A 1031 exchange is a technique that investors commonly use to transfer property tax-free. However, our sophisticated investors are using 1031 exchanges to transfer large amounts of wealth, tax-free to their children.
This is how it works:
Mom and Dad own a building that is worth $100,000 and is free and clear. Finding a new building worth $150,000 the sell their old building and use a 1031 exchange to buy an undivided two-thirds interest in the new building for cash. Their children buy the other undivided one-third interest.
A year or two later they sell the building for $250,000 of which $166,667 is the parents’ two-thirds share with the balance of $83,333 belonging to the children. Both the parents and the children do 1031 exchanges and buy a new property for $400,000 of which $166,667 (or 42 percent) is the parents, and the balance of $233,333 (or 58 percent) belongs to the children.
It Doesn’t End at 15%
A Closer Look at How Financing Works in a Reverse 1031 Exchange
Court Puts Commingled 1031 Exchange Funds at Risk