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.

Timing, 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.

Timing, Part 4

Quickly, here's some of the good and bad on 1031 exchanges. As far as limitations, there is a mandatory 45 day identification, and 135 days plus for settlement. That starts as soon as you get rid of your initial property, and it's a hard and fast rule.

On the other hand, you can write a contract anytime before settlement for a replacement property. That means if you handle this correctly, you'll be ahead of the game when it's necessary. However, if you waffle around, you're likely to get in trouble.

A 1031 real estate exchange deal relies on multiple stakeholders. It requires a detailed process. Having good professional assistance is key.

Question 1:
How long do we have to turn around our sale money so as not to pay taxes. I am unable to talk on the phone\nI have no voice due to cancer. Please e-mail me.

Answer:
The replacement property must be held for two years. The property needs to be viably utilized during the two years — as in rented or trying to rent or fixing up to rent. That’s the necessaries. On your tax return you need to fill out Form 8824.

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

Want a registered representative with a series 7 license and knowledge of reg D of the security act of 1933? Marilee Hill provides exceptional free advice on 1031 exchange deals as a former real estate broker with 20 years in the industry. She knows about the people side of the business as well as the timeline, IRS regulations and relevant technical details. Come to Marilee Hill to help you with an existing 1031exchange plan when you have to get all your ducks in a row before you head toward settlement.

Exchanges with Partnerships, LLC’s and other Entities, 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.

Exchanges with Partnerships, LLC’s and other Entities, Part 4

Trying to do a 1031 exchange with an LLC or partnership can be a thorny issue. It can be much different than an exchange with individual personal names. Where a retired couple can utilize a rental property to make an exchange, an LLC or partnership must abide by specific rules and regulations that might change that strategy.

Stakeholders in an “entity” can distribute assets in certain ways and after a two-year holding period, sell, go their separate ways while those choosing to exchange succeed in avoiding the capital gains tax. Then there's something called ‘drop and swap’ where different partners buy one another out in different ways. The key here is that most states allow this, but California does not.

From 1994 to 2002, with IRS modifications and the emergence of TIC and DST strategies the 1031 exchange has evolved and the results have given many more the opportunity to economically and efficiently “swap until you drop.”

Question 1:
I am selling my share of ownership from LLC to the other member. What are my options for doing 1031?\nPlease explain.

Answer:
You can't perform an individual exchange with an LLC. The traditional drop and swap transaction is no longer approved by the IRS, more scrutinized in California than other states. To effectively achieve your objective you need to plan ahead. First you distribute the assets of your LLC or Partnership to newly formed individual entities. You hold these new entities all owning a piece of the original property for two years and then you are able to sell with those who want to exchange and those who want to pay taxes all achieving their goals.

Question 2:
We own a commercial property with a partner. We put the building for sale it under contract. We our portion of the proseeds my husband and want to buy another commercial building to move our real estate businesse there. We rent to our self in the building we are selling. Can we do a 1031 exchange?

Answer:
It's important to have the property in personal names or separate entities and not in the name of the LLC or partnership in order to do the 1031 exchange. In terms of renting from yourself, this can be an effective as long as the rent and terms reflect the prevailing market.

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

When you're going to do a 1031 exchange deal, there are lots of things to consider – with a securitized property you need a licensed FINRA professional with either a Series 22 or Series 7 license, and your professional needs to understand how to work with the multiple stakeholders involved in the business. You also need to know about the crucial role of a qualified intermediary. Marilee Hill, with 20 years experience in the business, provides this free advice to clients to help them get started rolling the ball up the hill for a 1031 exchange deal.

The Role of the QI (Qualified Intermediary), 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.

The Role of the QI (Qualified Intermediary), Part 3

When you're trying to do a 1031 exchange, having a qualified intermediary is important. It’s so critical to the deal that a deferred exchange flunks without a QI. Among multiple pieces of paper the Qualified Intermediary provides you the confirmation documentation that the IRS requires.

Treasury regulations show why a QI is required, and what kinds of eligibility restrictions there are. Most of these restrictions deal with self-dealing and conflicts of interest – generally, you cannot use a family member or someone who has been working for you for a long period of time in some general role such as your personal attorney or CPA. Aside from this, your choice of QI is pretty wide open.

Question 1:
If exchanging property from Texas to California does it matter which state the 1031 coordinator is in?

Answer:
The 1031 coordinator can be in any state, as long as your property is like kind, and that includes having both properties be in the U.S.

Question 2:
I have two properties I'm going to be selling soon so I can buy an apartment. The properties are in California and the Apartment I want to buy will most likely be purchased in in Texas. I had questions about the cost, and what my options are. Thanks.

Answer:
You're generally on solid ground with a Texas to California exchange, as long as properties are like kind. You have to work with 1031 exchange time guidelines and a Qualified Intermediary – normal fees are $600-$1000, but in this case, the QI might have to do two separate deals which may increase the cost.

