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.

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.

Exchange Basics, 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.

Exchange Basics, Part 2

Back in the old days, many deals were cash only. But now, 1031 exchanges have become more sophisticated in multiple ways. The real professionals have been involved in the TIC and DST exchange markets. We have clients all over the country, access to the experts with knowledge in esoteric abstract 1031 issues and we are able to make our deals work according to IRS regulations.

One of the central premises for a 1031 exchange is that investors are going to save taxes. Sound simple - when you want to take out a chunk of cash and have a high basis? Think again. Then there is confusion - the sale of your primary residence is Section 121, not 1031, except where you have a rental unit or a rental on your primary residence. Are you doing like kind to like kind? — a pro knows how to check and provide a solid path forward.

A ‘like kind’ property refers to real property including what individual states define as real property such as timber and mineral rights from which you can facilitate 1031 exchanges. Geographically the definition is limiting to U. S. , U.S. Virgins Islands and Guam. If you own a property outside of the U.S. you have to exchange that property with another foreign property — France to Mexico, etc.

Question 1:
I have a single family home in Palmdale, CA which we have been renting since 1988. I want to exchange it with a commercial property in the North Dallas area where I now resides. What is the best way to go about it using this 1031 exchange?

Answer:
1. Hire a Qualified Intermediary
2. Go to settlement with the QI’s papers in hand
3. Use cash and debt on an equal basis
4. Put the money into the new property
5. Add debt or cash to the deal

Question 2:
I have a single house I've rented for 12 years which is paid off. I'm going to sale the house but would like to buy another rental house in another city. I bought this house in 1990. Not sure how a 1031 works.\nThank you, Mary

Answer:
Two United States properties are like kind to each other. Engage a Qualified Intermediary before you go forward with the details of a 1031 exchange deal.

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

Although the 1031 exchange is a basic concept, a lot of these deals raise significant questions – whether you want to know about what constitutes a complete exchange, the role of cash versus data, or how you deal with deductible expenses, ask Marilee Hill.

Marilee Hill has the experience to help you with a 1031 exchange. She came into the exchange field in 1999 having already managed her own apartments and learned a lot about with a real estate process.

Please contact Marilee Hill for your next 1031 Exchange strategy.