How Does Property Vesting Affect the 1031 Exchange?

Tina Colson: I do.

David Moore: We’re going to have a little discussion and we’re just addressing questions that we’ve received. If you’ve got questions, please don’t hesitate to write us an email or give us a call, ask the question. We’ll be happy to address it in a video and we’ll do whatever we can to help you get where you want to be. Tina, fire away.

Tina Colson: Thank you. Today we’re going to talk about property vesting and how it can affect an exchange. And we typically have a lot of work to do if somebody comes in vested in one manner and wants to purchase a property in another vested manner. One of the first questions we ask is, of course, how is that property vested, that they’re relinquishing? And as they move forward for their purchase property, we need to make sure that they are going to be in that same role of, if it’s a partnership in a relinquished property, we need a partnership in the new property. If they want to come across and have a sole proprietorship in the new property, now we’ve got some work to do so.

David Moore: Yeah. I think that the important thing to understand is that a partnership is specifically prohibited from exchange treatment. So we have to look at what that person’s relinquishing. They can’t be relinquishing and receiving a partnership interest. We have to create a structure that’s going to allow it. If it’s a … That vesting, for those of you that are not familiar with that term, just means how the property is held. And honestly, the deed doesn’t necessarily reflect how things are held either. If I sold you on a land sale contract, for example, you would own the property, yet, the deed would show I owned it. That deed is far from accurate, as far as the ownership there.

A lot of times … And for the brokers in the audience, you probably have gotten data reports many times where you think you’re working with one person, or one person owned the asset and you actually get this trio and it shows somebody else totally different. There might be a correction deed that needs to be taken care of. But really, that deed you’ve got to look at who’s enjoyed the benefits and burdens of ownership.

David Moore: We have to have continuity vesting through the exchange. And as you know, time’s the biggest headache in any transaction. Vesting’s the second biggest. And vesting, we’ve got to be careful, obviously, on these videos, we don’t want to just be a COVID central period of time this applies to, but something that is unique today and is starting to rear its ugly head is that we’ve got … The underwriting for loans is getting tighter and tighter. And on top of that, you’ve had people that have quit jobs or lost jobs, and it’s sort of hard to get financed if you don’t have a job.

Tina Colson: Right.

David Moore: The other thing, I’ve had people quit their jobs halfway through an exchange. That’s not a good idea. Think about this. We’re sitting in Oregon. Oregon’s not a community property stay. Let’s say, Sheila, my wife and I enter into a transaction. Let’s say the relinquished property is in her name and I want to be added to the replacement property. I can’t do that in Oregon. We live here, it’s not a community property state. Now, what we could do if the exchange is set up right, let’s say the relinquished property is in her name. Well, we’ve been married for a long time, almost 28 years. We file jointly. Even though I’m not on title, you think I’ve enjoyed the benefits of burdens of ownership?

Tina Colson: Absolutely.

David Moore: Yes, I have. Yeah. What am I going to do? In a transaction like that, if somebody, a couple comes to me in that situation, I’m going to tell them, “Let’s file a correction deed. Talk to your tax people. We’re going to clean this up now. You’ve been married, you file jointly.

You both have owned it for all practical purposes, so we’re just going to clean it up and then we’ll go forward.” But we got to look at this stuff before the property closes though. As soon as we’re in the exchange, if it was just in her name going away and I needed to be added, or I want to be added to the replacement property, if I don’t bring in money representing my ownership interest, it’s going to trigger tax exposure for her.

Tina Colson: Sure.

David Moore: We have to be careful because the person that enters the exchange has value and equity requirement going forward. If we’re using exchange funds to buy somebody else property, whether it’s a kid or anybody, you’re really transferring equity. And we talked about something earlier with gifting, for example.

Tina Colson: Right.

David Moore: That’s another video we’ll do talking about gifting, and discounting, and valuations of interest, minority interests, so on and so forth. But the thing is, you’ve got to look at what’s happening there and people don’t think about it. There’s gift tax laws in this state … Or in this state, in this country. I’m sorry. If you gift cash, it’s a set number. If you gift an interest in a property, that’s moving cash.

Tina Colson: Correct.

David Moore: And I see all the time, people will just deed property over to their kid or something. Well, you just gave them the entire equity of that thing, which is probably going to stick you on a big gift tax situation. It’s really important that we look at that and understand what’s going on.

And then through the exchange, we’re going to have to have continuity. If the group, partnership in and of itself can do an exchange, but the members can’t go different directions, then that’s when we get into the drop and swap, swap, and drop situations. Even adding a spouse can be problematic when we’re looking at community, or non-community property, or tax. Community, property states. We have to look at that and understand where the people are, what they’re doing, who’s on title? Who’s going to need to be on title of the replacement?

Tina Colson: Correct.

David Moore: And I’ve been doing this for almost 30 years now. And the thing is, people need to understand it’s an easy process, but the devil’s in the details. And the thing is, that’s why … We have a form you can fill out online, if you want to fill it out to set up an exchange and get started. I’m still going to tell you, “Let’s talk,” because that way we can make sure that we’re going to get you going in the right direction. Understand, we want to find the problem before it is a problem, or to the potential problem, and let’s get rid of it. Talk, talk, talk. Ask the questions and we’ll be happy to address them.

Tina Colson: Great. Thank you so much. Very helpful. And again, just give us a call, free consultation. We’re happy to help you out. And we have the answers. Again, David Moore, Tina Colson, Equity Advantage, 1031exchange.com. Thank you for being with us today.

David Moore: Thank you. Thank you, Tina.

Tina Colson: Thanks.