Using 1031 Exchange For Building Owned With Friends
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 633
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A reader wonders if they can do a
1031 exchange with the profits from a building they own with friends. Sam and
Ilyce report that it depends if the owners own the building as tenants in common
or as joint tenants.
Q: My husband and I are selling a multi-unit property that we own with a couple
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We want to defer the capital gain taxes. My husband and I have different plans
for the cash than our friends, and it may wind up that we re-invest our share
of the gain in a different property than they do.
Can we do this, or must the gain be re-invested into only one replacement rental
A: If you and your husband own your building as tenants in common with your
friends, your sale should be pretty easy and you will be able to defer capital
gains taxes and be able to purchase your own new investment property.
As tenants in common, you and your husband would own a specific share of the
building. This share could be fifty percent or it could be any other percentage,
but your title would specifically state that you own it as tenants in common
or would state your specific percentage interest in the property.
Assuming you own fifty percent of the property, upon the sale of the property,
you would have to set up an exchange trust under Section 1031 of the Internal
Revenue Code. In simple language, there are companies that specialize in helping
people defer taxes on commercial properties. These companies are generally referred
to as qualified intermediaries. To defer the tax, the intermediary will have
you complete a series of documents, including a 1031 Trust or Starker Trust.
The cost of setting up an exchange trust isn’t much but the benefits
of deferring a significant amount of tax to the Federal government can be tremendous.
Things are a bit different if you own the property as joint tenants.
If you own the property as joint tenants, the presumption is that you both
own the property in equal shares. If you and your husband invested in the property
equally, you will both have to sell and distribute the proceeds from the sale
If you actually own the property as joint tenants, but believe that you own
a greater share than the other owners, you must discuss with your attorney a
means to spit the ownership before the sale to allow you to defer your share
of the profits properly.
At the closing, your share of any money from the sale of the property will
go to the intermediary and you will have a certain number of days to identify
the new property you want to buy and some additional number of days to close
on the purchase of this new commercial property.
The rules regulating 1031 exchanges are rather strict. You must observe them
or lose your ability to defer your taxes.
If your friends decide to keep the money and pay the tax, it shouldn’t
affect your ability to set up an exchange. They can even set up their own for
a separate property they may decide to buy.
In general, the new property’s price must exceed the price of the property
you are selling. In your case, if you are a 50 percent owner of the old property,
the new purchase price must exceed 50 percent of the old property’s selling
Keep in mind that you can’t receive any money from the sale of the old
property. All of the money must be deposited with the exchange intermediary
to be used for the purchase of the new property.
Finally, don’t forget that the new property must be a replacement investment
property. You cannot use the funds to purchase a primary residence.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s
latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For
More Money In Any Market. If you have questions for them, write: Real Estate
Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s