1031 Exchange

[Jeff Adema]

I'll be honest, I'm somewhat of a beginner / novice with real estate investing. My wife and I own 3 rental properties that we purchased between 2010 and 2014 and we'd like to make a move towards releasing some of the equity from one of the properties and utilizing the proceeds to purchase a multi-family dwelling to increase cash flow. My thought is to accomplish this via a 1031 exchange. The purchase of the replacement property however would be done with a partner and in the construct of a business entity. I'd appreciate your feedback on whether or not the replacement property being purchased by LLC XYZ with a different tax ID than the selling property (my SSN) would make the capital gain taxable. Thank you in advance and I appreciate you taking the time to read.

[Dave Foster]

@Jeff Adema, You may find that going together as TIC with your partner is actually an easier sell to a lender than an initial structured entity - two sources of recourse, qualifying income, etc. Beyond that though there's still several ways to accomplish what you're looking for.

But you will have to take title initially as yourself to at least as much real estate as you sell in order to defer all tax. This again points toward an initial TIC structure or wholly owned by you with a second held by your partner for a short time until you can adjust the entities - something like that.

We would counsel against changing the entity of ownership immediately prior to closing and beginning your 1031.  However, immediately after the purchase and conclusion you can contribute property into an entity and change the membership structure with the help of your accountant.  This can address your liability and management concerns but just understand that in today's market the lenders are driving the train so you're going to be stuck with what they offer you.