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.

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