The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.
Related Persons Exchanges/Self Dealing Exchanges and Mortgages, Part 2
Sometimes when you look at what people think when they approach a 1031 exchange, you see something called “cognitive dissonance” – they’re thinking about the way they want things to be, rather than the way they are.
For example, related person exchanges can only happen in certain situations – the property has to be at market value, and the exchanger has to maintain continuous ownership of the new property for two years and the seller/relative can not be doing an exchange.
So renting to a relative can be a difficult proposition; rental price and terms have to be in keeping with the current market.
Also, you can’t break the like kind requirement by trying to set up an advantageous family loan situation.
Question 1:
Any restrictions on leasing/renting the replacement property to persons related to the exchangers?
Answer:
What you’re describing is not a valid way to do a 1031 exchange – the IRS will see it as self- dealing – in other words, like kind does not involve exchanging a deed to a property for a lien on a property.
Question 2:
I still have funds in my account from a 1031 exchange. May I use them to make a pre-payment or mortgage payment as that is part of my purchase? I could have given more money to the seller, but he only wanted 30% DP and a note for the balance due to his tax position.
Answer:
If you’re trying to do a related party exchange where the replacement property is owned by a family member, you need to keep the property for a minimum of two years to satisfy your exchange – rental must also be at market value – you also have to purchase equal or greater value and the seller/relative can not be doing an exchange.
About Marilee:
Role of Marilee Hill, Registered Representative (RR)
If you want someone to help you through the 1031 exchange process, Marilee Hill can help – she’s helped a lot of clients to figure out how to proceed with this kind of property plan.
As someone who has managed her own apartments and acted as a real estate broker, Marilee Hill understands the technicals as well as the people side of the business. Let her provide helpful advice on your real estate strategy so that you can have all your ducks in a row when you start to put your plan in place.
