USA 1031 Exchange and then CRUT

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I have a foreign rental property that I have held for more than 5 years with a gain of $1.6 million (basis was $1 million, current selling price $2.6 million). However the property has a recourse mortgage debt in the amount of $500,000. By my calculations, I would have to pay nearly $500,000 in state (NJ) and federal capital gains on this transaction because the one-time sale would put me in a higher bracket for capital gains and subject me to AMT. How can I defer capital gains from a sale of this property?

Issues:

  1. To transfer the asset into a charitable remainder unitrust to defer gains, it is necessary to transfer the property into the trust first before the sale. However, according to a PLR, transfer of property with recourse debt is generally not permitted because doing so would make the trust a grantor trust and thereby invalidate the deferral. There is no way for me to pay off this $500,000 debt BEFORE transferring and selling the property.
  2. I do not want to set up an installment sale with the buyer.
  3. Mortgage has due on sale clause, so a transfer of the title to the irrevocable trust would presumably violate the contract.
Potential solution?

Do a foreign-foreign 1031 exchange to invest the equity in one or multiple properties with a total net price of $2.1 million and take the capital gains hit on the mortgage boot of $500,000. THEN, proceed to transfer the new, non-mortgaged properties into the CRUT so that when the trust sells the properties, the entirety of the gains of the $2.1 million is deferred.

To avoid dealer status classification, would it be prudent to hold onto the 1031 exchanged property for at least a year before selling it?

Would this work? What issues might this run into and what other ways can I get around the mortgage boot problem I am facing?
 

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