Exchange Basics, Part 4

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 4

When you want to get involved in some kinds of contemporary real estate deals you have to understand that they’ve gotten a lot more advanced than they were in the old days. It used to be that a simple cash deal was the most common kind of exchange. Now you have TIC and DST 1031 exchanges approved (Rev Proc 2002-22 and Rev Proc 2004-86) by IRS with regulations as to entity structure.

As with some other kinds of deals, a 1031 exchange can be deceptively complex. You want to save taxes, and that’s a simple goal, or at least it seems like it should be, but the method is not always straightforward. There are lots of eligibility concerns, including like kind mandates and territorial requirements where the deal has to be apples to apples – US to US or foreign to foreign properties, for instance.

Dealing with these requirements and section 121 of code as well as other types of requirements takes some professional know-how. Make sure you’re on solid ground with a 1031 exchange.

Question 1:
I bought an investment house for $210k in 2014 and will sell it soon for 250k. I spent 10k to replace AC and water heater, My gain from this transaction is only 20k. Does it worthwhile to do the 1031 exchange – how much will it cost me to set up the exchange?\nThanks!

Not sure whether it’s worth it to you or not. It depends on several things. First, the hard costs of a qualified intermediary range from $600-$1000. Then you have the gap between $210K and $250K, which is $40K, and the $10,000 may or may not qualify as a capital improvement. Ultimately, your tax bracket matters, too, and so you have to offset the cost of additional taxes with the cost of going through with the exchange. To find out your exact tax exposure hire a CPA with 1031 knowledge. If he does not know what Form 8824 is — call the next guy.

Question 2:
Hi, How can I calculate the closing or 1031 exchange costs in an individual income tax return.and in which form should I do it?\nAlso the property has been sold 632000 Around 39400 selling fee and the exchange property has been purchased around 495000 through Safe Harbor Exchange Inc. \nPlease advise.

Your best bet in this type of situation is to hire a CPA who understands 1031 exchanges. You may be able to get more information from Safe Harbor Exchange. I recommend IRS form 8824 for specific guidance.

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

Marilee Hill is well qualified to weigh in on 1031 exchanges. With 20 years of experience, she understands Reg D of the Security Act of 1933 and the DST markets. Hill provides free services to customers who want to prepare ahead of time to know how to execute correctly a 1031 exchange. Marilee Hill’s experience includes being a real estate broker in multiple jurisdictions, and helping customers with tricky real estate deals. Talk to her about how you’ll approach a 1031 exchange strategy to make sure you’re on the right side of the IRS.

1031 Exchange