1031 Exchange Info/Advice

[Mark Y.]

Hi Everyone,

Looking to get further detail and advice regarding selling a rental property and a 1031 exchange.

My father owns an apartment for over 25 years but has not lived in it and has rented it for the past 5. He is looking to sell it and use the proceeds to help my buy a house. It seems like he is not exempt from capital gains tax so trying to find what would be the best solution to this.

My questions are:

1. If he sells and uses the proceeds as a 1031 exchange, can we both go into a purchase together as in mortgage/deed? Or since it is a 1031 would he have to buy the property on his own? Asking this because isnce the property will be a much larger price, don't believe he would be approved as a lone buyer.

2. Would it be a better idea to transfer the property to my name and sell/1031 exchange it that way? Or would there be further taxes/penalties in doing so?

Thank you for your help and look forward to your responses.

[Dave Foster]

@Mark Y., Reverse the thought process and you might find it easier - NYC is an incredible sellers market.  How marketable is your fathers apt?  Think about selling the apt with a closing date contingent on your finding the new property.  

You may also want to locate your new property first and get it under contract with as long a due diligence period as possible.  Then put your fathers apt on the market if it will sell quickly.  One of four options will occur

1. The apt will sell quickly and the 1031 happens - all tax and depreciation recapture avoided.

2. The apt doesn't sell but you cancel the contract on the new property within the due diligence time period - No harm no foul

3. The apt doesn't sell but you go ahead and buy it and then when the apt sells you don't do a 1031.  You pay the tax and pay down the mortgage on the house.  In this scenario your father pays the tax.

4. The apt doesn't sell buy you go ahead and buy the house using a reverse exchange.  In this scenario the QI for the 1031 takes title to the new house and can hold it for up to 180 days which should give you plenty of time to complete the apt sale.  All tax deferred.

To successfully complete the 1031 exchange your father must take title to at least as much real estate as he sells.  You could take title to any remaining %.  You would need to rent your fathers portion and actually have a lease and pay rent if you want to be safe.  But your father can gift you that rent back ever year within the legal limits and he can also gift you some of the interest in the property each year as well.

Not a bad plan at all.