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Ask Stephen G. Your Own Question
Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 6167
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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If I section 1031 exchange a piece of rental real estate

Customer Question

If I section 1031 exchange a piece of rental real estate for another piece of real estate can I gift a portion of the new property to my son without triggering capital gains tax? How about instead of gifting I provide a loan to purchase a percentage of the new property?
Submitted: 8 months ago.
Category: Tax
Expert:  Stephen G. replied 8 months ago.

Yes, you should be able to do either of those things without triggering any capital gains tax. You have to make a sale or exchange in order to "trigger" a capital gain.

Steve G.

Customer: replied 8 months ago.
Wouldn't providing a loan to purchase a percentage of the property be considered a sale?
Expert:  Stephen G. replied 8 months ago.

Not unless you were the one selling the property.

Expert:  Stephen G. replied 8 months ago.

Questions?

Customer: replied 8 months ago.
I am confused. If I owned 100% of the original property and sold/gave half of it to my son wouldn't that be considered selling it?
Expert:  Stephen G. replied 8 months ago.

There's a big difference between a gift and a sale. Which is it?

Expert:  Stephen G. replied 8 months ago.

If you are talking about gifting the property after you own it, there's no tax impact.

You can't gift something you don't own.

If you are talking about loaning money to your son to purchase something you own, that's a sale.

So, you need to be clear about exactly what you are referring to.

Lay out transaction you are asking about step by step.

Expert:  Stephen G. replied 8 months ago.

Here's what you asked about:

can I gift a portion of the new property

You didn't say anything about the old property being sold or gifted.

Expert:  Stephen G. replied 8 months ago.

Questions? May I clarify anything for you?

Customer: replied 8 months ago.
I was asking about two scenarios. Assume I section 1031 a rental property. I purchase another property with the proceeds. I lend my son money and he is paying it back with interest. The money I lent him is for him to purchase a portion of the new property.
Expert:  Stephen G. replied 8 months ago.

He's going to purchase a portion of the new property from you, then you've made a sale of a portion of the new property and you would have a capital gain to report. The transaction would not be eligible for Installment Sale treatment due to the related party rules, so you would have the tax to pay on your gain in the year of sale.

If you were able to purchase 1/2 of a property and invest the entire portion of your proceeds from the sale of the old property and have your son purchase 1/2 of the replacement property from the prior owner (the same owner that is selling to you) then lending him the money to do that would not trigger any capital gain to you.

That, of course would require you & your son to purchase a property twice as expensive as the property you were selling (the old property) in order for you to have a full deferral of your capital gain on the old property.