1031 exchange related party and ownership structure

Dear 1031x: I want to sell my office building and buy out my father who is  1/4 partner in LLC that owns and leases donut shop. My 2 brothers and I  are the other 1/4 partners. Could this be done as 1031 exchange? Thank  you.

Dear D: There are several problems with what you are proposing: 1) You cannot sell real estate and buy an interest in a partnership (LLC).  That's not a  like kind exchange.  2) You cannot buy from a relative in a 1031x unless: a) He is doing a 1031x when he sells to you, or b) the gain that he is recognizing is larger than the one you are deferring.   If you really want to do this is a tax deferred manner you could: 1) Restructure the ownership of the donut shop such that the four of you own it as tenants in common. 2) Swap you office building for your father's tenant in common interest in the donut shop.  That would be a real estate for real estate 1031 exchange.  3) Have your father hold the office building for two years.  This is a requirement of a related party swap in a 1031x. Then your father could sell the office building and your 1031x would not be questioned.  I know this is more complicated than you wanted to hear, but you asked. Sincerely,

Steve Hickox
Attorney / President

1031 exchange and foreign property

Hi -- There is some confusion on whether the replacement  property can be in the US territories, in our case, Guam. Pls advise.  Cheers,

 

Dear J:  It is my opinion that only property within the 50 US is like kind.  The only exception is the US Virgin Islands.  If you have income generating property or a business there then you can 1031x into the USVI.  In essence, if you buy and income producing property there then that should work. Guam and Puerto Rico don't work at all.  Sincerely,

Steve Hickox
Attorney / President

1031 exchange lease option

Dear 1031x: I would like to do a like exchange on a rental. The buyers will have a  lease option to buy. What happens to  the rent credit money.

Dear Mr. T:  Usually rent credit money is collected monthly.  It only becomes proceeds from the sale of real estate when the option is exercised and the transfer takes place.  If you return the rent credit to the closing agent as the transfer takes place, and make it part of the exchange proceeds then you can defer income tax on that portion of the purchase price.  Sincerely,

Steve Hickox
Attorney / President

1031 exchange and subsequent gift

Hello, I was wondering if I were to make a 1031 exchange if I would still be able  to gift a property, or if I would have to gift the property as a 1031  exchange.  Would I basically be able to do a 1031 exchange and gift the  new property to someone to use as their primary residence?  Thank you very  much.

Dear L:  Under section 1031 both the old and new properties must be held for investment.  If you 1031x and then immediately gift the property away that indicates that the new property was never held for investment.   I would be preferable if the donee moved into the property and paid rent to you for a period of 1-2 years.  After that time a gift of the property would probably be acceptable.  Sincerely

Steve Hickox
Attorney / President

like kind property

I have sold property in Florida that was farmland and I am 
buying a house in California. Does that qualify for like property?

Thank you for contacting 1031x.com.
The answer to your question is Yes, you can sell farmland and buy a house as
long as both properties are used as investment properties and not primary
residence.
We look forward to working with you in the near future for all you 1031
exchange needs.

Denise Warfield
Operations Manager

1031 exchange holding period

1) Any money used to purchase the initial property, including deposit, closing costs, any associated costs fixing the place, etc. are not included in the $$$ that are calculated as profit in the tax portion and therefore must be used for the new purchase.  Is this correct?
2) Can the 1031 be used for properties held for less than 1 year?
3) How long must the newly acquired property be held to  avoid paying those taxes; or are they just deferred until you sell regardless of time period and pay income/capital gains on the sale of the 2nd property?

Dear Norman1.  The IRS rule is to trade equal or up in value and reinvest all 
proceeds from the sale of your relinquished property, regardless of your 
initial deposit, closing costs or repair costs.>
 2.  There is no required holding period for a 1031 exchange.  You cannot 
buy a property specifically for resale and then qualify for tax deferral 
under IRC section 1031.  However, if you buy for investment and the market 
place moves in your favor then there is no required holding period.>
 3.  Taxes are deferred until you sell your property and do not continue to 
do a 1031 exchange, regardless of how long you have held the property.>
 Hope this helps, we look forward to working with you in the near future 
for all you 1031 exchange needs.

 

Dear 1031x: I had Rental Property, that I sold to my Grandson, In  California. The Sale price to him was $400,000, which he got a loan for and he paid me $300,000. with the remaining $100,000., to be paid the middle of next year. I would like to have information on how this is going to effect me financially.

 

Thank you for your help

 

Dear Gloria:  Did you do a 1031 exchange when you sold to you grandson?  If not then you will have capital gains tax both state and federal due on your gain.

Steve Hickox
Attorney / President

1031 exchange condo conversion

Dear 1031x:  My clients owned a building with 7 stories (6  residential units and 1 ground retail unit)He plan to condo the building  and sold the top 6 residential units and kept the ground floor unit. Can  this be structured as a 1031X? Thanks

Dear Mr. F:  This question is more complicated than you might think.  1) When property is subdivided it is usually treated as inventory held for resale and taxed at ordinary income rates.  That income is taxed higher than capital gain rates and is not available for 1031x treatment. 2)  If the property has been held for a period of time for investment then the gain, up to present, is capital gain and 1031x eligible.  3) It is only the increase in value due to subdivision and condo conversion that would be ordinary income.  4) The question is: How can we "trap" the gain up to this point as use 1031 to defer this while reporting the subsequent gain as ordinary income?  5)  What we recommend to customers is an immediate sale of the property to a condo conversion and marketing entity.  This sale would be a 1031x.  Then the new entity, with a new tax basis, does the conversion and sells the units with ordinary income treatment on the profit.  Sincerely,

Steve Hickox
Attorney / President

1031x

Dear 1031x: Is the price of a new home calculated before capital gains is  applied?

