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Title Requirements and Changes



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.

Title Requirements and Changes

Here’s the underlying guideline for this discussion: investors cannot swap their basis to their own advantage, which can be seen as defrauding the IRS.

The hard rule is that the title on the sale property must read the same way as the title on the purchased property. If you’re working with family members, there are rules in place for that as well.

Why do you have to hold a property for two years when dealing with a relative? It’s so that the IRS establishes “intent.” The rule prevents an investor from using a quick series of swaps to shift an undesirable basis.

This works in specific ways according to your family situation. For instance - so you got married! That can be a great thing, because the IRS does not think that in your decision to marry your intent was to shift a tax basis – in other words, it regards it as a legitimate life change. So you can add your new spouse to the title anytime!

On the other hand, many investors see this and they think they can add a daughter or son - forget it! If you are planning your estate and have decided to have a Revocable Living Trust with your Social Security number attached to it, not a newly requested EIN, then you can change the title to your Trust. Otherwise, you’re out of luck.

Question 1:
My name is on a deed from a 1031 with my name before I was married now married can i change the name to my married name

Answer:
Good news…YES! The IRS will acknowledge this change.

Question 2:
Marilee,\nWe are participating in a 1031 exchange from VA- Texas.\nMy question is this... To honor the 1031 exchange rules, we need to have the deed in our name, correct? We are able to purchase for cash, hence not needing a mortgage.\nThank you,\nGwen

Answer:
Yes, the deed needs to be in your name or names as titled on the relinquished property. Purchasing with cash is fine, even if your previous property had some debt. You can always substitute cash for debt.

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

Marilee Hill is a real estate professional with extensive experience in many aspects of buying and selling properties, as well as 1031 deals. In office and retail sales and leasing, owning and managing her own apartment buildings, and working with formulas and items like DSTs (Delaware Statutory Trusts), Marilee demonstrates how important it is to understand working with people.

She understands the human side of the business, and the value of truthfulness and transparency. The motto “My clients' success is my success” has stood her in good stead, in a market and role where financial savvy and people skills both matter a lot.

Please contact Marilee Hill for your next 1031 Exchange strategy.

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.