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

Get free advice from Marilee Hill about a 1031 exchange process before going to a Qualified Intermediary. Marilee Hill has 20 years experience in the business and is a Registered Representative with a series 7 license qualifying her to provide properties for Accredited Investors governed by Reg D of the Security Act of 1933. She knows about the technical side of the business and the people side of the business as well. Marilee Hill has a lot of experience navigating these kinds of deals and consulting clients to stay on the good side of the IRS. Don't be afraid to ask her about a deal that you're dreaming up.

Exchange Basics, 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.

Exchange Basics, Part 4

When you want to get involved in some kinds of contemporary real estate deals you have to understand that they've gotten a lot more advanced than they were in the old days. It used to be that a simple cash deal was the most common kind of exchange. Now you have TIC and DST 1031 exchanges approved (Rev Proc 2002-22 and Rev Proc 2004-86) by IRS with regulations as to entity structure.

As with some other kinds of deals, a 1031 exchange can be deceptively complex. You want to save taxes, and that's a simple goal, or at least it seems like it should be, but the method is not always straightforward. There are lots of eligibility concerns, including like kind mandates and territorial requirements where the deal has to be apples to apples – US to US or foreign to foreign properties, for instance.

Dealing with these requirements and section 121 of code as well as other types of requirements takes some professional know-how. Make sure you're on solid ground with a 1031 exchange.

Question 1:
I bought an investment house for $210k in 2014 and will sell it soon for 250k. I spent 10k to replace AC and water heater, My gain from this transaction is only 20k. Does it worthwhile to do the 1031 exchange - how much will it cost me to set up the exchange?\nThanks!

Answer:
Not sure whether it's worth it to you or not. It depends on several things. First, the hard costs of a qualified intermediary range from $600-$1000. Then you have the gap between $210K and $250K, which is $40K, and the $10,000 may or may not qualify as a capital improvement. Ultimately, your tax bracket matters, too, and so you have to offset the cost of additional taxes with the cost of going through with the exchange. To find out your exact tax exposure hire a CPA with 1031 knowledge. If he does not know what Form 8824 is — call the next guy.

Question 2:
Hi, How can I calculate the closing or 1031 exchange costs in an individual income tax return.and in which form should I do it?\nAlso the property has been sold 632000 Around 39400 selling fee and the exchange property has been purchased around 495000 through Safe Harbor Exchange Inc. \nPlease advise.

Answer:
Your best bet in this type of situation is to hire a CPA who understands 1031 exchanges. You may be able to get more information from Safe Harbor Exchange. I recommend IRS form 8824 for specific guidance.

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

Marilee Hill is well qualified to weigh in on 1031 exchanges. With 20 years of experience, she understands Reg D of the Security Act of 1933 and the DST markets. Hill provides free services to customers who want to prepare ahead of time to know how to execute correctly a 1031 exchange. Marilee Hill’s experience includes being a real estate broker in multiple jurisdictions, and helping customers with tricky real estate deals. Talk to her about how you'll approach a 1031 exchange strategy to make sure you're on the right side of the IRS.

Exchange Basics, 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.

Exchange Basics, Part 3

Traditional real estate deals often tended to be done in cash, if the parties had the money. Now, 1031 exchanges have become more complex. It's important to know all of the details about 1031 rules, which can seem abstract, and IRS regulations, which are fairly set in stone.

The basic premise of a 1031 exchange involves deferring taxes. You want to be able to sell without having capital gains assessed on your profits and depreciation. There is the expression, “Swap until you Drop” at which time your heirs inherit at current market value and no ugly taxes due.

In order to do this with a 1031 exchange, you need to recognize like kind property rules. You have to understand the sale of primary residences and investment or rental properties and not confuse them. There's also jurisdictional requirements where US to US properties can be exchanged, or foreign to foreign properties, but not a combination of the two.

Question 1:
My wife and I are considering a 1031 exchange in the next 12 months (approximate value: 500k). We feel it would be prudent to have expert guidance before making any decisions.

Answer:
It's good that you're planning ahead — that leads to success or at least no disastrous surprises, such as failure to hire a Qualified Intermediary and blowing your 1031. Knowing the rules is definitely an advantage in this type of process.

Question 2:
Can cash equity replace debt on a 1031 exchange?

Answer:
Yes, cash equity can always replace debt.

Question 3:
With an exchange, is it correct that any loan on the replacement property needs to be equal or greater than the loan on the relinquished property?

Answer:
Yes, the loan on the replacement property has to be equal to or greater than the loan on the existing property – keep in mind you can always replace a loan with cash.

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

With 20 years in the business, Marilee Hill knows how to help clients with 1031 exchange deals. She understands the 1031 exchange and how to use a qualified intermediary to make a deal work.

Marilee Hill has experience with the rental side of the real estate business and the selling side. Her services in regards to a 1031 exchange are free – she just helps clients to start the deals. The qualified intermediary does the technical work for a fee.

Come see Marilee Hill about any questions you may have about a 1031 exchange deal.