Exchange Basics, Part 10

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Exchange Basics, Part 10

Take a look at today's market, and you'll see that it differs quite a bit from the traditional real estate world that existed decades ago. Nowadays, things are complicated, and 1031 exchange strategies are one of those things.

Since the main goal is to save money on taxes, part of understanding the 1031 exchange involves knowing the tax code and what's possible according to IRS rules and regulations. That means understanding the principle of like kind for properties, timelines and more.

When you're looking forward to successfully completing a legitimate 1031 real estate exchange, a qualified intermediary is a must. That's another aspect of doing these sometimes complicated real estate deals.

Question:
My wife and I have owned 8 residential properties in Chesterfield county for many years, most of which are now free and clear. We are interested in exploring the possibility of doing some exchanges to relieve ourselves from the landlord concerns while avoiding taxes, etc. \n

Answer:
With eight residential properties, you can sell them one at a time as the tenants depart, and do eight or more exchanges, theoretically up to 24 using the straightforward three property identification rule. As with the DST, you can exchange into multiple asset classes anywhere in the U. S. where you can easily achieve diversification. The old adage “Don’t put all your eggs in one basket” still holds here, and before you first place a property for sale, learn the rules governing an exchange and the structure of the DST. The DST’s two most salient features are the need for a sponsor as the decision maker, and the designation of all debt as non-recourse.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

Coming into the real estate business with experience in property management and leasing, Marilee Hill has been actively advising dealmakers on 1031 exchanges for years. As a FINRA certified real estate professional, she is knowledgeable in series 7 licensing and everything else that goes along with these sorts of real estate deals. When you need great information about qualifying intermediaries or anything else, come to Marilee Hill and let her help you to start the process and get all of your ducks in a row.

Failed Exchanges & The Role of the Qualified Intermediary

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Failed Exchanges and The Role of the Qualified Intermediary

Question:
Just sold an investment property. Looking to learn more on 1031 program

Answer:
If you did not hire a Qualified Intermediary, and sign the paperwork, and the QI’s paperwork work was at settlement, you have constructive receipt of the proceeds, and you cannot do an exchange. Unfortunately, your first lesson is expensive.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

Marilee Hill knows about 1031 exchange processes – as a 20 year real estate professional, she is able to help offer clients advice on exchange replacement properties and regulations such as reg D of the Security Exchange Act of 1933.

Marilee Hill is a registered representative with a series 7 license who can help with the preliminary work of understanding what to do with a 1031 exchange deal. Then there's a qualified intermediary service that generally charges $600-$1000 or more to help achieve the deal. Marilee Hill’s services, on the other hand, are free.

Like Kind Exchange - Asset Class, Part 4

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Like Kind Exchange - Asset Class, Part 4

Many people who are hearing about a 1031 exchange for the first time wonder about what “like kind property” means. It generally refers to two different properties that are a similar type of property. But it sometimes gets pretty complicated.

For instance, before a revenue ruling in 1991, a particular client paid a real estate attorney over $100,000 in research costs and representation to declare a particular property “like kind”. After the IRS 1992 ruling defining “like kind” as exchange of real property held for productive use in a trade or business or for investment. After that broad definition, the revenue ruling meant that clients no longer pay those legal fees for determining like kind. Most CPAs are now knowledgeable.

Anyway, like kind is critically important to a 1031 exchange deal.

Question:
Can you do a 1031 from a commercial building to duplex and single homes to use as income.\n

Answer:
Yes, you can sell a commercial property and buy residential property. The tax-deferred exchange was first legislated in1921, and like many new ideas, the concept has evolved in ways that may not have been contemplated at its inception. In 1991, there was the creation of the safe harbor role of the Qualified Intermediary.

The 1991 law enabled what we now know as the ‘standard delayed three party swap.’ In 1992, the IRS clarified "like kind” to be assets held in a trade or business, or for investment; assets do not have to be of the same functional type (e.g. a residential property does not have to be exchanged for another residential property).

About Marilee: Role of Marilee Hill, Registered Representative (RR)

Marilee Hill knows about 1031 exchange processes – as a 20 year real estate professional, she is able to help offer clients advice on exchange replacement properties and regulations such as reg D of the Security Exchange Act of 1933.

Marilee Hill is a registered representative with a series 7 license who can help with the preliminary work of understanding what to do with a 1031 exchange deal. Then there's a qualified intermediary service that generally charges $600-$1000 or more to help achieve the deal. Marilee Hill’s services, on the other hand, are free.

Exchanging into Multiple Properties, Part 4

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Exchanging into Multiple Properties, Part 4

Exchangers can bundle properties into one lot, observing the closing date of the first property closed as the beginning of an ID period.

However, other rules apply – how the properties are titled, what the timeline is plus the debt to cash ratio all need to be understood before a sale. In selling a property and buying multiple properties, or selling multiple properties to buy one property exchangers have to be able to consolidate the timeline, add up and maintain the debt to cash ratios and make certain all the entities together can do an exchange.

Question:
I would like to exchange land that I'm selling for several small houses. the houses will not be actually built for six months after the exchange. If I purchase the houses on spec from the builder, does this qualify as a 1031 exchange under the IRS rules?

