1031 Exchange

[ILLMAS]

TP currently has a construction project (commercial/condos) worth around 1M, his mother is going to sell a rental property, they want to do a 1031 exchange on the sale of the rental property and use the 1031 exchange to buy a portion of the project. The money coming in from the sale will make the mother about 33% owner, I would like to know if this is possible? Also if this is possible, TP would have to report on his tax (related party transaction) return the 1031 exchange, for example he sold 300K of his project and he recieved 300K, so it would be wash? Any help would be greatly appreciated.

Thanks

MAS

[jainen]

>>TP would have to report on his tax (related party transaction) return the 1031 exchange<<

Section 1031 is one of the few parts of the tax code where FORM is more important than SUBSTANCE. You must get everything set up EXACTLY right. Talk this over with a qualified intermediary, someone really smart. If they don't tell you they have to look up the answer, find someone else. It will be very difficult to call this a 1031 exchange.

The mother can not exchange a house for corporate stock (securities are never 1031 property). Nor can she exchange into a partnership arrangement. If she sells to the corporation she will be taxed. If she exchanges first she will end up with another property and still have the same problem.

The corporation can't acquire the house and then do an exchange, because they will not have held it as a rental. They can't exchange one of the condos for the house because those are inventory. I'm not saying you can't find a way to do it. You just won't find it on the Internet.

[ILLMAS]

Thanks, one of my associates have recommeneded that I look into tenants in common (TIC) 1031 exchange, here is a link incase anyone is interested in learning more about a TIC 1031 exchange.

https://www.1031cpas.com/1ten31Exchanges/3.50ten31ExchangeManual.htm#WhatIsATIC

[jainen]

>>learning more about a TIC 1031 exchange<<

Your problem is not title as such. The nut is the property itself. Since the project is being developed for sale, it is not eligible for 1031 treatment, plain and simple. That is, it is not being held for investment or productive use in a business. It would be a neat trick--maybe some clever lawyer could write it up with the developer renting the property back or something, and in this market it just might meet the customary two-year holding requirement. But don't forget the original gain is only deferred. If the project ends up in the hole (and presumably it's already in trouble which is why they are looking for non-conventional funding sources), she will have lost her cash but still have a big tax bill. And that's just from the mother's point of view. In any case the developer has to pay tax currently on the disposition of 1/3 of his inventory.

I'm telling you, stop browsing the Internet and go see a real estate attorney.

[kcjenkins]

And I'll add my voice to Jainen's on that piece of advice. I seriously doubt that you'll find a reputable attorney that will say yes, but if they do, then at least it will be HIS professional liability on the line, not yours.