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Can we exchange our rentals for a home, then rent it to our son?

February 9, 2000


Subject:  1031 options
From:  Gary and Diane Brauch
Date:  Sun, 16 Jan 2000

Michael -

We have a son facing the daunting prospect of buying a home in an inflated California market. In considering ways to help, we came up with the following scenario.

We own two rental condos. If we exchanged them under 1031 to a home, sold half of the home to our son, and rented the other half to him, the tax breaks could be significant.

Is this something the IRS would approve? If not, do you have any other creative suggestions?

Thanks,

Gary and Diane Brauch

Answer

Date:  29 Jan 2000

Hello Gary and Diane,

It might be possible to make an exchange as you suggest. You would have to charge a fair market value rental.

Also, you would be required to file California non-resident income tax returns, which could increase your tax return preparation fees (if you don't live in California).

Another idea is, if you have equity available in your residence, to borrow against it and loan the funds to your son. You can take a tax deduction for interest for a loan secured by your home for up to $100,000 borrowed in excess of the amount borrowed relating to purchasing or improving the residence.

You should charge interest to your son for the loan. By charging the applicable federal rates, you could qualify interest expense for any loan as investment interest expense, deductible up to the amount of interest income. In this case, you can borrow from any source, including refinancing your rental properties.

This is complex stuff, so consult with a local tax advisor.

Good luck!
Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Can we exchange our rentals for a home, then rent it to our son?

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