Answer:
You want to exchange land for several small houses built on spec by a builder, and to settle on the spec houses when finished? You can exchange from land to houses and you can buy more than one property with the proceeds from a single sale. However, if you cannot settle on the houses within six months of your sale property, you’re going to run into serious problems. Contemplate the right time frame here.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

Marilee Hill knows about 1031 exchange processes – as a 20 year real estate professional, she is able to help offer clients advice on exchange replacement properties and regulations such as reg D of the Security Exchange Act of 1933.

Marilee Hill is a registered representative with a series 7 license who can help with the preliminary work of understanding what to do with a 1031 exchange deal. Then there's a qualified intermediary service that generally charges $600-$1000 or more to help achieve the deal. Marilee Hill’s services, on the other hand, are free.

Related Exchanges and Boot, Part 1

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Related Exchanges and Boot, Part 1

Question:
Hello, \n\nWe are selling a 4 plex ($1.36 million) which we did not live in and buying a triplex (equal sq footage per apt ) (1.85 million) which we will live in one and rent the other two.\nWe were told we would have to buy something more expensive so we would not have to pay taxes on the 4 plex.\n

Answer:
You’ll need to determine the square footage of the unit you want to live in, and what percentage of the three units your new home unit represents, by square footage. Based on these percentages, the price of the two units you are renting need to be $1.36 million. If they are not, you will owe taxes on the difference, i.e. two units are worth $1.1M, so taxable is $260,000.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

With a wealth of experience in real estate and 1031 exchanges, Marilee helps people to deal with a complex real estate process. Her long experience with her own properties and having real estate broker licenses in three jurisdictions help.

Marilee likes helping clients to understand the ins and outs of a real estate deal. With her combined more than 20 years as a commercial real estate Broker plus another 20 years with FINRA licenses Marilee has the experience to help clients to plan adequately for a real estate future. Let Marilee help you with a real estate portfolio that needs a guiding strategy in terms of tax regulations and more.

Exchanging Multiple Properties, Part 3

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Exchanging Multiple Properties, Part 3

Exchangers can bundle properties into one lot, observing the closing date of the first property closed as the beginning of an ID period.

However, other rules apply – how the properties are titled, what the timeline is plus the debt to cash ratio all need to be understood before a sale. In selling a property and buying multiple properties, or selling multiple properties to buy one property exchangers have to be able to consolidate the timeline, add up and maintain the debt to cash ratios and make certain all the entities together can do an exchange.

Question:
Do you have to set up an exchange before you sell a property? I plan to sell 1 or 2 and plan to buy 1 does the 1031 need to be set up first? Thx Steve.

Answer:
So you want to sell two properties, and buy a single property with the proceeds? You need to hire a Qualified Intermediary, and the QI’s paperwork must be at the title company before you settle on your first sale property.

You have 45 days from settlement to identify up to three properties. So you must sell your second sale property within the first property’s 45-day identification time frame, to be able to use funds from two sales to buy one property. There are an additional 135 days from the settlement of the first property to settle on your selected purchase. When you are doing a 1031 exchange, there is no restriction on when you can sign the contract for your exchange purchase property. What you want to do involves a lot of planning, and a little luck.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

With a wealth of experience in real estate and 1031 exchanges, Marilee helps people to deal with a complex real estate process. Her long experience with her own properties and having real estate broker licenses in three jurisdictions help.

Marilee likes helping clients to understand the ins and outs of a real estate deal. With her combined more than 20 years as a commercial real estate Broker plus another 20 years with FINRA licenses Marilee has the experience to help clients to plan adequately for a real estate future. Let Marilee help you with a real estate portfolio that needs a guiding strategy in terms of tax regulations and more.

Like Kind Exchange - Zero Cash Flow Asset, Part 1

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Like Kind Exchange - Zero Cash Flow Asset, Part 1

Question:
I'm a commercial r.e.broker. My client is looking at a Zero Cash Flow (ZCF) purchase with pay down/readvance for his 1031. His accountant asks for an opinion letter on this scenario. Can you help?

Answer:
You have no need for an opinion. A 1031 is a 1031, and the 1031 exchange process is well established. What you need is an explanation of why an investor invests in a Zero Cash Flow property, and how the property functions over time to enable the investor to lower Zero Cash Flow's debt to a level where the investor can do a 1031 into a cash flow property.

Zero Cash Flow is an investment into which one places cash. Then the investor acquires debt leverage of 80% or greater. The property produces no income, and has a loan that amortizes in a pretty standard way.

The purpose of the ZCF is to acquire the debt, so that the 1031 exchange investor can acquire a property with a lower debt leverage ratio. The plan is for the Zero Cash Flow property to build enough equity or “amortize” in ten years, to the point that when the property is sold, on its own or combined with the sale of another less leveraged property, the investor can purchase a potential cash flow property.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

For free advice on 1031 exchanges, contact Marilee Hill. She has 20 years experience in the business as a real estate broker and property manager, and she understands DST requirements and the security act and everything else as it applies to 1031 exchanges. She'll point you toward the right resources, for example, a qualified intermediary, and estimate cost and likely outcomes.

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