Castle-NNN: Does fractional ownership qualify for my 1031 exchange?
My Castle-NNN Question
Question: I own two homes in VA that are rented out. I would like to
sell them both using a 1031 exchange and roll them into an apartment
complex in TX, which would give me part ownership of the TX property (not
full). My questions are: #1 Does the 1031 exchange rules allow me to do
this - ie multiple properties, rolled into one larger property, with a
percentage ownership, not full? #2 Would both properties need to be sold
within the same 180 day allowance and rolled over together, or could one
be sold, rolled over, and a year later (for example), the other sold and
rolled into the same apt. complex? #3 Would the owners of the TX apt
complex have to pay capital gains tax on the portion of the apt complex
they would sale to me, even if they retain their majority interest?
Thank you for your assistance!
The answers to the above questions.
To answer question #1:
Yes, you can sell 2 properties and buy 1, even if the 1 you are buying is a
fractional ownership. The IRS stated with Revenue Procedure 2002-22 that
fractional ownership in real estate does qualify for a 1031 exchange (more commonly known as Tenant in Common or TIC). Just
remember that you need to buy at equal or greater value that the
relinquished property.
Question #2:
Either way would work. If you sold both your properties within the 180
days, you could combine the monies and purchase your fractional ownership.
For example, lets say that fractional ownership equals 20%. If you
sell one relinquished property at a time you would
purchase 10% of the apartment complex when you sell your first property.
Once you sell the second property, whether it is a year later or two, you
would purchase an additional 10% ownership at that time. Your total
ownership would then be 20%.
Question #3:
The owners of the apartment complex will have to pay capital gains tax on
the fractional portion of the complex that is sold to you UNLESS they do a
1031 exchange for that fractional portion and exchange into investment real estate or a qualifying oil and gas property.