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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Hi Barbara, I have a client who has a property #1 which

This answer was rated:

Hi Barbara,

I have a client who has a property #1 which was 50% his residence & 50%
rental property for 2 of the last 5 years. 50% value approx. $275,000.

He owns a rental property 50/50 with his sister and would like to exchange the
50% rental #1 for his sister's 50% of rental #2. 50% value approx $300,000.
Would this exchange be possible, since he already owns 50% of the #2 property?

Thank You,
Fred

Stephen G. :

Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Stephen G. :

I don't know who Barbara is, but she evidently isn't available as your question was opened up to the rest of the online tax professionals.

Stephen G. :

I see no reason why you couldn't do what you are suggesting. If you have to equalize the transaction with your sister because of the difference in value, then to the extent your sister receives boot (cash) from you, that portion of any gain will be taxable to her.

Stephen G. :

Questions?

Customer:

You mean the $5,000 difference in values as the cash? Or the full $275,000 cash she will be getting for her 50%? Her basis will be the 50% of the original cost & improvements through 2013.

Stephen G. :

Yes, that $5,000.

Customer:

she will have to pay capital gains on her 50%? not just the $5,000 boot?

Stephen G. :

I thought you were asking about a swap here?

Stephen G. :

How is she going to get 275,000 in cash?

Stephen G. :

You mentioned 275,000 in cash above. Did you mean to say 275,000 in value?

Stephen G. :

In the 1031 exchange, all she would receive is the $5,000. in cash or no cash if the exchange were made "even Steven".

Stephen G. :

Are you there?

Customer:

My computer is having problems. Sorry the question was confusing. Sister wants

Customer:

cash for her half. Brother wants to buy her half. Brother needs to sell a property in order to

Stephen G. :

I'm sorry, but I don't know exactly what you are asking now; Are you saying that the brother wants to sell his residence or rental # XXXXX?

Stephen G. :

So he owns 100% of Property 1 which is 50% residence & 50% rental, correct?

Stephen G. :

He want's to exchange his 50% of Property 1 which is rental for His sisters share of Property 2, correct?

Stephen G. :

So, as far as the exchange goes, that's fine; if he has to give his sister 5K on this part of the transaction, then she would be taxed on that.

Stephen G. :

Now, he's then going to sell property 2? and purchase his sister's share of Property 1?

Stephen G. :

Is that what you are getting at?

Stephen G. :

So what then, he's going to sell Property 2 in order to buy back his sister's 50% interest in Property 1?

Customer:

Sister does not own any of property #1. Sister wants to sell her 50% of property #2.

Stephen G. :

Why not just sell Property 2 & split the proceeds.

Customer:

Brother can only buy sister's 50% by selling his, 100% owned property #1.

Stephen G. :

I understand, she doesn't now own any of Property 1; so where's the 1031 exchange?

Stephen G. :

There's no exchange involved?

Customer:

The exchange was for the brother's 50% rental portion of property #1

Customer:

and he could exlude gain on the 50% residential property

Stephen G. :

That's what I said initially ie. the sister exchanges her interest in Property 2 for the brother's 50% rental interest in Property 1;

Stephen G. :

So he then sells Property 1 and she get cash for her portion of property 1, is that correct?

Stephen G. :

The sister's tax basis in 50% of property 1 becomes the same as her basis in Property 2, adjusted of course if there's 5K in boot.

Stephen G. :

So, as I originally said, I don't see any problem with this.

Customer:

Sister does not own property #1. The sister would have to pay capital gains on her 50% of property #2.

Stephen G. :

The brother's tax basis in the newly acquired 50% interest in Property 2 becomes the same as his tax basis in the rental portion of property 1.

Customer:

Brother wants to exchange 50% of property #1 which has been a rental and

Stephen G. :

and?

Stephen G. :

Are we clear on this now?

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Are we clear on this now or is there still some confusion?
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