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.
