By accepting you will be accessing a service provided by a third-party external to https://www.1031exc.com/

Exchanges with Partnerships, LLC’s and other Entities, 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.

Exchanges with Partnerships, LLC’s and other Entities, Part 3

Doing a 1031 exchange with a partnership or LLC is a different process than other types of exchange deals. You have entity exchange rules, which apply to these processes, and these rules can change over time.

For instance, there's a process where someone in a partnership or LLC buys out someone else that some people call ‘drop and swap.’

Here, state law is a major wrinkle in how you develop a 1031 exchange with the drop and swap because the state of California doesn't allow this any longer, but other states do.

Basically, there are specific rules for cashing out of a multiple party LLC after a specific time frame which happens to be 2 years. And these rules can be navigated by people who have planned ahead and carefully follow the requirements for an exit from a LLC to a successful 1031 exchange.

Over time, the IRS has provided clear rules and more accessible structures for these types of deals. However, the like kind requirement still applies in that partnerships or LLCs can't take money from properties and put it into funds, REITs or mortgages.

Question 1:
am a REALTOR working with a client who is the beneficiary of a trust. Her mother passed and her mother's principal residence has been placed in the trust. Is it possible for a trust to do a tax free exchange and avoid paying capital gains?

Answer:
Here's an interesting one because as part of the estate, the principal residence already doesn't have any taxes applied — the value of the property is the fair market at date of death. If several years have passed and the value has increased, of course, you can do an exchange. To do an exchange with an accredited investor status, the trust has to have a value of $5 million or more (includes debt).

Question 2:
Can a QPRT be used for a 1031 exchange? Thank you Ann Oliver

Answer:
A QPRT does not have anything to do with a 1031 for this reason – the QPRT relates to estate planning for personal residences, and 1031 exchanges can't be done with personal residences.

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

Marilee Hill has 20 years of experience working in the real estate field and knows 1031 exchanges in and out – as a FINRA certified professional, she has helped many clients to deal with 1031 exchanges.

Marilee Hill likes to say that there are two sides of the business, the technical side and the people side – both of them are important in working through 1031 exchanges which are often complicated and have obstacles. Let Marilee Hill help you to pursue a 1031 exchange on solid ground.

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.

Partial Exchanges and Boot - Asset Class, 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.

Partial Exchanges and Boot - Asset Class, Part 3

When you take out some of the cash from an exchange, the result is a partial exchange. Cash is the driver in these kinds of deals, and the investor can always increase the debt with cash if so desired.

The timelines are inscribed in granite — and then after the horrific events of 9/11, the IRS issued a nationwide exception extending the 45 day identification rule and the settlement deadline for the entire United States. Since then, the IRS has expanded its exceptions for major natural disasters. Don’t dawdle.

Here's what's important with a partial exchange – when you're taking out the cash, you pay taxes on everything above the adjusted base.

There's 25% on any depreciation, and then depending on income, you'll pay another 15% to 20% on that money – plus 3.8% for the Affordable Care Act!

Other income taxes to the local jurisdiction can also apply. That ends up being a lot of money!

It only took me 19 years to learn that when you take out 40% of the cash or more the tax to be paid is closer to what the tax would be on the whole!!

When they're trying to research these kinds of questions, many investors wistfully think that they can take out the original capital and roll over the profits into another deal. Some also wistfully think that because the loan is paid off at settlement there is no need to replace the loan, just 1031 the cash!! However, you can't do either – the IRS is emphatic about that.

The government looks at your HUD sheet to see cash received and loan payoff amounts. Capital improvements also apply to the adjusted gross, and you can deduct the fees of a qualified intermediary for a partial exchange as you can with a complete exchange.

Question 1:
If I take a note back on the property with a six (6) percent interest rate as partial down payment, but put the note in an escrow account not controlled by me, is the note considered a taxable gain?

Answer:
In this situation, you're going to owe taxes on the partial down payment unless you place the note with a qualified intermediary and sell the note and reinvest the funds within the time frame requirements. However, just placing the note in the escrow account has “0” bearing on the taxes due.

