Related Persons Exchanges/Self-Dealing Exchanges and Mortgages, Part 5

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 5

Some people have some blinders on when they start considering a 1031 exchange. One way you could think about it is that they suffer from cognitive dissonance – they’re not really able to square the facts with what they think they should be able to do.

One limiting rule involves related person exchanges. You can’t have a relative be involved in most 1031 deals. It just doesn’t work out. If you do go this route the relative can not also do an exchange with the funds he receives from the sale of his property from your exchange. After that, to have a valid exchange you, the exchanger, must keep the property for two years before you can do another exchange. IRA does not want families to manipulate their basis.

I want to remove myself from the title of a California property I purchased jointly with a relative using a 1031 exchange after selling my Florida property. Can you please advise me on this matter?

You have no need for an opinion. A 1031 is a 1031, and the 1031 exchange process is well established. What you need is an explanation of why an investor invests in a Zero Cash Flow property, and how the property functions over time to enable the investor to lower Zero Cash Flow’s debt to a level where the investor can do a 1031 into a cash flow property.

You purchased a property though a 1031, jointly with a relative? Regardless of who that relative may be, how you remove yourself depends on how you and your relative hold joint title. If you both own a stated percentage, and both of your personal names are on the title, the paperwork is simple, and cost varies by jurisdiction. However, you’ll need a contract between you and your relative to clarify everything. If you intend to do another 1031 exchange, you’ll also need a professional Qualified Intermediary to hold the funds that you receive from your relative.

On the other hand, if the property is held in an entity such as an LLC, you cannot do an exchange unless you first distribute your interests into separate LLCs. Then you can sell and pay your taxes, or you can wait two years, sell, and after the end of those two years, execute a 1031 exchange without tax liability.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

For free advice on 1031 exchanges, contact Marilee Hill. She has 20 years experience in the business as a real estate broker and property manager, and she understands DST requirements and the security act and everything else as it applies to 1031 exchanges. She’ll point you toward the right resources, for example, a qualified intermediary, and estimate cost and likely outcomes.

Marilee Hill, MA Hill