Timing, Part 5

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.

Timing, Part 5

When you're trying to set up a successful 1031 exchange deal, there's some particular research that has to be done. There's also a timeline where you have a 45 day identification time frame and settlement time of an additional 135 days.

The IRS is very strict about the timeline. However for 9/11 and some natural disasters IRS has granted settlement deadline extensions. That’s not business as usual, though, so it pays to plan ahead.

Here's the thing – as a dealmaker, you can write a contract anytime before settlement for replacement property. Set this up correctly and you’re likely to have smooth sailing for a 1031 exchange deal.

With that said, you might have more than one partner or stakeholder in the process, so look for information on how to utilize a qualified intermediary and move successfully toward completing your 1031 exchange.

Question 1:
Hi! I have a couple questions. I have 2 single family rentals in Denver Colorado. 1) Can I exchange the TWO of them TOGETHER for ONE rental in California (since property there is so much more expensive). 2) can the rental in California be a condo or must it also be a single family residence? Susan

Answer:
You can combine two properties and do one exchange following the time lines determined by when the first property settles. The California property can be a condo or a single home or a funeral home! The definition of like-kind was expanded in1992 to be “real property if properly held for use in a trade or business or for investment purposes”.

Question 2:
Is there any rule that owner must hold the title of the property that is acquired by 1031 exchange for certain period of time? Or Can I sell the subject property right after the 1031 exchange is completed?

Answer:
First, there's a two year rule that is generally excepted as the safe time frame for holding a property for exchange. The two years prevents flipping, which is not allowed under IRS rules.

Then there is intent which needs to deviate from the rule needs to be documented. Suppose you are in the real estate business. You set up two LLCs for specific purposes, one for flipping property and one for holding property. You purchase two houses you want to hold and place the houses into your “holding” LLC. You proceed to hire an architect and he draws up plans. The houses are not listed for sale. You receive an offer you cannot reuse. With your separate LLC’s, architect bill and his plans plus lack of marketing material your intentions are well documented! You can take the offer and do a 1031 exchange.

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

When you need advice on a 1031exchange deal, come to Marilee Hill – as a FINRA certified registered representative with the series 7 licensing, Hill has advised many clients on how to put together a 1031 exchange deal. Since Hill is not a qualified intermediary, she doesn't charge for services. Hill will direct you to a qualified intermediary who will probably charge from $600 to $1000.

However, this is a small amount compared to your potential tax savings from a 1031 exchange. Ask Marilee Hill about her experience in 1031 exchange deals.

The Role of the QI (Qualified Intermediary), 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.

The Role of the QI (Qualified Intermediary), Part 4

Looking to do a 1031 exchange deal? A qualified intermediary is critically important. Without the qualified intermediary, the deal won't work. You'll end up without a successful result.

But there's another wrinkle here, too. Your qualified intermediary has to be free of any conflict of interest. You should not use a family member or your personal attorney or someone else like that to be your QI. That's a recipe for disaster. You can find out more in specific Treasury regulations regarding the subject.

Question 1:
Questions: \nConsidering selling rental home in California and buying a condo in Naples for $1,500,000.\n1. How to obtain maximum security with escrow account?\n2. Does exchange have to be completed in tax year?\n3. Do all potential properties have to be identified before close?\n

Answer:
A qualified intermediary will help you to get maximum security for your exchange funds. Ask if the Q.I. is bonded? All potential properties have to be identified within 45 days of close. When you close on all properties before 45 days you have no need to file the ID’s. If for whatever reason you are unable to purchase any property identified — you pay Uncle Sam the taxes.

If your exchange window goes into the following tax year — you need to get an extension and file your taxes after you close your 1031 exchange.

Question 2:
can you email me a form to use to designate a replacement property.

Answer:
Your QI can help you with forms, but if you do not have a qualified intermediary, you do not have a deal. If you have gone to settlement and have constructive receipt of the funds, you have lost your ability to do an exchange. Get the necessary paperwork from your QI before you go to settlement and file with the QI the properties you want to purchase by the end of the 45 day identification period.

Question 3:
I need to set up a 1031 excvhange

Answer:
I can provide you with contact to a qualified intermediary who I trust and have used for many years. They will help you to complete the deal.

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

Marilee Hill has a lot of experience with 1031 deals and understands the people side of the business too. She does not charge for her advice, but does not act as a qualified intermediary herself. Ms. Hill is a registered representative with series 7 licensing and experience searching for and evaluating securitized replacement properties. Ask Ms. Hill about costs for QI services and how to go about a 1031 exchange deal.

