Partial Exchanges and Boot - Asset Class, 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.

Partial Exchanges and Boot - Asset Class, Part 3

When you take out some of the cash from an exchange, the result is a partial exchange. Cash is the driver in these kinds of deals, and the investor can always increase the debt with cash if so desired.

The timelines are inscribed in granite — and then after the horrific events of 9/11, the IRS issued a nationwide exception extending the 45 day identification rule and the settlement deadline for the entire United States. Since then, the IRS has expanded its exceptions for major natural disasters. Don’t dawdle.

Here's what's important with a partial exchange – when you're taking out the cash, you pay taxes on everything above the adjusted base.

There's 25% on any depreciation, and then depending on income, you'll pay another 15% to 20% on that money – plus 3.8% for the Affordable Care Act!

Other income taxes to the local jurisdiction can also apply. That ends up being a lot of money!

It only took me 19 years to learn that when you take out 40% of the cash or more the tax to be paid is closer to what the tax would be on the whole!!

When they're trying to research these kinds of questions, many investors wistfully think that they can take out the original capital and roll over the profits into another deal. Some also wistfully think that because the loan is paid off at settlement there is no need to replace the loan, just 1031 the cash!! However, you can't do either – the IRS is emphatic about that.

The government looks at your HUD sheet to see cash received and loan payoff amounts. Capital improvements also apply to the adjusted gross, and you can deduct the fees of a qualified intermediary for a partial exchange as you can with a complete exchange.

Question 1:
If I take a note back on the property with a six (6) percent interest rate as partial down payment, but put the note in an escrow account not controlled by me, is the note considered a taxable gain?

Answer:
In this situation, you're going to owe taxes on the partial down payment unless you place the note with a qualified intermediary and sell the note and reinvest the funds within the time frame requirements. However, just placing the note in the escrow account has “0” bearing on the taxes due.

Question 2:
I AM A REAL ESTATE BROKER AND I HAVE A CUSTOMER SELLING A RENTAL HOUSE AND SHE WANTS TO KNOW HER TAX LIABILITY I SHE ACQUIRE A HOUSE AT A LOWER VALUE THAN THE ONE SHE IS SELLING AND SHE WANTS TO KNOW WHAT PERCENTAGE APPLIES, THANKS

Answer:
When you want to do a complete 1031 exchange, the rule is that you have to put the money intoa property with an equal or greater value than your initial property.

If the second property is a lower value, you have to take the difference and pay 25% on depreciation, as well as federal capital gains tax and state income tax. Send her to a knowledgeable CPA.

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

Marilee Hill is a FINRA certified professional with 20 years of experience in real estate. She has a lot of skill and experience in dealing with 1031 exchanges and helping clients to think about the risks they're taking on as well as the potential reward.

Marilee Hill understands the technical side of a 1031 deal, which is pretty complicated in many situations. She also understands the people side of the business, and dedicates herself to helping clients through some pretty thorny scenarios.

Ask Marilee Hill about your next 1031 exchange strategy to get a great professional in your corner.

Partial Exchanges and Boot - Asset Class, Part 2


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.

Partial Exchanges and Boot - Asset Class, Part 2

You can characterize a partial exchange this way – cash that is removed from the exchange (and the total of debt and cash) is not “equal or greater in the exchange property.”

You can substitute cash for debt, even all the debt.

An investor can also increase the amount of debt, leaving all the cash in.

In taking out cash, the investor has to pay taxes on anything above the adjusted base – first 25% of any depreciation – and then income tax, which can range up to 15 to 20%, if 20%then add  3.8 % more for Obama Care Tax plus paying the tax in the jurisdiction where the sale property is located.

Can you take out the original capital and just roll over the profits?
No.

The loan was paid off of at settlement, so I don't have to replace the loan with the new property, right?
Wrong.

Look at your HUD sheet and you'll see the exact amount you need to exchange *— all cash received plus any loans paid off.

The monies you spent to ready the property for sale are operational costs for the year of sale.

*Funds that you spent on capital improvements also apply to the adjusted gross – also, you can deduct your qualified intermediaries fees – make sure you're on solid ground with accounting advice from a professional.

Question 1:
I am about to close escrow on a piece of property which will create a capital gain of $129,000. I plan to roll this into another investment.\nMy question is, can I take the $50,000 that I borrowed to purchase this piece of property ( which I sold for $179,000) out at the time of closing ?\n\n\n

Answer:
In this type of exchange, any cash that you remove is considered “boot” and will be taxed – debt paid off at settlement that's not replaced with debt or cash is also boot.

