Client wants to sell a rental property in one state and 1031 exchange it for a rental in another state. The issue is the rental property in the second state is what is called an Additional Dwelling Unit. Meaning it is a rental unit (seperate building) located on the same property as the primary residence. Again, it is a seperate unit but unit can't be sold seperately. Thoughts if this is ok?
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"Dude, you are correct" Rapid Robert -
Doesn't a property have to be sold/purchased to qualify as an exchange property? What is the status of the other part of the property of which the ADU is a part? Personal residence?
I recall reading of regulations etc dealing with partial interests, so that's where I'd start my search. I don't have an answer.Last edited by Rapid Robert; 08-26-2024, 07:17 PM."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard -
As far as I know, yes, it is okay.
However, how much will it benefit the client?
Generally, to maximize the benefit from the deferred gain of a 1031 Exchange, the new property must be "upgraded" compared to the prior property. If the cost of the ADU is less than the selling price of the prior rental, some (or all) of the gain will be taxable.Comment
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Thanks. Great point. The rental is in the midwest with a potential sales value of $240k a $140k gain, this is less than the price of an ADU in California. ."Dude, you are correct" Rapid RobertComment
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For us poor ignoramuses who just want to learn something, could someone please answer the questions in post #2? How does one acquire title to a property that can't be sold separately? How is its FMV determined? How do we determine that there has been no personal use of the relinquished property?"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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