Timing, 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.

Timing, Part 3

A 1031 exchange isn't usually simple. There's a lot of learning and planning involved. You have a 45 day identification period for listing properties. There are an additional 135 day settlement time. Real estate is real estate and the 45 days is critical — if your identified properties all disappear you have no exchange. Preferably, identify and settle during the 45 days. That’s just some of the timeline rules and the IRS has mandated many other time relevant regulations for 1031 deals.

Yes, the IRS extended its 45 day identification period for events such as 9/11 and major stormdamage on the East Coast – but in general, these rules are pretty ironclad, so it pays to not mess around when you're trying to achieve a 1031 exchange deal.

However, there is some wiggle room in terms of writing a contract. Essentially, you can write a contract anytime before settlement on a replacement property in a 1031 exchange.

One of the key pieces is collaboration – you'll have to work with sponsors and other stakeholders to make the deal work.

Question 1:
Sean with house ready to sell $139,000. Tammy many rental houses wants to buy it. has one rental house for sell $84,000. Sean wants money now but doesn't Tammy have to sell hers first to meet the 45 day rule. Tammy will have to give additional $55,000 in cash so does boot disallow 1031 exchange?

Answer:
This sort of convoluted program isn't likely to happen. There is a reverse exchange — given the expense of a reverse exchange it doesn't sound like this is going to fit into that classification.

Question 2:
All cash offer in Escrow, need a 1031 exchange trust to receive and hold cash paid for beach property sold, need time to look for beach property in Cambria or Shell Beach CA. G.T.

Answer:
So after closing escrow, you have a 45 day period to identify properties. It's important to have financing lined up and be ready to move quickly when escrow is closed. Sometimes you can try to delay closing escrow, but it's best to have all your ducks in a row.

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

Marilee Hill knows about 1031 exchange processes – as a 20 year real estate professional, she is able to help offer clients advice on exchange replacement properties and regulations such as reg D of the Security Exchange Act of 1933.

Marilee Hill is a registered representative with a series 7 license who can help with the preliminary work of understanding what to do with a 1031 exchange deal. Then there's a qualified intermediary service that generally charges $600-$1000 or more to help achieve the deal. Marilee Hill’s services, on the other hand, are free.

Turning a 1031 Exchange into a Private Residence, 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.

Turning a 1031 Exchange into a Private Residence, Part 3

If you're the ‘get rich quick type,’ skip the 1031 exchange – it's not a scheme for the person who likes immediate gratification. It's a long-term real estate strategy that works for those who are patient and work deliberately to maximize capital gains.

Here's how a 1031 exchange makes your money work for you – say you have a personal residence and an investment property – with exchange planning, you sell your investment property and exchange it with a property in a location where you want to move to for retirement or for other reasons. You can do this after a two year rental. You can move into the exchange property as your primary residence, and sell your former primary residence with no taxes on the the adjusted gross plus the $250,000 exclusion for each person on the deed.

Question 1:
If we sell our current rental property and we do a 1031 exchange on a single family residence, how long is one required to maintain that property as a rental, or investment, before we can claim it as a primary residence? We are looking to find a place where we might want to retire down the road.

Answer:
The rule of thumb in a 1031 exchange to be safe is two years. That will often be two different tax years — and remember to depreciate the rental.

Question 2:
did 1031 last oct., then moved into property 9 months later after breaking up with wife, we then sold are joint house she bought here own house in aug., I filed for divorce in june, what happens if i don't divorce her, is their enough " SPECIAL circumstances" or what would u advise

Answer:
A situation like this may call for getting creative. Nine months is not two years. I would recommend moving out of the house you occupied 9 months after your exchange and rent it. That is safe. All else is “facts and circumstances” caused by personal choices, not situations imposed upon you such as “my house burned down.”

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

When you talk to Marilee Hill, you’re talking to a 20 year real estate professional with FINRA certification who understands the ins and outs of 1031 exchanges and sophisticated real estate deals.

Want someone who understands the technical side of the business as well as working with people? Marilee Hill has helped many clients to achieve their 1031 exchange goals. This takes work and a dedicated attentive assistance toward the end goal. Marilee Hill is reliable and knows about how to help clients successfully pull off a 1031 exchange.

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.