1031 exchange rules for tax returns

[Jeromy Asido]

Hello,

My parents have a rental property for the past 10 years (purchased in 2010). They are wanting to sell it this year, but it is in a trust. They want to sell it for two townhomes where one will be paid off and one will require a loan.

When the replacement properties are purchased, they want to add me to the title of the home as we want to to put it in 3 of our names. We understand that this will be for rental purposes and the townhomes will be for rent. However, one of the town homes will be going on my parents tax return for rental business income, while the other townhome will be going under my tax return for rental business income. 

Is this allowed in a 1031 exchange? As my parents are giving me a rental property for business income.

thank you 

[Bill Exeter]

Hi @Jeromy Asido, 

Your parents are selling a rental property and then structuring a 1031 Exchange.  They must acquire replacement properties that have a value (purchase price) that is equal to or greater than the rental property they sold.  They can add you to title as long as the percent they purchase/own in the new replacement property is equal to or greater than what they sold.  

The percent of both properties they purchase and own as part of their replacement properties must be owned and reported by them on their tax returns as rental/investment properties to satisfy their 1031 Exchange requirements.  They need to show that they had the intent to reinvestment and hold for rental/investment purposes.  You would report both properties on your tax return based on the percentage that you purchased and own.  

They can gift the property to you later if that is the intent, but the initial intent must be for them to acquire and hold as rental/investment property in order to satisfy their 1031 Exchange requirements.