Seeking End Game Guidance, Boulder CO Plex 1031 or other solution

[Adam Cornell]

Greetings and thank you in advance for your generous advice.  Situation is, my father in-law has owned a small Tri-plex in Colorado for over 50 years (held in a family trust).  Due to health issues he is no longer able to landlord, and does not wish to manage a PM.   Therefore he is considering selling the property.  He would like to minimize capital gains taxes and has suggested 1031 exchange into a property in the Portland, OR area where my wife and I live and already manage four doors of our own.  We are eager to assist, but we are very concerned about the 45 day window to identify a replacement property given the low multifamily inventory in Portland.    

I just read Brandon's article from Nov www.biggerpockets.com/renewsblog/make-millions-103... .   It is a very helpful article.  End Game section mentions  addresses "Die and Pass It  All On" strategy.   Unfortunately, this could be the scenario due to circumstances beyond anyone's control.   

My 1031 questions are as follows.

• Are my concerns about inventory valid?  
• Any other pitfalls about an interstate 1031 we should be prepared to address?

Regarding what happens if my father in-law passes before the property sells:

• Does that reset the cost basis to current market value?  The property being in the family trust, we are not sure  how that works.

We really appreciate having this resource of experienced people to draw on for advice.  If you know of any other potential solutions we welcome your advice.  Many thanks.

[Dave Foster]

@Adam Cornell, You've got the structure of a good plan in place.  The 45 day window is  certainly serious but there's some things that mitigate that.

1. Shop before your sale so you know a good deal when you see one.

2. Go into contract even before you close the sale or shortly after so the 45 day window becomes moot. 

3. Contingencies on the purchase side may be hard to get in a sellers market but don't forget you're also a seller.  So sell the old property with an extended or floating closing date contingent on finding good replacements.

3. A reverse exchange could be used to mitigate that 45 day angst allowing you to control your new properties first before selling.

4. There are several good classes of passive fractional properties that are usually more readily available that you can use as back up on your 45 day list.  There are some competitive 1031 compliant products that won't require debt assumption and have decent returns.

5. Lastly (and I'm sure you're doing this) make sure you think of real estate as a commodity.  what's available today will be available in 3 weeks.  It just may have different addresses.  I don't have boots on the ground in Portland but clients up there are speaking of some squirrelly market behavior that is slowing things down.  Could just be holidays or a catching of breath.  Either way it's to your advantage.

Since the requirements of the 1031 are that the tax payer for the old property be the same as the taxpayer for the new property it will be a simple matter for you to move your father-in-laws property to the area but he'll still be on deed.   Do not create a scenario where title is transferred at all at this point.  Craft a strong operating agreement and then manage the property until he passes.

When he passes the heirs will get the property as if they paid market value for it on the day he died (the step up in basis that @Caleb Heimsoth was speaking of).  So the tax disappears.  It's the ultimate tax escape strategy for a 1031 investor.  Unfortunately someone has to die for it to go into effect.  But that is usually the aim of the buy and hold 1031 investor.