1031 Exchange and Capital Gains

1031 exchange into personal residence

Mr. Hickox,

Is it possible to sell a rental, and exchange with your primary residence (make it a rental), and move into a new residence. There are no lenders involved and the ownership for rental is wife only but present residence is wife/husband. I would think you would need to sell your present residence to WHO??and buy it back as a replacement property. Thanks

Dear P: The simple answer is no you cannot sell your rental and buy your principal residence (from yourself) even if you immediately convert the residence to a rental. Any hoops that you jump through as far as selling the residence to a third part and then buying it back would be ill advised. Please consider selling the rental and finding another suitable replacement property for your 1031x. Sincerely,

Steve Hickox
Attorney / President

1031 exchange, refinance, second transaction

Dear 1031x:

If I sell a property and buy another one with a 1031, spend all the cash, and take the same amount of loan, no taxes are to be paid, this is correct I suppose.

However, in order to be a successful 1031, the new property should be investment property, and to be kept at least a year and one day.

Am I still correct ?

1. What if I sell this newly bought property, after one year and one day, for the same amount of money that I bought it for, and not re-invest ?

2. If I sell it for more than I bought it for, and wish not to re-invest, on what part do I need to pay taxes, if I keep it for more than one year and a day ?

Thanks for your advice.

Dear Mr. B: Let me give you a simple example to explain: 1) You buy for $100K and one year later sell for $120K. Your gain is $20k. Tax will be paid on this $20K unless you 1031x. You do a 1031x and buy a new property for $120K. Soon thereafter, for an independent business reason, you take out a new mortgage for $100K. This will be non-taxable borrowed money; not income. You wait another year and sell for $130K. You do not do a 1031x this time. You will be taxed on all the gain. That is the $20K you made in the first transaction and the $10K you made in the second transaction. 1031 is a deferral method only. I hope this helps. Sincerely,

Steve Hickox
Attorney / President

1031 exchange construction

Dear 1031x.com: I own a home and a piece of vacant property. I would like to exchange my home for a retirement home on my vacant property. Can I do an improvement exchange by getting a builder (or someone) to hold the title to my vacant land while a retirement home is built, then exchange my existing home for the land/retirement home property? If so, how do I protect myself from the middleman running off with my property; and is the transaction strictly a "hold" or is it a sale? Where can I find specifics? Thanks, Dave.

Dear D: What you are describing is not really a 1031 exchange. When you eventually sell your home that sale will be governed by IRC section 121and not by 1031. You cannot 1031 exchange your principal residence. All you really need to do is hire a builder to build on your vacant land, then sell your home and move into the new home. Sincerely,

Steve Hickox
Attorney / President

1031 exchange by corporation

Dear 1031x.com: I sold a property in FL, with my corporation, and want to buy other property in another state. Will this bring problems, when the FL company sells this property later on (after one year and one day) ? What if I would buy different (max 3) properties in different states, would this still be a valid 1031 ? 2. Also, the selling price includes a loan of about one third of the selling price. If I am right, the seller of the new property cannot hold part of mortgage to make 1031 fully valid, and I need to look for financing. Will I have trouble financing if company is from other state than property ?

Dear Mr. B: I am not sure I understand your question. Here is the answer. If the old property is owned by a corporation then the 1031 exchange must be done by the corporation and the new property(ies) must also be owned by the corporation. Yes, this can create financing difficulties for you especially in a new state. Why are you holding investment property in a corporation? This is usually a bad idea. You can buy up to three new properties located anywhere in the USA. You can later sell any of them and 1031 exchange again. It is ok for the seller of the new property to carry back financing for you. This kind of financing will be treated like any other financing from a tax stand point. If this is not a complete answer for you please try again. Sincerely,

Steve Hickox
Attorney / President

1031 exchange transfer of property between LLC

Dear 1031x: Can we quitclaim a lot that we purchased thru a 1031x from one LLC to another LLC and retain 1031 status? Both LLCs have the same members. Can we sell or property that we purchased thru a 1031x before one year passes and do a new 1031x transaction without recognizing gain? Thanks for your help.

