1031 Exchange Questions

2 Replies

I believe I will be initiating a 1031 Exchange on behalf of my client soon (offer is submitted on Upleg), and I wanted to get some clarification on two questions:

QUESTION ONE:

She is low on cash for reserves in her bank account, so she will need some passthrough money from the buyer of her downlegs (she needs reserves in bank for loan on new upleg).

Does this passthrough need to be first transferred from escrow to an intermediary account then her bank, or could it be transferred to her bank from escrow (skip 1031 intermediary account)? This will be boot/a taxable event, but I am trying to make sure that doesn’t ruin the whole exchange and that she can still proceed with an exchange with the remainder of the proceeds. I want to make sure any transfers don’t mess the whole exchange up.

QUESTION TWO:

She has three properties under contract that are her downlegs. One property is in an LLC, another under her name with no middle initial, and another under her name with middle initial. All three are solely owned by her.

Does she need to put the one or two uplegs she's getting under an LLC? Can she facilitate this transaction under herself or any entity because she's the sole owner and taxpayer? Summed up, she owns all three by herself, she wants to exchange into 1-to-2 uplegs – as long as she's sole owner on downlegs and uplegs, doesn't matter?

Thank you very much for your expertise.

@Aaron Moayed , I just left a response for you as well.  For for the good of the group - It's a very good question.

1. Those reserves can come from the sales proceeds. It is called taking "boot". The requirement to defer all tax is use all of the proceeds in the purchase of the new property. But they can pull boot out of the exchange. They will pay tax on that amount but shelter the rest of the gain in the exchange. There's two times to do that -

-They can get it immediately at the sale if they know exactly how much they need. The amount is recorded on the settlement statement and a check is cut to them directly from the sales proceeds.

or

-At the end of the exchange all remaining proceeds come to them after the close of their purchase.  The cash is still taxable.  But it stays in the exchange until they know exactly how much they need.

2. There's several options here. The different spellings and initials won't matter as long as the properties are reported on her personal tax return. If so then they all have the same taxpayer (her tax return). The one that is owned by the LLC might be the same deal. If that LLC is a disregarded entity meaning she is the only member and it does not file it's own tax return, then again the activities of the property are also shown on her personal tax return. In that case all of those properties would be seen as being owned by the same person.

So she can sell as the different spellings and the LLC and purchase as just herself, or that LLC, or a different LLC that she sets up as long as it is a disregarded entity as well. I think you got it right!

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