Related Persons Exchanges/Self-Dealing Exchanges and Mortgages

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

These questions bring to mind the idea of “cognitive dissonance,” – or in other words, the way you would like things to be; not the way the facts are.  Related person exchanges are permitted for situations where a property is at market value, and with certain terms – plus:

  • The exchanger must have continuous ownership for the next two years.
  • The related person who is selling cannot do an exchange.
  • The property you have just purchased in an exchange must be rented at price and terms in keeping with the current market.
  • 1031 exchanges are ‘like kind to like kind;’ the IRS sees no like kind in exchanging a deed to a property for a lien on a property.

Question 1:
I have rental property in FL I would like to sell and roll over the gain into another property I own in GA to pay down the dept on it.  Is there any way to accomplish this under 1031?

In a word: NO! The IRS sees this as self-dealing. 1031 Exchanges are like kind to like kind only.  The IRS sees no like kind when evaluating a plan to exchange a deed to a property for a lien on a property.

Question 2:
I have a rental property that I want to do a 1031 Exchange for a replacement property that is owned by my brother in law and my sister.  They are currently residing in the replacement property.  I would take out no money (I’d pay $40K more).  Is this possible or are all related parties excluded?

For related party exchanges, you need to keep the property for a minimum of two years to satisfy your exchange to a related party.  As your brother in law and sister are living in the property, I assume the property is either their primary residence or they are renters both of which mean your brother in law and sister cannot exchange the property.  Your  rental price and terms must be at market value.   By taking out no money and paying $40,000 in cash and the property has no debt to satisfy, you satisfy the requirement to purchase equal or greater.

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

Know about DSTs and PPMs? A 1031 exchange or other real estate play can be complicated and hard to understand. Marilee Hill helps clients to cut through the jargon and figure out what’s within their rights in a property plan.

Marilee entered into the securitized 1031 exchange industry with a lot of experience: as a property manager, a real estate broker and someone with a great grasp on the GSRE. Prior to her new role, Hill ran her own apartment buildings and had real estate broker licenses in three jurisdictions.  Hill understands the people element of real estate, how to work with sponsors and clients, and always says that “My clients’ success is my success”.

1031 Exchange