You should have a partnership agreement with 704(b) provisions. If you do a cost seg, there are rules which pertain to 1250 property. If you do a 1031, the partnership CANNOT buy into a partnership which owns real estate as replacement property.
A tax attorney may or may not be able to answer the tax questions.
You need to find someone who is qualified do handle these issues.
If you don’t, you could end up with a real tax mess, among other things.
I bought a foreclosure about six months ago with a friend of mine. We fixed it up and rented it out as planned. Our intention is to sell it in about a year, then 1031 into another property that will cash flow, then repeat in another year or so. Our long term plan is to have an apartment building in about 8 years that will have good cash flow to help put our respective kids through college.
I expect a scolding at this, but our partnership agreement is verbal. We’re willing to put something in writing, but we’re not 100% sure how to go about it. I’m thinking that we need to form a partnership, and file a 1065 with K-1’s. We also want to do disproportionate allocations of expenses (interest and depreciation) since he could use extra deductions, while all my income is wiped out anyway from other properties and my child credits (4 kids). In return for my giving up the deductions, he would pay me half of his savings, either as cash to me, or as a contribution to our venture. I understand that if we operate as tenants in common, we would simply report our interests on our schedule E’s, but that we would lose our ability to make these disproportionate allocations.
Also, I’m confused on the subject of cost-segregations. If we carve out say 25% of our purchase price to depreciate as 5-year property, then do a 1031 exchange, would we continue to depreciate the 25% (of relinquished property) on the new property? If we segregate 25% of the new property, would we have two pieces of segregated bases, or would the new 25% (of a higher purchase price) just replace the original 25%?
I intend to take these issues to a tax attorney, but was hoping to find somebody on this site to help me understand so that my (metered) time in an attorney’s office can be more efficiently spent. Thank you.