Are you considering getting into real estate but need a partner to cover the initial investment? Or maybe you’re already in a co-ownership arrangement and need information about how to move forward (or get out of it)?
Here are the basics you need to know about partnerships and co-ownerships when it comes to real estate investments.
The Partnership is the Entity
Let’s say you jointly own a piece of property with a partner. You are not the owner of the property and neither is your partner. The partnership itself is what owns the property and has the ability to sell or exchange it. If you exchange it, it is the partnership that goes on the title to the replacement property.
Why Would I Want to Exchange My Co-Owned Property?
There are tax benefits to exchanging one investment property for another. A 1031 exchange, so named for the relevant section in the IRS tax code, allows you to exchange an investment property for a different one while deferring the capital gains tax that would typically be levied on the profitable sale of an investment property.
It’s common for individual partners to want to sell a co-owned property, take their cut of their sale, and then move it into a 1031 replacement property in their sole name in order to end the partnership. This strategy is achievable, but it requires informed planning and it comes with some tax risks.
Ending a Partnership or Co-Ownership
If both partners want to end the partnership and sell off the property, they first must get the property deed from the partnership before the sale can go forward.
This requires that the property be distributed from the partnership to its partners. In the case of a 1031 exchange, the partners need to hold the property as tenants for a certain period of time (which can vary) in order to fulfill the “held-for” stipulation in the tax code.
If you don’t want to exchange your property, but just want to cash out, then the most common way to do that is with a “split-off.” This involves distributing the shared tenancy to the individual partners.
Getting Help with Partnerships and Co-Ownerships
Selling or exchanging shared real estate investments can be tricky, so many people choose to seek the help of a qualified professional. A tax expert can cut through the red tape and minimize your tax burdens so that the sale of your property maximizes your profits and reduces your hassles and expenses.