All Forum Posts by: Steve Wolterman

If I understand correctly, Company A is selling property for $850k to a 3rd party in two weeks.  The question is can Company B sell a building for approximately $400k to Company A, when you and your father are both members and managers of Company A and Company B.  Unless there are additional owners of Company A and B, the answer is likely no.  It sounds like you and your father are the two members of both Company A and Company B.  The Internal Revenue Code has attribution rules that attribute ownership of parent/child to each other as well as partnerships to each other when there is common ownership of 50% or more in each.  i.e., Company A and Company B, if owned by you and your father only, are considered related parties with regard to a 1031 exchange.  Generally speaking, you cannot acquire replacement property from a related party in a 1031 exchange.  If it's going to be considered, factors such as whether Company B is going to do its own exchange and an analysis of the tax basis in each property are critical.  Only if you can prove that there is no basis shifting to avoid tax should one even consider acquiring replacement property from a related party in my opinion.  Another thing I like to point out to clients is that you have to self report on Form 8824 if a 1031 exchange involves a related party.  I think  it is safe to say that one can expect greater scrutiny from the IRS when the related party box is checked.  

You will not have to pay any tax upon converting it into your primary residence.  And if you sell the house in the future and have qualified for the Section 121 exclusion, you can exclude up to $500,000 of gain if you are married, and $250,000 if you are single.  In order to qualify for the Section 121 exclusion, you must have used your home as your main home for a period of at least two years out of the last five years prior to its date of sale.  

I'm not sure I understand your question about transferring this 1031 to another property of yours.  

3-4 years holding period means you are in great shape to sell the property as relinquished property in a 1031 exchange.  

Yes, vacant land held for investment is like kind to a residential rental property.  Any real estate held for productive use in a trade or business is like kind to other property held for the same.  i.e., vacant land is like kind to residential is like kind to office space is like kind to industrial etc.  

There may be some issues for you depending on how long you have held the land.  How long have you owned it?

We are trying to facilitate a Reverse 1031 Exchange for a new client who resides in NJ, is under contract to purchase replacement property in NJ, and will be selling relinquished property in TN after the purchase of the replacement property. The client needs 3rd party financing for the purchase of the replacement property. Does anyone know of any lenders in the NJ area (or who will lend to NJ borrower) who might be familiar with lending in a Reverse 1031 Exchange transaction? i.e., the replacement will be purchased by me as EAT (and held in a newly created LLC) and parked until the client sells the relinquished property, at which point 100% of the membership interests of the LLC will be transferred to the client. Thanks!

We are trying to facilitate a Reverse 1031 Exchange for a new client who resides in NJ, is under contract to purchase replacement property in NJ, and will be selling relinquished property in TN after the purchase of the replacement property. The client needs 3rd party financing for the purchase of the replacement property. Does anyone know of any lenders in the NJ area (or who will lend to NJ borrower) who might be familiar with lending in a Reverse 1031 Exchange transaction? i.e., the replacement will be purchased by me as EAT (and held in a newly created LLC) and parked until the client sells the relinquished property, at which point 100% of the membership interests of the LLC will be transferred to the client. Thanks!

Hi Tyler, I am a qualified intermediary and attorney, a member of the Federation of Exchange Accommodators (FEA), and am happy to answer any questions you have.  There are other QI’s on this forum as well who I have seen provide helpful information.  The FEA has a directory of QI’s.  Thanks, Steve

Sanjeev, you can sell multi-family property and buy a single family residence in a 1031 exchange.  The key is that the single family residence must be held for active use in a trade or business, i.e., used as rental property and not your residence.  Any real estate that is held for active use in a trade or business is like-kind to other real estate held for active use in a trade or business.  i.e., you can sell multi-family and buy office space or industrial.  

Further, if you own the multi-family properties in a partnership, the partnership would have to undergo the exchange.  You cannot take your portion from the partnership's sale of the multi-property and invest in replacement property in a 1031 exchange.  Alternatively, and time permitting, you could possibly undergo restructuring of the partnership prior to the sale of multi-property in order to "go your own way" and purchase replacement property with your proceeds.  

Their heirs will still take the investment at a stepped up basis on the seller’s death and eliminate the tax consequence.  

Actually, this could be on the easier side of things. They obviously don't want the burden of having to buy "bricks and mortar" replacement property that they have to manage. They can sell to you and buy into a DST. The IRS has blessed DST structures (given some particulars) as "like kind property" for purposes of a 1031 exchange. i.e., they could sell and exchange into a fund that will pay them an annual coupon or return of 5.5 to 6.5% return, zero property maintenance obligations. Think of them buying into a fractional interest of a 300m Amazon industrial warehouse. Corporate guaranteed by Amazon. They can still pass on that investment to their heirs and keep the tax deferral and pick up cash payments to take care of their income needs. There are definitely options for them.