{"id":222,"date":"2025-03-20T23:28:40","date_gmt":"2025-03-20T23:28:40","guid":{"rendered":"https:\/\/www.bourbonnaistax.com\/blog\/?p=222"},"modified":"2025-03-20T23:28:41","modified_gmt":"2025-03-20T23:28:41","slug":"can-you-use-a-1031-exchange-when-buying-for-family-heres-what-you-need-to-know","status":"publish","type":"post","link":"https:\/\/www.bourbonnaistax.com\/blog\/can-you-use-a-1031-exchange-when-buying-for-family-heres-what-you-need-to-know\/","title":{"rendered":"Can You Use a 1031 Exchange When Buying for Family? Here&#8217;s What You Need to Know"},"content":{"rendered":"<div class=\"wp-block-image\">\n<figure class=\"alignright size-full is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"600\" height=\"600\" src=\"https:\/\/www.bourbonnaistax.com\/blog\/wp-content\/uploads\/2025\/03\/1031-and-related-stuff-20250320.jpg\" alt=\"\" class=\"wp-image-223\" style=\"width:452px;height:auto\" srcset=\"https:\/\/www.bourbonnaistax.com\/blog\/wp-content\/uploads\/2025\/03\/1031-and-related-stuff-20250320.jpg 600w, https:\/\/www.bourbonnaistax.com\/blog\/wp-content\/uploads\/2025\/03\/1031-and-related-stuff-20250320-300x300.jpg 300w, https:\/\/www.bourbonnaistax.com\/blog\/wp-content\/uploads\/2025\/03\/1031-and-related-stuff-20250320-150x150.jpg 150w\" sizes=\"auto, (max-width: 600px) 100vw, 600px\" \/><\/figure><\/div>\n\n\n<p><strong>Here&#8217;s a GREAT question from a client:<\/strong><\/p>\n\n\n\n<p><em>Bill,<\/em><\/p>\n\n\n\n<p><em>We\u2019re going to buy an investment \u00a0property\u00a0[out of state] for our son to rent from us.\u00a0 Considering actually buying two units. \u00a0 We are going to sell the home town condo in the near future but not before buying the [out of state]\u00a0property.<br>\u00a0Wondering about tax implications. We expect to net about $100k on the condo.\u00a0 If we sell it in 2 months but if we close on the [out of state]\u00a0unit before closing on the home town unit would that count toward a 1031 exchange\u2026can it be retroactive?<\/em><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>Thanks for reaching out with these great questions! Since this is such a common scenario for real estate investors, I thought it would be helpful to break it down clearly. If you&#8217;re planning to buy a rental property for your son, or any other related person, especially as part of a 1031 exchange strategy, here\u2019s what you need to know:<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>\ud83c\udfe1&nbsp;<strong>Can You Use a 1031 Exchange If You Buy First?<\/strong><\/p>\n\n\n\n<p>No \u2014&nbsp;<strong>1031 exchanges are not retroactive.<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>If you sell the home town condo\u00a0<strong>after<\/strong>\u00a0closing on the out-of-state property, you can\u2019t apply the 1031 exchange rules.<\/li>\n\n\n\n<li>However, you\u00a0<strong>can<\/strong>\u00a0structure it as a\u00a0<strong>reverse 1031 exchange<\/strong>\u00a0\u2014 but that\u2019s more complex and restrictive (more on that below).<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>\ud83d\udcc8&nbsp;<strong>Capital Gains and Depreciation Recapture \u2013 What to Expect<\/strong><\/p>\n\n\n\n<p>If you sell the home town condo outright:<\/p>\n\n\n\n<p>\u2705 Your total gain =&nbsp;<strong>Sales Price \u2013 Depreciation \u2013 Costs of Sale<\/strong><\/p>\n\n\n\n<p>\u2705 The gain breaks down into two parts:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Depreciation Recapture<\/strong>\u00a0\u2013 Taxed at a flat\u00a0<strong>25%<\/strong><\/li>\n\n\n\n<li><strong>Capital Gain<\/strong>\u00a0\u2013 Taxed at\u00a0<strong>15%<\/strong>\u00a0or\u00a0<strong>20%<\/strong>, depending on your AGI and capital gains tax rate.<br>\u2705\u00a0<strong>Net Investment Income Tax (NIIT):<\/strong>\u00a0If your AGI is over the threshold ($250K married, $200k single), you\u2019ll owe an extra\u00a0<strong>3.8%<\/strong>\u00a0on the full gain.<br>\u2705\u00a0<strong>State Tax:<\/strong>\u00a0Add the approprate rate for your state\u00a0income tax.<\/li>\n<\/ul>\n\n\n\n<p>\ud83d\udc49 Example for North Carolina &#8211; If you sell the condo for around&nbsp;<strong>$238,000<\/strong>&nbsp;and back out about 6% selling costs, have a remaining basis of $93k and total depreciation allowed or allowable* of $25k, you could be looking at roughly a&nbsp;<strong>$28K\u2013$33K<\/strong>&nbsp;tax bill. That&#8217;s a BIG hit on $100k-$130k of profit.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>\ud83d\udcb0\u00a0<strong>What Happens to Suspended Losses?