Using Section 1031 to Help the Kids

Family - Using 1031 to Help the KidsAt first glance, this sounds like mixing business with pleasure but it’s really not that far fetched! The traditional method to help the kids acquire a home would be to provide a gift or a loan that can be forgiven or repaid over time.

The new gift limitation is $14,000 per person, per year. A mom and dad could make gifts that would total $56,000 in a single year to their child and spouse. That size gift would provide a 20% down payment plus closing costs on a $250,000 purchase!

What if you have the desire to help your kids but not the cash to do so? It is possible with Section 1031 to sell a current investment property and use the proceeds to give the kids a head start. Here’s how this works: Exchange a qualified investment property and replace the value by acquiring a single family property that your kids have selected as your new replacement property. The goal is to go even or up in value so depending on the sale price of the existing or relinquished property, it may be necessary to acquire more than one property. Key to this strategy is to use a Qualified Intermediary to facilitate the sale as an exchange, don’t touch the cash, and rent the new property at market price.

Because you cannot use preferential treatment with related parties, it is important to keep good records by fully documenting the new lease arrangement. Be sure it would be the same arrangement that would be charged to a third party. If this presents a hardship, rent the property to only your child’s spouse. By definition, your in-laws are not related to you. In any case, a fair rent should be charged to keep your investment intent for the first two years after you acquire the new property.

You can keep track of your new investment property by making regular visits and coordinating any needed repairs with the new tenants (your kids). Depending on the distance and purpose, trips may be deductible. Sounding better all the time!
Upon the death of the property owner (read dad) the property can be transferred to the kids at a stepped up basis without tax consequences. As with any tax strategy, planning and good consulting advice is essential. Just one more reason that Section 1031 is family friendly!

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