Question 2:
I AM A REAL ESTATE BROKER AND I HAVE A CUSTOMER SELLING A RENTAL HOUSE AND SHE WANTS TO KNOW HER TAX LIABILITY I SHE ACQUIRE A HOUSE AT A LOWER VALUE THAN THE ONE SHE IS SELLING AND SHE WANTS TO KNOW WHAT PERCENTAGE APPLIES, THANKS

Answer:
When you want to do a complete 1031 exchange, the rule is that you have to put the money intoa property with an equal or greater value than your initial property.

If the second property is a lower value, you have to take the difference and pay 25% on depreciation, as well as federal capital gains tax and state income tax. Send her to a knowledgeable CPA.

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

Marilee Hill is a FINRA certified professional with 20 years of experience in real estate. She has a lot of skill and experience in dealing with 1031 exchanges and helping clients to think about the risks they're taking on as well as the potential reward.

Marilee Hill understands the technical side of a 1031 deal, which is pretty complicated in many situations. She also understands the people side of the business, and dedicates herself to helping clients through some pretty thorny scenarios.

Ask Marilee Hill about your next 1031 exchange strategy to get a great professional in your corner.

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.

Partial Exchanges and Boot - Asset Class, 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.

Partial Exchanges and Boot - Asset Class, Part 2

You can characterize a partial exchange this way – cash that is removed from the exchange (and the total of debt and cash) is not “equal or greater in the exchange property.”

You can substitute cash for debt, even all the debt.

An investor can also increase the amount of debt, leaving all the cash in.

In taking out cash, the investor has to pay taxes on anything above the adjusted base – first 25% of any depreciation – and then income tax, which can range up to 15 to 20%, if 20%then add  3.8 % more for Obama Care Tax plus paying the tax in the jurisdiction where the sale property is located.

Can you take out the original capital and just roll over the profits?
No.

The loan was paid off of at settlement, so I don't have to replace the loan with the new property, right?
Wrong.

Look at your HUD sheet and you'll see the exact amount you need to exchange *— all cash received plus any loans paid off.

The monies you spent to ready the property for sale are operational costs for the year of sale.

*Funds that you spent on capital improvements also apply to the adjusted gross – also, you can deduct your qualified intermediaries fees – make sure you're on solid ground with accounting advice from a professional.

Question 1:
I am about to close escrow on a piece of property which will create a capital gain of $129,000. I plan to roll this into another investment.\nMy question is, can I take the $50,000 that I borrowed to purchase this piece of property ( which I sold for $179,000) out at the time of closing ?\n\n\n

Answer:
In this type of exchange, any cash that you remove is considered “boot” and will be taxed – debt paid off at settlement that's not replaced with debt or cash is also boot.

Question 2:
HI.... I bought two family house in Brooklyn in 1979 for $ 40,000.00 I still live in this house. Right now this house Market value is $ 1.5 M  if I sell this house for this price how much  tax do I have to pay.

Answer:
Let's calculate your adjusted gross basis – each half of the duplex represents 50% of the whole amount.

The adjusted gross basis for that half that constitutes your primary residence is $20,000 plus capital improvements.

So then, at sale, if the property is worth $1.5 million, you and your wife will each have a $250,000 tax-free exemption.

You would pay taxes on your personal residence portion on all money above $20,000 plus capital improvements, plus your $500,000 personal exemptions.

On the rental, your basis is the small amount of depreciation remaining, plus half the value of the (ground) property at the time of purchase.

You'll also have to consider the non-depreciated portion of capital improvements.

Everything above your gross basis is taxable.

Question 3:
If there is booty after an exchange, and I elect to pay cap. gains tax on the booty, and the properties exchanged are rentals, will I have to add any depreciation allowances taken in previous years on property sold to the realized gain?\n\nThanks\nFred

Answer:
If you're paying on boot, you have to pay a 25% tax on all depreciation and then you also pay capital gains tax and local jurisdictional tax.

Your current basis on your sale property is the basis for your new property.

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

With 20 years of experience in the real estate business, Marilee Hill is a FINRA certified professional in real estate and understands how to pursue 1031 exchanges.

She has a lot of experience with 1031 and helps clients to proceed in a straightforward way and to understand risk and liability as well as compliance.

She understands the technicals and the people side of the business, and helps exchangers to understand before they exchange how to solve complicated transactions. 