<\/strong><br>If you have<strong>\u00a0suspended losses<\/strong>\u00a0on the rental you&#8217;re selling or exchanging (hint: look for Form 8582 on your federal tax return, at the bottom of Page 2 &#8220;unallowed losses&#8221; for the activity):<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>If you sell outright \u2192 the losses are released and can offset the gain,\u00a0<strong><em>UNLESS<\/em><\/strong>\u00a0you&#8217;ve made an aggregation election under\u00a0 \u00a7469(c) of the Internal Revenue Code (there are different elections under\u00a0 \u00a7469(c)\u00a0for real estate professionals and non-real estate professionals, but aggregation of properties ties up suspended losses until ALL aggregated properties are disposed of.)<\/li>\n\n\n\n<li>If you do a 1031 exchange \u2192 the losses remain suspended and attach to the new property.<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>\ud83d\udc68\u200d\ud83d\udc69\u200d\ud83d\udc66\u00a0<strong>Renting to Your Son, or any other related person \u2013 Key Tax Rules<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>To qualify as a legitimate rental property (and preserve 1031 eligibility), you\u00a0<strong>MUST charge fair market rent<\/strong>.<\/li>\n\n\n\n<li>You\u00a0<strong>can\u2019t gift the rent<\/strong>\u00a0or cover it on his behalf.<\/li>\n\n\n\n<li>This is closely scrutinized with related party transactions \u2014 but the Tax Court has ruled in favor of taxpayers when fair market rent is\u00a0<em>properly documented<\/em>. (See\u00a0<strong>Adams v. Commissioner, T.C. Memo 2013-7 (2013)<\/strong>).<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>\ud83d\udd04\u00a0<strong>Reverse 1031 Exchange \u2013 How It Works<br><\/strong><br>If you buy the out-of-state\u00a0property\u00a0<strong>before<\/strong>\u00a0selling the condo, you could still qualify for a 1031 exchange through a\u00a0<strong>reverse exchange<\/strong>:<br>\u2714\ufe0f A\u00a0<strong>Qualified Intermediary (QI)<\/strong>\u00a0and an\u00a0<strong>Exchange Accommodation Titleholder (EAT)<\/strong>\u00a0must hold temporary title to the property.<br>\u2714\ufe0f You\u00a0<strong>can\u2019t take personal possession<\/strong>\u00a0of the replacement property before selling the original one.<br>\u2714\ufe0f\u00a0<strong>No recourse loans allowed<\/strong>\u00a0\u2014 financing must be non-recourse or cash.<br>\u2714\ufe0f Must complete the sale within\u00a0<strong>180 days<\/strong>\u00a0of the purchase.<br>\ud83d\udd0e Reverse exchanges are more complex and expensive \u2014 but they can work if the numbers make sense.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>\ud83c\udfc6\u00a0<strong>Next Step: Let\u2019s Talk Strategy<br><\/strong>If you have questions or would\u00a0like to explore these and other real estate strategies further, let&#8217;s\u00a0set up a quick consultation to go deeper into the numbers and your tax position. Head\u00a0<strong><a href=\"https:\/\/forms.gle\/TZpnUQiNJuiTAhfq7\">HERE<\/a><\/strong>\u00a0to see if you qualify for our Tax and Wealth Strategy.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you&#8217;re planning to buy a rental property for your son, or any other related person, especially as part of a 1031 exchange strategy, here\u2019s what you need to know.<\/p>\n","protected":false},"author":2,"featured_media":223,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[3],"tags":[99,101,104,50,103,98,100,102,4,11,9,6],"class_list":{"0":"post-222","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-taxes","8":"tag-99","9":"tag-aggregation","10":"tag-capital-gain","11":"tag-irs","12":"tag-passive-loss","13":"tag-real-estate","14":"tag-reverse-1031","15":"tag-suspended-loss","16":"tag-tax","17":"tag-tax-savings","18":"tag-tax-strategy","19":"tag-taxes","20":"entry"},"_links":{"self":[{"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/posts\/222","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/comments?post=222"}],"version-history":[{"count":1,"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/posts\/222\/revisions"}],"predecessor-version":[{"id":224,"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/posts\/222\/revisions\/224"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/media\/223"}],"wp:attachment":[{"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/media?parent=222"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/categories?post=222"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.bourbonnaistax.com\/blog\/wp-json\/wp\/v2\/tags?post=222"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}