Dear M:  I am not sure what you are asking.  Please try again with more detail.  Thank you.

Steve Hickox
Attorney / President

1031 exchange with owner carry

Hi, We are thinking about selling our rental town house and buy a new house as  a rental. So, it would be a 1031 exchange. My question is : when we  sell the property at$ 340,000 and buy a $340,000  house if we owner finance  $40.000 for the rental town house(selling property)  as a second mortgage to the buyer, is this $40.000 taxable income for us?   Thanks for your time.

Dear A:  As structured your $40K carry back would be taxed as you receive the principal back under the installment sales rules of IRC section 453.  The rest of your exchange would be tax deferred under IRC section 1031.  Please visit our website and click on 1031 tax newsletters then read the newsletter entitled "Defer Gain on Owner Will Carry by Combining with 1031 exchange."  This will give you some alternatives to a straight owner carried deal.  Sincerely,  

Steve Hickox
Attorney / President

1031 exchange reverse exchange

Dear 1031x: You mentioned a reverse exchange; what is it?

 

Dear N:  A reverse exchange occurs when the new property is purchased before the old property is sold.  Because you cannot hold title to both properties simultaneously, a reverse exchange involves "parking" one of the properties.  Reverse exchanges are more expensive for us to perform than forward exchanges. Sincerely,

Steve Hickox
Attorney / President

1031 exchange and holding period

Dear 1031x: Is there a time requirement for holding property acquired via  1031 before selling it as another 1031? I bought vacant land via 1031 in March 2005 and I am receiving offers and  don't know if I have to hold the property to satisfy specific time  requirements.

 

Dear N:  There is no required holding period for a 1031 exchange.  You cannot buy a property specifically for resale and then qualify for tax deferral under IRC section 1031.  However, if you buy for investment and the market place moves in your favor then there is no required holding period.  I hope you will chose us for your 1031x.  Sincerely,

Steve Hickox
Attorney / President

1031 exchange and real property tax

Dear 1031x: In California, does a 1031 exchange of rental property carry  forward the property tax base.  I have a three bedroom single family  second home in Thousand Oaks that I would like to exchange for a similar  house or condo in San Diego.  I have owned the current property since 1979  and have a very low assessed value compared to market.

Dear M:  A 1031 exchange will defer federal and state income tax.  It has nothing to do with state and local property tax.  I hope we can help with your 1031 exchange.  Sincerely,

Steve Hickox
Attorney / President

Dear 1031x:  I am thinking about doing a 1031 and trying to understand the  procedure.  When a replacement property is found, does the down payment  for that property come out of the Qualified Intermediary Account, separate  funds of the Purchaser or it doesn't matter???

 

Dear R:  You can use either exchange funds or separate funds to make an earnest money deposit.  Our preference is that you use separate funds to make the deposit and then replacement those funds with exchange funds when you close on the purchase. 

Steve Hickox
Attorney / President

1031 exchange into mortgages

We are considering selling a condominium that we have used as a  rental property for ten years.  We have never lived in it.  It is paid for  free and clear. If we decide to sell, we will pay LOTS of taxes - capital gains plus  alternative minimum tax. Of course, we would like to avoid that. A different investment:  In the past, we have invested in first and second  Deeds of Trust. This was set up to pay us interest only for 12 to 24 months with a balloon  payment at the end for the principal.
Question:  Can we exchange the proceeds from the sell of the rental  property into Deeds of Trust?
Thank you for your time.

 

Dear R:  Thank you for contacting us.  I too like direct lending as an investment alternative to real estate.  Unfortunately the IRS does not consider the sale of real estate and the use of the funds to make new loans to be a "like kind" exchange.  You must buy real estate.  Because you have a lot of equity in your condo you might consider refinancing the property and taking cash out which you use to make loans.  Then sell the condo with the new mortgage on it being paid off.  Then 1031 exchange into a new property.  This is a way of freeing up some of your equity.  Contact me further if this sounds interesting to you.  Sincerely,

Steve Hickox
Attorney / President

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1031 exchange with some use as principal residence.

Dear 1031x:  I plan to sell rental home, pay off existing 78k mtg use profit to buy medical condo.  ?our rental was empty last Nov04 thru Mar05, and we went there while our  new home we are in now was under constriction.  qualify 1031????

 

Dear Dr. T:  Thank you for contacting us.  1) Remember you must trade equal or up in value to fully defer.  Reinvesting just the gain will not completely defer. 2) Your short term use of the property as a residence while your home was being completed will NOT disqualify this property from 1031x deferral.  I hope we can help.  Sincerely,

Steve Hickox
Attorney / President