax you must purchase at least as much as your net sale (contract price minus costs of closing) and you must use all of your net proceeds (net sale minus any mortgage pay off).  But that is to defer all tax.  If you want to purchase less than you sell or take cash out you can.  You will pay tax on the difference.  The IRS interprets the difference as you pulling profit out.

Jason's idea of keeping the 1031 and then refinancing to use the refi cash to invest in a syndication is a great one.  You can allocate your proceeds in any way you want.  Of course that leaves you with a fixed asset still.  But it does get you into a syndication free and clear.  Again, there are some syndications that allow you to purchase tenant in common interests in the real estate itself and these qualify for 1031 treatment.