Exchange Basics, Part 8 

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 8

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 1:
After 2 holders of property, 25% holder, 75% holder, complete 1031 exchange and new property purchase, can all the income go to the 25% holder without any tax problem for the 75% holder who has no income to report? Does IRS require income reporting from both tenants in common?

Answer:
This is an interesting question based on the “tenant in common” principle of “pari-passu” or “equal footing” – where you have two partners in the deal, the IRS holds them to be, in its own words, “equally managed without any display of preference” … so what that means is you still have to file, even if a specific party doesn't have to pay in the end. IRS wants to see the numbers!

Question 2:
I am selling a prop. for 775,000 on land contract.300,000 down. balloon in 3years. Want to buy another rental property for 300,000 cash. Will the 1031 work for the 300,000 to be shielded from the gain? I bought the property, a MHP with a 1031 9 years ago. The new property is consisting of 9 homes.

Answer:
Where you have situations like this with a balloon payment, it's necessary to structure the deal properly. The land contract is also a moving piece here. The 9 homes to be purchased qualify under the 95% 1031 I.D. rule. Your best bet is to hire a qualified intermediary to help you through the transaction.

Before any commitment check with a CPA with 1031 experience to see what the tax would be on the $300,000 exchanged. From my experience you are disproportionally penalized when the amount exchanged is less than half the sale price. .

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

Marilee Hill has advised many clients on 1031 exchange deals. As a FINRA certified real estate professional with knowledge in series 7 licensing and more, Marilee Hill can help advise on some of the tricky aspects of a 1031 real estate exchange deal. Get great advice from a friendly, established voice in the real estate business – and help with your next 1031 exchange deal.

Exchange Basics, Part 7

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 7

When you go to start a 1031 exchange, you’re essentially trying to save yourself money in taxes. That's the bottom-line goal, but many people pursuing these deals can run into challenges along the way. Today's landscape is more complex, and today's rule making is more robust. The IRS has specific rules and regulations for like kind and everything else involved in a 1031 exchange.

So you want to save on taxes – but you have to know what's involved in these deals. It's not as simple as finding any property and doing any exchange. The like kind requirements are fairly strict. If the person doing the exchange doesn't understand them, they’re likely to be unsuccessful in doing the deal without getting in some kind of trouble with regard to filing.

Knowing about how to do legitimate 1031 exchange deals and about the role of qualified intermediaries helps real estate holders to know how to do these valuable deals, to make sure they are in good shape when the paperwork goes through.

Question 1:
I am planning to do 1031 exchange as follows:\nselling property #1 for 625,000\nLoan balance $65,000\nsale expanses about $40,000\n\nBuying Property #2 for $610,000\nadding cash for the difference between sold and purchased prices.\n\nDo I have to pay taxes on the price difference $15,000 ( Boot ??? )

Answer:
So if you have a 625K loan balance and those expenses, and you're buying for 610K, your second property will be greater in value than your net sale, which is good. You'll have to exchange your net sales proceeds (625-65 = 540) you put all of the 540K into your second property, and if you take any out, you have to pay taxes on it. Other than that, you're in good shape, because your second investment is greater.

Question 2:
Selling a property that is going to be approximately $89,000 in capital gains.

Answer:
As mentioned above, in a 1031 exchange deal, you have to buy an equal or greater amount of real estate. That’s equal or greater in terms of net sale price after sale expenses. Net sale price equals DEBT + CASH + PROFIT. Your $89,000 needs to add any debt you paid off plus all additional cash.

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

Marilee Hill can help real estate holders to get great advice on 1031 exchange deals – as a FINRA certified professional with experience in all sides of the real estate industry, she understands how to advise clients on how to start looking for qualified intermediaries, identifying like kind properties and all the rest. She also understands the people side of the business, and her goal is to help clients to be successful in the real estate world.

Exchange Basics, Part 6

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 6

When you look at how things used to be done in the old days, real estate today is much more complicated in many ways. There are more types of ways to get involved with real estate, and more diverse deal opportunities. The 1031 exchange strategy is part of this – so are TIC and DST exchange deals.

The essence of a 1031 exchange deal is that you save money on taxes – but that's easier said than done. Without the right kinds of strategy and compliance, people who set out to do 1031 exchanges can run into serious roadblocks. Some of these have to do with like kind property requirements – when you run afoul of these, you tend to get in trouble with the IRS. In exchange properties simply have to be of like kind as defined by the jurisdiction; for example in NYC a coop can be exchanged, in Texas Mineral rights an be exchanged and in West Virginia timber rights can be exchanged.

Those who are contemplating a 1031 exchange deal should know all of the requirements and make sure they comply, including using a qualified intermediary, conforming to time frame requirements, and making sure properties in question are like kind.

