1031 Exchange, Tenants In Common
My father is now retired and has a rental that he no longer wants to deal with. He wants sell it but does not need the money. Can my father and myself do a "tenants in common" on a piece of property with a residence on it and I use it as my main residence? He would do a 1031 and I would do a owner finance. Do I need to pay him rent? Can he gift his share to me in the future as part of his estate planning?
Thanks
Yes, you can do this if structured property.
First, your father will need to make sure that the purchase will satisfy his 1031 exchange requirements. Both properties need to be rental properties from his perspective. The most conservative approach would be to have you pay market rate rent to him for his percentage ownership. Although he could probably classify his percentage ownership as investment property with no rent, the best way to prove to the IRS that the property is held for rental or investment is to show rental income.
Second, your father must trade equal or up in value and must reinvest all of his net cash proceeds from the sale of his current (relinquished property). For example, if your father's relinquished property sold for $400,000, then his percentage of the tenant-in-common that he acquires must be equal to or greater than $400,000. The rest of the property could be allocated to your tenant-in-common percentage ownership.
And, yes, your father can gift you the property as part of his estate plan. I would have the two of you sit down with an estate planning attorney to discuss the various options available. Typically, you would want to inherit the property upon his death so that you would receive a stepped up basis on his percentage ownership as of the date of his death, but there are other options available the the attorney can review with you.
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Thanks so much for the reply. Sounds like we are on the right track....
Brought this up to our CPA an he is saying this can only be done as an LLC. I don't understand why this would require an LLC. Any thoughts?
Thanks in advance.
No, I have no idea why your CPA suggested that. We have done many transactions either exactly like this or very similar to this and most of them are done as individuals.
Did he give you any reason or explanation as to why he or she recommended this?
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No good reason in my opinion. This is the second time he has had poor advice on this subject. I need to find another resouce so I can get this done correctly.
Thanks again.