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 4
Timing, Part 3