How to handle tax treatement of additional partner on new rental property purchased using 1031 proceeds along with capital contribution from new partner.

[swhampton7]

I recently purchased a new rental property using 1031 proceeds along with a capital contribution of my daughter( she wanted to get started in real estate investing). I have a single-member LLC which owned the property sold under the 1031 rules. My question is how do I structure the replacement property for tax purposes so that both my single-member LLC and my daughter's initial and future capital contributions(if needed) get the most favorable tax benefits but doesn't impact my 1031 treatment. I was advised by my attorney handling the 1031 transaction that I had to keep the same tax structure in place to purchase the replacement property or I could lose my 1031 protection of capital gains. Do I need to create a joint-venture agreement between my single-member LLC and her where we would share profits, expenses, and depreciation base on current and future capital contributions? Or should I sale her part of my single-member LLC based on the initial contribution to acquire the replacement property? Please advise accordingly!!!

[tagteam]

Can you further explain this transaction with a bit more precision?

Your post almost makes it appear as if you handled the proceeds from the sale and then had your daughter add funds to purchase the replacement property. If that's the case, you don't have a valid 1031 exchange. 

[swhampton7]

Yes, that's exactly how the transaction was handled. I was told by real estate attorney that my daughter could become an additional investor in the new property as long my portion of the investment came from my single-member LLC and the  single-member LLC would be owner which is how title is currently recorded. I could not create a partnership with the daughter since the IRS would consider this a different tax structure that was  in place on the 1031 property sold . I was advised to sell her part of my LLC or create a joint-venture agreement. Just trying to find out what is the best strategy. Thanks

[tagteam]

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@swhampton7 wrote:

Yes, that's exactly how the transaction was handled. 

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If that's exactly how the transaction was handled, you do not have a valid 1031 exchange.