Question 2:
HI.... I bought two family house in Brooklyn in 1979 for $ 40,000.00 I still live in this house. Right now this house Market value is $ 1.5 M  if I sell this house for this price how much  tax do I have to pay.

Answer:
Let's calculate your adjusted gross basis – each half of the duplex represents 50% of the whole amount.

The adjusted gross basis for that half that constitutes your primary residence is $20,000 plus capital improvements.

So then, at sale, if the property is worth $1.5 million, you and your wife will each have a $250,000 tax-free exemption.

You would pay taxes on your personal residence portion on all money above $20,000 plus capital improvements, plus your $500,000 personal exemptions.

On the rental, your basis is the small amount of depreciation remaining, plus half the value of the (ground) property at the time of purchase.

You'll also have to consider the non-depreciated portion of capital improvements.

Everything above your gross basis is taxable.

Question 3:
If there is booty after an exchange, and I elect to pay cap. gains tax on the booty, and the properties exchanged are rentals, will I have to add any depreciation allowances taken in previous years on property sold to the realized gain?\n\nThanks\nFred

Answer:
If you're paying on boot, you have to pay a 25% tax on all depreciation and then you also pay capital gains tax and local jurisdictional tax.

Your current basis on your sale property is the basis for your new property.

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

With 20 years of experience in the real estate business, Marilee Hill is a FINRA certified professional in real estate and understands how to pursue 1031 exchanges.

She has a lot of experience with 1031 and helps clients to proceed in a straightforward way and to understand risk and liability as well as compliance.

She understands the technicals and the people side of the business, and helps exchangers to understand before they exchange how to solve complicated transactions. 

Be sure you're on solid ground and ask Marilee Hill about your 1031 exchange strategy.

Partial Exchanges and Boot

 

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.

Partial Exchanges and Boot

A partial exchange occurs when any of the cash is removed from the exchange, and when the total of debt and cash is not equal or greater to the amount that’s in the exchange property. In these types of deals, cash is the driver, and you can always substitute cash for debt. The investor can always increase the amount of debt.

When taking out cash, the investor will pay taxes on the amount above the adjusted base; he or she first pays 25% of any depreciation taken, then, depending on the investor’s income for that tax year, he or she also pays either 15% or 20%, plus an additional 3.8% (due to the Affordable Care Act) and finally, income tax to the jurisdiction in which his or her sale property is located. It’s not pretty!

Some of my favorite wishful thinking questions are: Can I take out the original capital and just roll over the profits? The loan was paid off at settlement, so I do not have to replace the loan with a new property! Obviously, the answers are “No” and “ Wrong!” From your HUD sheet, you need to exchange all cash received, plus any loans paid off. The HUD sheet should not include money that comes back to you for sprucing up the property for sale. Funds spent for capital improvements before sale apply to your adjusted gross. Talk to your accountant. You can deduct the resulting QI’s fees from your exchange

Question 1:
Are monies paid for upgrades prior to the sell of a property entering a 1031 exchange considered taxable boot if you receive it back after the sale?

Answer:

Funds spent to prepare a home and grounds for sale cannot be added to the adjusted gross base, and should never be on the HUD 1 settlement sheet.

Capital expenditures, whenever they are made, are added to the purchase price to calculate the adjusted gross. For example - a home is purchased for $200,000, and over twenty years, additions are built to enlarge the home. Kitchens are gutted and replaced, totaling $250,000. The adjusted gross basis is then $200,000 (the original purchase price) + capital improvements at $250,000 = a $450,000 adjusted gross basis.

Question 2:
Selling 2 commercial buildings for 9.7m. and buy one commercial building the building of 2.9mi

Answer:
You will pay taxes on the difference between $9.7M and $2.9M = $6.M minus your adjusted gross basis (your original purchase price + capital improvements). The total taxes will reflect 25% of all depreciation taken, then federal capital gains taxes and state income taxes.

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

Marilee Hill knows real estate. With experience in office and retail sales and leasing, and as a broker, and working in the real estate community, Hill already had a solid basis of knowledge when she entered the 1031 field years ago.

She also understands the human side of the business: how to talk to investors and sponsors and get everybody on the same page, and overall, to keep a sense of humor and positive outlook in what can be, without the right guidance, a frustrating experience.

Please contact Marilee Hill for your next 1031 Exchange strategy.