Question 1:
I co-own a property with a partner and like them to buy me out and invest the proceeds into another property. Can I use at 1031 exchange to purchase another property. Also, would the value of the property that I purchase need to be only more than my half of the former property value or entire?

Answer:
If your names are on the title and not some generic business entity, you can take the proceeds from the deal to exchange into another property. Make sure that the second property is of equal or greater value than the initial property that you bought from your partner, i.e. if there is $30,000 of debt and $100,000 of cash you need to replace $130,000 of which $100,000 must be cash. All $130,000 can be cash.

Question 2:
Is 1031 exchange rule applies to business opportunity ? L know it’s applies real estate only.\nPlease let me know.\n\nThanks,\n

Answer:
In terms of 1031 exchanges, like kind involves exchanging real property. Effective January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify for non-recognition of gain or loss as like-kind exchanges

Question 3:
I completed a 1031 Exchange in 1992 and I'm now going to sell the replacement property (vacant land). However, I can't find my paperwork and I wondered what complications I'm going to face at tax time. I have fairly accurate personal records of the money involved but no official paperwork.

Answer:
You need your old tax records. Contact the IRS and retrieve the 1992 filing. You need formal proof of your cost basis which the 1992 tax return should give you. The expenses during the time you held the property do not affect your basis. With the 1992 information you can calculate the profit. You can then pay taxes or execute another exchange. Either way you need to know you basis!!

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.

Exchange Basics, Part 5

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 5

How is today's market different from the old days? One aspect of this is that it's much more complicated. With TIC and DST exchange deals and various kinds of 1031 exchange strategies, there are widespread alternatives to doing cash only deals and pursuing traditional tax burden outcomes.

Of course, you want to be saving taxes when you're doing a 1031 exchange, but various roadblocks exist, and they can be pretty daunting. People who don't understand the like kind requirement can get in trouble with a deal that's not going to be fully kosher with the IRS.

Observe all of the requirements for a legitimate 1031 exchange deal, whether that means using a qualified intermediary, observing timeline requirements or keeping properties like kind in terms of domestic or foreign locations.

Question 1:
We have a rental property held in an LLC by me and my wife. We would like to sell this property and possibly acquire some other properties. Is the original capital investment (minus depreciation) liquid IE usable for any purpose? We would then like to place the profit in an exchange.

Answer:
The deal is that you need to exchange debt on the property paid off at settlement and all of the cash including refinancing funds, original equity and profit. Any other kind of exchange isn't going to work.

Question 2:
I have mixed use, commercial property. I live on the property, plus have 3 income buildings on 1.3 acres. There are 2.7 acres - land which I want to sell. My accountant has my property 50-50. IF I sell the land for $200,000 as 1031, will I have to invest $200,000 or $100,000 based on the 50-50?

Answer:
In this case, your investment is $200,000 based on your existing property.

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

When you come to Marilee Hill, you get fully qualified advice on 1031 exchange deals for free. Marilee Hill can talk to you about the need for a qualified intermediary and what that means. She's FINRA certified and fully conversant in series 7 licensing and private placement management memorandums and everything else. Let Marilee Hill help you to figure out what to expect with a 1031 exchange.

Related Persons Exchanges/Self-Dealing Exchanges and Mortgages, 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.

Related Persons Exchanges/Self Dealing Exchanges and Mortgages, Part 4

There's this interesting thing that happens when many people approach a 1031 exchange – they start practicing wishful thinking, or in other words, cognitive dissonance.

Maybe they think that the property doesn't have to be like kind, or there's no two-year holding period … or self-dealing is totally fine…

These are all pitfalls to a successful 1031 exchange deal, because these requirements do exist and they are hard and fast rules and the IRS is watching.

You can't just set up loans inside the family and shortcut the process requirements, so it pays to be informed when you start to work on a 1031 exchange deal.

Question 1:
My husband and I married later in life. He has a family trust in which he holds all his property. I have my own family trust in which I hold my own property. Can I sell a rental property in my trust and purchase a rental property from my husbands trust in a 1031 exchange?

Answer:
Because you are married, this is considered self-dealing. If you're divorced, you can do it. It's really that simple

Question 2:
Selling student rental apt. building for %500k. I have appreciated it for 21 years. My CPA tells me I will owe approximately $120k capital gains. I own another rental building which I owe 210k bank mortgage. Will I be able to save any capital gains tax if I apply sale money to mortgage?

Answer:
Unfortunately, this violates the like kind requirement in that a deed of ownership is not comparable to a lien against a 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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