Exiting the 1031 Exchange Chain

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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.

Exiting the 1031 Exchange Chain

If you are a patient type – if you like deferred gratification, and savor the value of a financial win that takes some time to achieve, this strategy will work for you.

So you are thinking of retiring ,and you want to leave your overtaxed state with its cold weather and dreary climate, setting sail for warmth, sunshine and more liquid capital to spend. You have a personal residence, and an investment house. With planning, you can sell your investment property and do a 1031 exchange with the proceeds, putting that money into your future retirement location. Rent out the exchange house for a minimum of two years, and voila, you can move into the exchanged property and claim it as your primary residence. At the same time, you can sell your long-term primary residence and take out your adjusted gross base, plus a $250K exclusion gain for each person in title, and pay tax only on the remaining profit!

Question 1:
If I put properties into a 1031 exchange program, paying the capital gains, and some years later they have in creased in value and I sell them, leaving the 1031 program, how do I calculate the capital gains in the year of the properties\nThanks,\n

Answer:

If you sell a property and exchange the proceeds, and then later sell the exchanged property and do not execute a 1031 exchange, you pay taxes on the difference between the net sale price and your current basis. Assuming no capital improvements on the exchanged property, your basis on the exchanged property at time of sale would be the basis of the original property when exchanged, minus the depreciation taken during the hold period of the exchanged property. First, you pay 25% on depreciation of the exchanged property, then you pay capital gains to Uncle Sam and finally local state income taxes based on the net sale amount. California is different —has a claw back wrinkle. In addition to paying the state in which the property is now located – you also pay CA the monies you avoided paying California when doing a previous exchange into another state.

Question 2:
My question I would like to sell houses [2] that we use as rent houses and bought with money from land sold in Arkansas put in a 1031 how do we fine how much we will have to pay taxes to the feds?

Answer:
If you do not do another 1031, you will pay taxes on the difference between the net sale price and your current basis; 25% on depreciation taken, plus federal taxes and, if applicable, finally state income taxes on the net sale amount. Ask a CPA who has clients who have done 1031 exchanges to calculate the damage.

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

Marilee Hill has a wealth of experience counseling customers on tricky 1031 exchange rules, and much more. With experience in land sales, office and retail sales and leasing, experience, Hill has managed her own chain of multi-family apartment buildings and has worked as a real estate broker in multiple jurisdictions. Marilee believes, “My clients success is my success” – she knows the “people side” of the business, and what it takes to skillfully navigate the financial waters of a 1031 transaction, educating a range of clients on how to proceed depending on their particular lifestyles, personalities, and circumstances.

Talk to Marilee Hill about your next 1031 exchange deal.

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1031 Exchange