Be sure you're on solid ground and ask Marilee Hill about your 1031 exchange strategy.

Like Kind Exchange - Location, 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.

Like Kind Exchange - Location, Part 3

New technology is creating lots of rapid change in how business works today. However, in some ways, our world still looks like the same as it did decades ago.

For instance, if you bought a property 15 years ago in Washington state, that property is no doubt still at the same location. You, however, may be moving to another state for retirement or have a family member who's interested in managing a property. As long as there's straightforward ownership criteria and like kind eligibility, there shouldn't be any problem with a 1031 exchange for these strategies.

Question 1:
Hi, I own an investment property in Australia that I am looking to sell. I am a US Resident (Green Card) and want to buy another property in Australia with the sale proceeds and avoid CGT under 1031. Do you deal with foreign 1031 exchange transactions, specifically in Australia?

Answer:
Yes, a 1031 exchange has to be made from one foreign property to another foreign property, or from one domestic property to another domestic property. I don't handle foreign 1031s so ask around for qualified intermediaries near you.

Question 2:
I have a 1031 property in the UK..intend to sell and buy another 1031 in the UK and rent it out for two years and then swap our primary residence in U. S. Virgin Islands for the one in the UK….we are worried about the 45 day rule to identify the propertie(s) you want....what happens if the seller backs out?

Answer:
While you cannot exchange a primary residence outright, you can sell it under section 121. Each person on the deed can get a $250,000 exclusion from taxes. Suppose you change your primary residence to the United Kingdom: in this case you cannot swap or exchange a U.S. Virgin Islands residence for that property.

U.S. Virgin Islands tracks to the United States in terms of domestic 1031 exchanges.

Question 3:
I have a house in India which I want to sell. Can I get the benefit buying a primary home in U. S. Virgin Islands with the provision of 1031 exchange program and defer the capital gains on that.

Answer:
Again we need to respect the like kind requirement. You will need to exchange a country outside of the U.S. or its holdings with another property in a country foreign to the U.S.

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

With extensive experience in real estate and specific knowledge of 1031 exchanges, Marilee Hill has helped many clients to understand the risks and the rewards that go along with this kind of deal.

She's been a property manager and a real estate broker, and Hill understands FINRA and assorted rules and regulations.

She enjoys helping clients to navigate a complex terrain when it comes to strategizing and setting up a 1031 exchange and looking for a qualified intermediary to help.

Ask Marilee Hill about your next 1031 exchange plan.

Like Kind Exchange - Asset Class, 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.

Like Kind Exchange - Asset Class, Part 3

Many people who are hearing about a 1031 exchange for the first time wonder about what “like kind property” means. It generally refers to two different properties that are a similar type of property. But it sometimes gets pretty complicated.

For instance, before a revenue ruling in 1991, a particular client paid a real estate attorney over $100,000 in research costs and representation to declare a particular property “like kind”. After the IRS 1992 ruling defining “like kind” as exchange of real property held for productive use in a trade or business or for investment. After that broad definition, the revenue ruling meant that clients no longer pay those legal fees for determining like kind. Most CPAs are now knowledgeable.

Anyway, like kind is critically important to a 1031 exchange deal.

Question 1:
Can I use 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, you cannot use exchange funds to pay down the loan on a property. You also can't use money from the sale of stocks for real estate. A deed and a lien on the property do not represent like kind, and neither do equities and real estate funds.

Question 2:
After selling a vacant lot, can we buy a condo or single residential home?

Answer:
Since both the vacant lot and the condo or single-family home are ‘real property,’ YES you can.

Question 3:
Will the following 1031 exchange be judged as "Like Kind"? Day Care business (w/bldg and property valued for $2,000,000). For a home remodeling business (w/ a bldg and property valued at $1,300,000).

Answer:
In your example, the building and property both qualify for like kind – your boot will be $700,000, and you pay taxes on that – you may also need a separate business contract for the day care operational items.

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

Marilee Hill has 20 years of experience in real estate, and is a FINRA licensed professional who knows the 1031 exchange field well. Since dealing with her own multi-million dollar properties and helping clients to look at risk management with these kinds of deals, Hill has done a lot of work in this area, and understands the process and how it affects various stakeholders. Get help from a professional who understands the 1031 exchange system.