How do you do a 1031 exchange for a house-hack with 2 owners that own as JTWROS?

[Ellie Narie]

I am selling a 4 unit property that is owned by my partner and I as joint tenants with rights of survivorship. As in, we both own 100% of the property. We both occupied one unit for 2 out of the last 5 years. The other three were rented. We are not married. My partner claimed all the rental income and expenses. He also claimed the 25% of the property as primary residence, and he's the only one on the mortgage. 

What are the logistics for carrying out a 1031 exchange? Do we just have escrow write us a check for the 25% of the proceeds after the sale, since that was our primary home portion? And the other 75% gets put in with a QI for a 1031? 

I have a replacement property picked out already and an accepted offer on it. I heard that I can do a same-day exchange and not even use a QI if it occurs on the same day. Is this true? 

Now, for the replacement property... I am pre-approved for the loan, and the lender only lends to LLCs. However, my partner is on the original property's loan that we are selling. The main problem is the LLC part. We currently own the original property in our personal names since it was a house-hack. If the lender for the replacement property wants to lend only to an LLC, how do we make this work with a 1031 and the "same taxpayer" rule?

Thanks. 

[Wayne Brooks]

@Dave Foster can help you out.

[Dave Foster]

Thanks for that kind shout out @Wayne Brooks.  @Ellie Narie, as you can see there's a few moving parts to make this work with a 1031 exchange.  So, first I'd encourage you,even though technically  you might not need a QI for a simultaneous swap.  That doesn't relieve you of the need for all of the correct documentation notifications and information your accountant will need to fil the form 8824 at the end of the year.  In fact what you're describing is a direct exchange.  And the simple task of directing the money to be sent to a second title company would constitute you having constructive receipt of the funds.  And that by itself could blow up your exchange.

The cost for a QI like us to do your 1031 exchange is very small - especially considering al of the other issues you have going with this sale.

The QI does have to be in place prior to the sale of the old property.  

1. It is possible to apply both the primary residence exclusion and sec 1031.  The mechanism would be that you would only do a 1031 exchange on 75% of the property.  That percent of the sale and proceeds goes into the 1031.  And 25% of the gain is cut as a check directly to the two of you.  Being the only one on the mortgage is not going to be an issue.

2. You could use disregarded LLCs if your lender requires an LLC. If your in a community property state and file a joint tax return then one LLC with both of you on it might be OK. Otherwise you would take title to the new property as two LLCs with one of you as the single member of each.

You've got a very good scenario to get some of the proceeds tax free and defer the tax on the rest.  As long as you purchase at least as much as 75% of the net sale.  And use 75% of the net proceeds in the purchase.

I'll reach out via pm to answer further questions

[Ellie Narie]

Quote from @Dave Foster:

Thanks for that kind shout out @Wayne Brooks.  @Ellie Narie, as you can see there's a few moving parts to make this work with a 1031 exchange.  So, first I'd encourage you,even though technically  you might not need a QI for a simultaneous swap.  That doesn't relieve you of the need for all of the correct documentation notifications and information your accountant will need to fil the form 8824 at the end of the year.  In fact what you're describing is a direct exchange.  And the simple task of directing the money to be sent to a second title company would constitute you having constructive receipt of the funds.  And that by itself could blow up your exchange.

The cost for a QI like us to do your 1031 exchange is very small - especially considering al of the other issues you have going with this sale.

The QI does have to be in place prior to the sale of the old property.  

1. It is possible to apply both the primary residence exclusion and sec 1031.  The mechanism would be that you would only do a 1031 exchange on 75% of the property.  That percent of the sale and proceeds goes into the 1031.  And 25% of the gain is cut as a check directly to the two of you.  Being the only one on the mortgage is not going to be an issue.

2. You could use disregarded LLCs if your lender requires an LLC. If your in a community property state and file a joint tax return then one LLC with both of you on it might be OK. Otherwise you would take title to the new property as two LLCs with one of you as the single member of each.

You've got a very good scenario to get some of the proceeds tax free and defer the tax on the rest.  As long as you purchase at least as much as 75% of the net sale.  And use 75% of the net proceeds in the purchase.

I'll reach out via pm to answer further questions

Thank you for the response, very helpful. I didn't think about creating two LLC's, one in both of our names. For #1, would this check for the 25% be cut to us by escrow after the transaction? 
For #2, we are not in a community property state and we don't file a joint tax return. We are not married, so our tax returns always remain separate. 
Could we do this exchange without a QI if done on the same day?

[Dave Foster]

@Ellie Narie, 

1. I can't speak to every QI but we would have it cut to you at closing.

2. Now there's two tax payers in a non-community property state selling and taking primary residence exemption on one of the tax payers.  I would not recommend doing this without a QI.

[Ellie Narie]

Quote from @Dave Foster:

@Ellie Narie, 

1. I can't speak to every QI but we would have it cut to you at closing.

2. Now there's two tax payers in a non-community property state selling and taking primary residence exemption on one of the tax payers.  I would not recommend doing this without a QI.

 Hey Dave, 

So I just called my title company, and unfortunately we wouldn't be able to have two LLCs that own the property with rights of survivorship. Each LLC would have to be allocated a specific percentage, while as on the original property, my partner and I both wholly own 100% of the property together.