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

Forum|Forum|1 year ago
October 7, 2024
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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!!!

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Anonymous_

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swhampton7Author

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