Kentucky to Tennessee Rental Exchange

Investor · Bonaire, GA · Member since 2016 · 4 posts · 0 votes

I am selling a rental home that I own 50% of in Northern Kentucky (just south of Cincinnati). I want to execute a 1031 exchange for a rental home in Chattanooga. I have read about them online, but am looking for particulars on how I should actually go about executing one? Do I need to hire a lawyer, or deal with a certain company, etc.

The home I am selling in KY is worth about $250K ($125 since I own 50%). I will pay taxes on the appreciation and deprecation I've written off on it in the past 3 years of owning it. I want to avoid this by doing a 1031 for a multi-unit or SFH in Chattanooga TN for equal or higher value (I think that's a rule). Please advise.

Nick

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

10y

@Nick Murray, if you own that KY property as a tenant in common with someone else then you're in great shape. You can sell it and do a 1031 on your 50% and purchase something in TN and defer all gain and depreciation recapture.

If the other owner wanted to they could do the same with their 50%. Or the two of you could go together and exchange for 100% of the sale. Or you could do your exchange and they could take their cash and pay their tax.

There's some very strict guidelines that you'll need to be aware of and you'll have to use a qualified intermediary to document and perform the exchange. But so far so good for you.

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Sonya Antrobus
Investor · Falmouth, KY · Member since 2016 · 37 posts · 13 votes
10y
I'm no expert but I have read that you must enlist the services of a 'qualified intermediary' and you cannot touch the money. There are also time limits between when you close on 1 and name the target of your 1031 exchange. If you get the money, you no longer qualify for the exchange, that is why you have to have the intermediary. Lots of information out there on Google. I also saw a few things on the blogs here at BP pertaining to a 1031 exchange.
Try a search on 1031 exchange here on BP and then choose the forum option on the left. I'm sure there are others out here with more experience than I but it is a good place to start.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
10y
@Nick Murray, if you own that KY property as a tenant in common with someone else then you're in great shape. You can sell it and do a 1031 on your 50% and purchase something in TN and defer all gain and depreciation recapture.
If the other owner wanted to they could do the same with their 50%. Or the two of you could go together and exchange for 100% of the sale. Or you could do your exchange and they could take their cash and pay their tax.
There's some very strict guidelines that you'll need to be aware of and you'll have to use a qualified intermediary to document and perform the exchange. But so far so good for you.
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Roger Poulin
Realtor · Hermitage, TN · Member since 2014 · 125 posts · 93 votes
10y
Most attorneies and accountants are qualified intermediaries, and so are some title companies. If you closing is using any of those types of people, and it better have at least 1 of those, ask them what they charge for a 1031. It is usually a modest fee and easier then getting some additional internet based company to do it as an extra party to the transaction(s).
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Nick Murray
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Investor · Bonaire, GA · Member since 2016 · 4 posts · 0 votes
10y
Thanks for the tip. However, I'm confused on the benefit of a 1031. I understand that I'm deferring capital gains and depreciation payment, but eventually I will have to pay these taxes. Help me understand why it's such a benefit. In the end won't I end up paying the same amount of taxes, just at a later date?
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David Schwan
Manchester, TN · Member since 2016 · 67 posts · 9 votes
10y
You will only pay taxes once you keep the money. in theary you keep rolling your profits over into a 1031.
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Nick Murray
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Investor · Bonaire, GA · Member since 2016 · 4 posts · 0 votes
10y
Right, which will equate to the amount I would've paid on all my deferred 1031 transactions. I'm not avoiding any taxes, just adjusting when I pay them. So the only benefit is the immediate increase in purchasing power, I think.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
10y
@Nick Murray there's a number of benefits
1.even if all you do is defer for a period of time you get the use and benefit of the compound interest made from the deferred taxes- exactly like an IRA. That by itself can generate quota a bit of cash.
2. But it gets better. You can defer until the end when your last purchases are passive real estate and you can generate passive income on those deferred taxes till you die .
3. When you die your heirs will get your real estate "stepped up" in value so the tax is eliminated.
4. Periodically, you can "convert" a 1031d property into your primary residence by doing this you create an intersection with sec121 and with proper planning you can turn a significant amount of that tax deferred gain into tax free.
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Nick Murray
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Investor · Bonaire, GA · Member since 2016 · 4 posts · 0 votes
10y
Thanks for the spelling it out for me in digestable bits Dave. Makes sense and definitely a benefit.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
10y
@Roger Poulin, The world of the internet has certainly changed the dynamics of business. But I'm not buying your statement that "almost all attorneys and CPAs are qualified intermediaries." In fact, most attorneys and CPAs do not act as qualified intermediaries. They are prohibited by law from acting as their clients QI and instead refer their clients to those who have more experience and knowledge in the specific nuances of the act.
Most title companies also are not qualified intermediaries themselves either. Many of them have relationships with specialty QI firms such as ours. But they know not to try to do it themselves.
For one thing there has to be an extra 3rd party to the transaction to handle the 1031. For another, ask yourself who you'd rather have operate on you - the surgeon referred to you who you may not know with dozens under his belt, or the one who's your next door neighbor but who operates with one hand and holds the how to book in the other.
There's a middle ground. Search out referrals absolutely. Just today in the forums I've seen tag lines from at least 5 different well respected QI firms who operate nationally. The title company may have someone they know personally. Your realtor, the same.
But in order for it to be legal there does have to be the extra party as part of the transaction. If they do their job right the transaction is seamless and more importantly the client is protected with good counsel from the QI throughout the process and beyond.
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Bryan DruryPro Member
Investor · Owensboro, KY · Member since 2008 · 130 posts · 65 votes
10y
@Nick Murray,
I agree with @Dave Foster in that you need to make double sure the QI is indeed qualified and knows what they are doing.Otherwise you may be liable for paying all taxes plus penalties.Ask me how I know!Our local bank served as the QI and it went thru seamlessly, but almost went off the rails because of someone else.Conduct thorough research and enlist professionals to assist you and it will boost your REI career.Good luck
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