First Time 1031 Exchange First Time Southern California

Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes

Hello bigger pockets getting ready to do a 1031 exchange in corona California. First time ever for us we are selling a commercial building can use any tips or pointers. Also what kind of properties should we be looking at right now?? Thank you very much bigger pockets.

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Priyanshu AdathakkarPro Member

Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes

You have not identified any properties yet and you are talking of 1031 exchange?

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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
9y
@Thomas Rutkowski,
I will do my best to explain this.
The sale of property through a 1031 Exchange (Section 1031) allows you to defer all of your income tax consequences, including capital gain tax, depreciation recapture tax, and avoid the Medicare Surcharge (Obamacare tax). The taxes are indefinitely deferred into the new property. You can defer the taxes again and again through successive 1031 Exchanges (hence, they have not been triggered, but can continually be deferred through out one's lifetime). You can borrow against the property that you exchanged into, you can pledge the property, you can gift the property, etc., with out resulting in any income tax liability. The taxpayer's heirs will receive a step-up in cost basis upon his or her death.
The sale of property through an Installment Sale (Section 453) does not allow you to defer all of the income tax consequences. You can defer some or all of the capital gain taxes depending on how much cash is received, but not the depreciation recapture tax. The taxes are not indefinitely deferred because upon the maturity of the Installment Note the taxes are now due whether the taxpayer wants to recognize and realize them or not - they have no choice (hence, they have been triggered, but not realized). There is no way to defer them again. The taxes would also become due if you borrow against the Installment Note, pledge it, hypothecate it, etc. The taxpayer's heirs will not receive a step-up in cost basis upon his or her death.
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Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
9y
@Bill Exeter - I'm very familiar with 1031 exchanges. That's why I like the monetized installment sale better. All of the taxes normally due on sale are deferred in an installment sale. This includes the depreciation recapture, NIIT, and debt over basis. The taxes are due when the seller has constructive receipt of the sales proceeds.
You keep mentioning the step up in basis upon death. Regardless of this step up in basis, there may still be an estate tax consequence for the seller/owner. The asset is a part of their estate and its value at the time of death is included in the estate. This too is mitigated by a monetized installment sale.
The monetized installment sale simply a tool to get cash at closing and defer the taxes for 30 years. It is a very easy financial decision. The seller is walking away from the closing with the government's money in their hands, interest-free, for 30 years. Its a very easy planning exercise to take a portion of that money and set it aside to pay the future taxes. The rest can be invested anywhere the seller pleases.
As you state, the monetization loan must not violate the pledge rule. That is the key to why the monetized installment sale is such a great solution.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
9y
Hi @Thomas Rutkowski,
We are just going to have to agree to disagree.
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Robin Boyer
OP
Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
9y
@Bill Exeter can't wait to see how our exchange goes I am pumped! I been looking at properties in San Diego left my realtor down there a message.
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Robin Boyer
OP
Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
9y
@Bill Exeter thank you for your email yesterday that calmed me down a lot as you know real estate can be stressful especially your first time. Can we do a auction in our exchange? Can we buy houses cash? If I want to get a 4 plex in San Diego a cabin in big bear for say 90 cash do you see this as a possibility? My hard money lender said we can squeeze some apartments and a house or two! Wow!
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
9y
Hi @Robin Boyer,
Yes, you can acquire replacement properties through various types of auctions. However, auctions can present various challenges and/or problems when trying to meet the deadlines of your 1031 Exchange transaction, and they often do not involve any kind of purchase agreement/contract that can be assigned to the Qualified Intermediary.
When auctions do not allow or provide any type of purchase agreement/contract we must structure the purchase of your replacement property differently by acquiring legal title of the replacement property acquired through the auction and then conveying that same replacement property to you. There are a number of moving parts here, so it will depend upon the type of auction and their procedures.
Yes, you can acquire some of the replacement properties for all cash and then put greater leverage on other replacement properties as long as you meet your reinvestment requirements by trading equal or up in value based upon your net sale price and reinvesting all of your cash in the various replacement properties that you acquire. This will take special planning, so we should discuss further as you proceed.
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