1031 Exchange and Tax Filings

[desanto05]

Hello 

Need some advice. My dad sold investment property in Florida. The net proceeds went into a 1031 exchange company. We have identified a new property and him /I are reinvesting into a new property in South Carolina as rental also. I will take an equity loan from my primary residence to make up the difference of the purchase price. The house will be paid for at that point.

On my next years' taxes:

1. Will I be able to claim deductions for property taxes, insurance, maintenance, depreciation etc. costa associated with the property.

2. The rent from this property will generate some profit that my dad will take as income because he only receives social security (minimal amount per year). Will I have to include that as 1099 for him at the end?

and if yeas he will have to claim that as additional to his social security when he files.

Just trying for the best to work out legitimately

Thank you

[Critter-3]

You and your dad have a partnership and should file a form 1065 accordingly which will issue a K-1 form to each partner for their portion of the profit/loss on the rental. 

[desanto05]

@Critter-3  instead of that, wouldn't I be able to document a deduction on whatever I give to him on schedule E line 19 as "recipient adjustment to 1099 misc income" or something similar? I project to give him like 10-12k for an entire year plus whatever he gets in social security which is like $11K

[Critter-3]

Doesn't legally work that way ... please seek a local professional to discuss your options. 

[desanto05]

Hello

I was told by a CPA that I can take all the applicable deductions and claim my dad as  a dependant on my taxes

your thoughts?

[Mike9241]

@desanto05 if dad puts say $1 million into new property from the 1031 exchange and you put in $500,000 you would have a partnership. dad would get 2/3s of income and deductions and you would get 1/3 + probably the interest from the home financing. if your suggesting that he gift you his interest there's a big tax problem for dad. 

Don't Fall Into This Trap
Many people will fall into the trap of thinking that as soon as their 1031 exchange is complete, they can do whatever they want with the new property, including gifting it. However, this is not the case, because you still have to prove the proper intent of investment or business usage with your new property before doing anything else with it, or else you risk ending up in hot water with the IRS.

If you gift the property immediately after the exchange, it will be clear to the IRS that you actually did not have proper intent to use the property for investment or business. Your main desire at the time of the exchange must be to use your like-kind replacement property only for business or investment.  If the IRS was to determine this then the benefits of the 1031 would be denied to your father with a bill for taxes, penalties and interest. If you eventually want to gift your property after properly using it for several years, it’s best to consult with your accountant and tax advisor to determine if you are allowed to do so.

Even with gifting the depreciation he took doesn't go away. that transfers to the donee.

Perhaps we misunderstand your intent. it is not at all clear what you want to do and what you are trying to accomplish.

[desanto05]

@Mike9241 hello thank you for replying!

So dad's proceeds from the sale of Florida property went into a 1031 exchange. We have identified a similar property in South Carolina for investment rental. I'm in the process of getting a home equity loan from my primary residence in NY to make up the diffrence in higher price and pay off the new property. So from the rent I will be paying the HEL, the property taxes, home insurance, HOA, maintenance etc. We will probably have maybe $700-800 extra every month. I'm planning to give these funds to my dad every month to supplement his income as he only receives minimal amount from social security. So when it comes to tax season next year you're saying that he will have a certain percentage of ownership and claim accordingly and I will have the lower portion to claim? Want to be have clarity and do nothing wrong

Thank you again! 

[Rick19744]

Based on the limited facts I have the following comments:

• First and foremost, a forum such as this is not meant to provide detailed tax advice. 
• Because your transactions, Section 1031 and then the formation of a partnership, as both are complicated areas of the tax code, you need to meet with a tax professional before you finalize anything.
• Partnerships are complicated and fraught with potential traps for the unwary.
• What you want to do, and what you are able to do for tax purposes, many times don't reach the same result.  Based on the limited facts, I believe this is the stage you currently are in.  That is why you need to meet with a tax professional where you can have a one-on-one, address the situation, the goals and understand what you are able to do tax wise.  Don't be penny wise and pound foolish.

[Mike9241]

i suggest you seek outside professional advice. it becomes complicated. first your dads money hopefully being held by the exchange trustee must go directly to the seller. there are time limits which must be strictly adhered to. how your money gets in the deal may complicate closing.  then the issue of the deductibility of the interest on your HELOC.  its not a partnership obligation but you do want the deduction and probably not as investment interest so that needs to be dealt with. it won't qualify as home equity debt. 

[desanto05]

@Mike9241 @Yes I’m going to seek professional CPA tax advice - I’ve been getting different answers to this situation 

Thanks!