1031 Exchange Q on Replacement Property

[Deann Pancheri]

Sold a rental property  for 1.8 Million, purchased another property for 2.2 Million.  We also purchased the back unit for 2.1 Million.  DUE TO COVID-19, the builder was not able to separate the properties and agreed to do that after the close. it was our intention to buy (1) unit with our exchange and have our children and us buy the back the unit. We had to close escrow ON BOTH PROPERTIES AS ONE UNIT (clearly two condos fully self contained) - Price 4.3 Million  to meet our deadline before the "condo split" happened.  We closed with our 1031 cash of about 1.2Million, a note in 1st position from one of our companies for 1,441,000 and another note in 2nd position which was the note from our adult children and younger kids trusts.   This 2nd trust deed note states that it can be converted to equity.  Our original loan balance on the former exchange was only 675,000 so the current note of $1,441,000 over both units (sold as one initial and split later) is more than enough to satisfy the debt requirement.  

WE want to take the 2nd trust deed (kids Money) and in lieu of note, give them interest in the home for the value. WE are not taking out any of our cash, but would add them to the title based on what they put into the note of 1.6 M (and the 2nd trust deed would go away).  Is this allowable?  I can't see why not, if we are leaving our 1031 cash in it and our debt/loan is the same or more than our previous property. (it is more than double the amount).  This would reduce our debt (on 2nd trust deed) and convert it to ownership.