Dear C: Generally speaking each LLC will have its own tax id #, file a separate tax return and be treated as a separate taxpayer. Therefore, you cannot simply transfer real estate from one to another without tax consequences. However, in the situation where ownership is identical you might be able to merge one LLC into the other without tax consequences. Please check with your business tax advisor about this. In answer to your second question, yes you can sell within one year and 1031 exchange forward with full deferral of income tax. Sincerely,

Steve Hickox
Attorney / President

infox@1031x.com

1031 exchange mult istate; state income tax

Dear 1031x: If I am resident of State of Oregon and have business property there; then, do a 1031 exchange for property in Hawaii, and move/become a resident of the State of Hawaii, what happens if/when I sell the Hawaii property in a fully taxable transaction with respect to Hawaii Income tax? Will my basis for Hawaii Income tax be the reduced/tax-deferred basis and will I be subject to Hawaii income tax on the same amount that is taxed for federal income tax purposes? Where can I find more info on this 'cross-border' state tax when liquidating a 1031 exchange property?

Dear R: When you defer Federal income tax through IRC Section 1031 almost all States allow deferral of State income tax as well. In your example you would first defer your Oregon State income tax. When you then sold your Hawaii replacement property, Federal and Hawaii State income tax would be due, but nothing would be due to Oregon. Your tax basis for both Federal and State taxes is the same. Sincerely,

Steve Hickox
Attorney / President

1031 exchange with complications

Dear 1031x: I left you a voice mail concerning my wife's interest in a house. She and her brother were both put on title of the parents house in 1988. Mother passed away around 1993. Her father passed away around 1997. House was not appraised until this year when my wife decided she wanted to get the cash out and sell her half interest to her brother who lives in it.

First question..... What relationship does my wife have to this property? She visits twice a year for 2-3 weeks at a time. Is this a second home? Or, is this an investment property?

Secondly, I've got another 18 months to retirement........We wanted to use this money to help buy our retirement home in cash. Is there a way of doing a 1031 exchange for an investment property that we will eventually stop renting and live in 18 months from now??

Thirdly, when my wife was put on title around 1988, is the point that the "step-up" would be done to establish her tax basis in the house? What if no appraisal was done in '88. How is all that calculated now??

Dear G: Your situation is not straight forward. Here's why: 1) If your wife received a gift of half the house from her Father during his life time then she gets a carried over basis (from her Father) and not a stepped basis. A stepped up basis only happens if she got her interest through inheritance. From what you tell me a carried over basis is more likely. 2) Selling to her Brother as part of a 1031 exchange is OK as long as he olds the property for two more years. 3) Is the property an investment or a second home? This will be answered mostly by your wife's intent. Did she intend to hold it for investment or as a second home. Another interesting questions would be: Did she collect any rent from her brother? If she did then an investment intent would be pretty clear. 4) To qualify for tax deferral under 1031 both old and new property must be held for investment. After an exchange hold the new property for investment for as long as you can. If, after buying for investment, you have an unforeseen life changing event, that alters your investment intent, then moving into the property is OK. Having said all that I suggest that your wife do a 1031x. I hope we can help. Sincerely,

Steve Hickox
Attorney / President

1031 eschange of LLC interest

Dear 1031x: Comments: I am receiving proceeds of $35,000 next week from the sale of my membership in a privately held LLC that owns a office building. About $33,000 is capital gain. Can I use a 1031 exchange to invest this money in a single family rental property that I plan to buy in the next 45 days?

Dear M: I believe that you are describing a real estate sale by an LLC in which you hold a membership interest followed by a distribution of proceeds to the members. This will not qualify for 1031 exchange. That is why I do not recommend ownership of real estate in an LLC with many members. Instead I recommend that each investor form their own single member LLC and that the several LLCs own the real estate as tenants in common. Then, when the real estate sells, each LLC can decide whether to 1031x or not. Sincerely,

Steve Hickox
Attorney / President

1031 exchange land for business

Dear 1031x.com: Can I exchange a rental property for a business (buying re-sale auto car business)??

Dear S: You must trade real estate for real estate. In your example, if the business has a real estate component to it then a 1031 exchange would defer taxes. This is especially true if the real estate component is at least a large (in value) as the property you are selling. I hope you will use us for your 1031x. Sncerely,

Steve Hickox
Attorney / President