1031 Exchange Estate Planning - Co-Investing with Heir

[Keith Meyer]

Does anyone know how TIC's affect 1031 exchange inheritance rules? Specifically if an heir was looking to co-invest with their parents in a 1031 exchange property, typically this would screw up the estate inheritance process and the stepping up of the tax basis to market value upon the passing of the parents.

In the situation where the parents are exchanging into a TIC in the replacement property, this seems to be a different situation since it's actually the parents LLC which is taking title to real property via the TIC, so if an heir was to invest in the property as an LP I feel the IRS may view this differently but am not sure. Any input from those who have faced a similar situation would be appreciated!

[Dave Foster]

@Keith Meyer The TIC interest that your parents own should receive the step up in basis. The virtue of the TIC structure is that they own a piece of real estate independent of you - it just happens to be a smaller property that is a % of a larger property that you also own some of.

In the situation you're talking about An interest in an LP or LLC also gets a step up in basis. But, especially for an LP there becomes the consideration of the successor heirs outside/inside basis in the entity. And that's a whole nuther discussion with your CA CPA. The step up is there. It is practiced. But you've got to take care with it.

If you're thinking about liabiity issues then SMLLCs owning TIC interests might be the way to go. You get the step up with fewer complications. 1031 flexibility is increased. Two liability shields is better than one - maybe?