Exchange Basics, Part 8 

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 8

Take a look at today’s market, and you’ll see that it differs quite a bit from the traditional real estate world that existed decades ago. Nowadays, things are complicated, and 1031 exchange strategies are one of those things.

Since the main goal is to save money on taxes, part of understanding the 1031 exchange involves knowing the tax code and what’s possible according to IRS rules and regulations. That means understanding the principle of like kind for properties, timelines and more.

When you’re looking forward to successfully completing a legitimate 1031 real estate exchange, a qualified intermediary is a must. That’s another aspect of doing these sometimes complicated real estate deals.

Question 1:
After 2 holders of property, 25% holder, 75% holder, complete 1031 exchange and new property purchase, can all the income go to the 25% holder without any tax problem for the 75% holder who has no income to report? Does IRS require income reporting from both tenants in common?

This is an interesting question based on the “tenant in common” principle of “pari-passu” or “equal footing” – where you have two partners in the deal, the IRS holds them to be, in its own words, “equally managed without any display of preference” … so what that means is you still have to file, even if a specific party doesn’t have to pay in the end. IRS wants to see the numbers!

Question 2:
I am selling a prop. for 775,000 on land contract.300,000 down. balloon in 3years. Want to buy another rental property for 300,000 cash. Will the 1031 work for the 300,000 to be shielded from the gain? I bought the property, a MHP with a 1031 9 years ago. The new property is consisting of 9 homes.

Where you have situations like this with a balloon payment, it’s necessary to structure the deal properly. The land contract is also a moving piece here. The 9 homes to be purchased qualify under the 95% 1031 I.D. rule. Your best bet is to hire a qualified intermediary to help you through the transaction.

Before any commitment check with a CPA with 1031 experience to see what the tax would be on the $300,000 exchanged. From my experience you are disproportionally penalized when the amount exchanged is less than half the sale price. .

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

Marilee Hill has advised many clients on 1031 exchange deals. As a FINRA certified real estate professional with knowledge in series 7 licensing and more, Marilee Hill can help advise on some of the tricky aspects of a 1031 real estate exchange deal. Get great advice from a friendly, established voice in the real estate business – and help with your next 1031 exchange deal.

Marilee Hill, MA Hill