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.

Related Persons Exchanges/Self Dealing Exchanges and Mortgages, 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.

Related Persons Exchanges/Self Dealing Exchanges and Mortgages, Part 3

Some people have some blinders on when they start considering a 1031 exchange. One way you could think about it is that they suffer from cognitive dissonance – they're not really able to square the facts with what they think they should be able to do.

One limiting rule involves related person exchanges. You can't have a relative be involved in most 1031 deals. It just doesn't work out. If you do go this route the relative can not also do an exchange with the funds he receives from the sale of his property from your exchange. After that, to have a valid exchange you, the exchanger, must keep the property for two years before you can do another exchange. IRA does not want families to manipulate their basis.

Question 1:
Can I use the the money of sale of rental property to pay loan on other rental property and use 1031 exchange?\nCan I use the money from stock sale to exchange to real estate?

Answer:
Unfortunately, there's really no way to use money from stocks for a 1031 exchange. This is only for real property as defined by each state. To use cashed-out stock is dead before arrival. Paying off a loan from the sale of a property on other rental owned by you is also an idea dead before arrival.

Question 2:
I am selling a 1031 property that my wife & I own. This is the second time we will rollover the profits 1st time (purchase for 220K sold for 485K 2nd time purchase for 485K sold for 545K) taxable would be difference from 220k to 545K correct? also can we purchase a property from one of our LLC’s?

Answer:
When you're approaching a 1031 exchange, your taxable amount is the difference between your net sale price minus your basis. Your basic shorthand of taxable difference $220K — $485K is correct. To your second question, you cannot buy a property from one of your own LLCs - that's considered self-dealing.

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

Come to a professional with 20 years in the business. Marilee Hill offers credible and established 1031 exchange consulting as a FINRA certified real estate professional.

Marilee Hill makes complicated 1031 exchanges simple. She helps clients to understand the process every step of the way and how to contemplate working with the requirements of a 1031 deal from an IRS perspective.

She also excels at working with people, from clients to sponsors to anyone else who's a stakeholder in the deal. Come to Marilee Hill for advice on how to do a 1031 deal in today’s market.

Related Persons Exchanges/Self Dealing Exchanges and Mortgages, 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.

Related Persons Exchanges/Self Dealing Exchanges and Mortgages, Part 2

Sometimes when you look at what people think when they approach a 1031 exchange, you see something called “cognitive dissonance” – they’re thinking about the way they want things to be, rather than the way they are.

For example, related person exchanges can only happen in certain situations – the property has to be at market value, and the exchanger has to maintain continuous ownership of the new property for two years and the seller/relative can not be doing an exchange.

So renting to a relative can be a difficult proposition; rental price and terms have to be in keeping with the current market.

Also, you can’t break the like kind requirement by trying to set up an advantageous family loan situation.

Question 1:
Any restrictions on leasing/renting the replacement property to persons related to the exchangers?

Answer:
What you're describing is not a valid way to do a 1031 exchange – the IRS will see it as self- dealing – in other words, like kind does not involve exchanging a deed to a property for a lien on a property.

Question 2:
I still have funds in my account from a 1031 exchange. May I use them to make a pre-payment or mortgage payment as that is part of my purchase? I could have given more money to the seller, but he only wanted 30% DP and a note for the balance due to his tax position.

Answer:
If you're trying to do a related party exchange where the replacement property is owned by a family member, you need to keep the property for a minimum of two years to satisfy your exchange – rental must also be at market value – you also have to purchase equal or greater value and the seller/relative can not be doing an exchange.

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

If you want someone to help you through the 1031 exchange process, Marilee Hill can help – she's helped a lot of clients to figure out how to proceed with this kind of property plan.

As someone who has managed her own apartments and acted as a real estate broker, Marilee Hill understands the technicals as well as the people side of the business. Let her provide helpful advice on your real estate strategy so that you can have all your ducks in a row when you start to put your plan in place.