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.

Exchange Basics, Part 9

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 9

Okay, so today's market is different from what you experienced in the old days – today's real estate investors have many options in addition to cash-only deals, and they also have the ability to structure deals in many different ways.

The 1031 exchange is one of those principles that is based on saving tax money, and that means it has to be looked at very thoroughly in terms of implementation. Investors need to know about like kind properties and necessary timelines, etc. They need to understand how each stakeholder party is treated by the IRS.

In order to help the real estate investor through this process, it's important to hire a qualified intermediary. That helps to ensure that the deal is based on solid ground and that every T will be crossed, and every “I” dotted.

Question 1:
Currently own Restaurant (building / land)that is leased to daughter would like to sell to her or some one else. the original investment was 1.9 m capital gain is est at approx450.000 How much do I need to invest in a different & what kind of building

Answer:
So here, your real estate is held for productive use and qualifies for a 1031 Exchange. The restaurant has a lease and and the lease is not part of the sale; the lease encumbers the building. Essentially, you will need to exchange for an amount equal to or greater than the original investment plus your profit.

If any financing was in the purchase or there is now financing you need to secure financing to replace that amount or you can replace it with cash. Too many think that when the debt is paid off at settlement —-no ned to replace it — WRONG.

Question 2:
My husband is in the process of selling his land. Also in the process of buying from the County, land that once was leased to us. Could this possibly be a 1031 exchange? The only thing is that there is a cabin on the land that is being purchased that we own! Please help! Thank You!

Answer:
This deal can qualify for a1031 exchange under the right conditions.That the land was once owned by you is irrelevant to the exchange. You cannot include in the sale the cabin — you already own it — so have the documents reflect that the cabin is not part of the sale. A good attorney familiar with 1031 exchanges can easily create the correct documents — starting with the contract.

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

As a knowledgeable real estate professional with FINRA certification, Marilee Hill has a track record of advising clients on 1031 exchange deals and similar real estate transactions. She also understands the people side of the business which is important in dealing with stakeholders and helping them to understand the process of IRS rules and regulations. Let Marilee Hill help to advise you on a QI and everything else that’s so important in these deals.

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.

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.