Will this 1031 exchange work?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
cudds
Posts: 70
Joined: Wed Dec 03, 2014 12:33 pm

Will this 1031 exchange work?

Post by cudds » Wed Jan 30, 2019 7:55 pm

Dr A. and his wife own a rental home.

Dr. A. and Dr. B. are going to purchase the commercial building ("Dental Building, LLC") that houses their dental practice, "Dr A & B Dental, LLC". Their practice is the only tenant in the building.

Dr. A is looking to sell his rental house and execute a 1031 exchange (if possible).....

1) Can Dr. A still execute a 1031 exchange if he is not the sole owner of the dental building?
2) If Dr. A buys his 50% of the building on Jan 1st, does he have 180 days to sell his rental home? What happens if it doesn't sell for over 180 days? Is the entire 1031 exchange out the window?


Thanks in advance! (and yes I'm going to cover all of this with my accountant in April.)

Stormbringer
Posts: 860
Joined: Sun Jun 14, 2015 7:07 am

Re: Will this 1031 exchange work?

Post by Stormbringer » Wed Jan 30, 2019 10:03 pm

You want to be careful of the "same taxpayer" rule for 1031 exchanges, which I believe generally means the same taxpayer who sells property A must own property B after the exchange. It wouldn't surprise me if a clever CPA and attorney could structure a deal that works, but it is something to be mindful of.

Also, you might consider quit-claim deeding the house to an LLC before executing the exchange, so that the LLC is part owner of the new building instead of you personally.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Topic Author
cudds
Posts: 70
Joined: Wed Dec 03, 2014 12:33 pm

Re: Will this 1031 exchange work?

Post by cudds » Thu Jan 31, 2019 11:28 am

Thanks! I'll have both look into the possibilities you mentioned.

Re: the 180 day rule.... What are the repercussions if the sale of the house and the purchase of the building are not within a 180 day window? Does the whole exchange fail?

Thanks..

riverguy
Posts: 496
Joined: Sun May 23, 2010 10:33 pm

Re: Will this 1031 exchange work?

Post by riverguy » Thu Jan 31, 2019 12:11 pm

Don't QC your house to an LLC right before the exchange. That will blow up your exchange if it is ever looked at.

1. Yes. 50% of real property is still real property. Dr A needs to own the real property directly though. If Dental Building LLC is the actual owner of the building, Dr A can't buy an ownership interest in Dental Building LLC with 1031 funds. Dr. A has to have direct ownership of the real property.

2. You would have to do a reverse exchange if you are buying before selling, but yes you have 180 days or the due date of your tax return for the tax year that the relinquished property was sold. If you don't do it in that time period then no exchange is allowed.

Sounds like you either are going to have to not do an exchange or not have your building ownership in an LLC.

Post Reply