1035 Exchange propery that was a gift and now a rental

[Daniel Forte]

Hi guys, I have a single family property that has been and is currently used as a rental, but was gifted to me by a close family friend years ago. It currently cash flows $200.00/month, but that is without a mortgage(it's paid off). I'm wondering if I could 1035 Exchange it with a more suitable property. Is there an issue cause it was originally gifted to me, and wasn't purchased by me for investment purposes? I really am trying to get around the capital gains on a 80K house. Thanks for any help. Dan F. NewB. Rochester Ny

[Dave Foster]

@Daniel Forte, There are some ways to let her use a gift limits exclusion to get it into your name without incurring a taxable event.  But from a 1031 perspective if you want to sell quickly you'll want her to do the exchange while in her name. 

The IRS specifies that property you sell in a 1031 must be property you purchased with the intent of holding for productive use.  If she transfers to you and you immediately sell then you have a problem because your intent was obviously not to hold for productive use.  So I would have her sell and buy and then transfer to you in a gift exemption manner that doesn't trigger the tax.