Tax advice on property exchange

7 Replies

I had gotten into real estate with the intent of acquiring rental properties and didn't have intentions of flipping. As it turns out, last year I sold a rental property that I had owned for about 10 months and the money made from the sale was used to purchase another property. At the time I had assumed (or hoped) that since I was reinvesting I was going to be able to avoid some tax on my profits. Now I have learned that I may not be that fortunate, as I read more about the 1031. But my questions is...even though I didn't use an intermediary I did line up the closing of the sale of the property I was selling and the one I was purchasing at the same time and place and the money made on the sale had never came into my possesion, is there any way to avoid the tax that comes with a short-term sale?

@Linda Weygant thanks for the shout out in the middle of crazy time for you!  @Jeffrey Haapapuro , , It sounds like you had a simultaneous closing. Technically this is possible. But there's a lot of steps and documentation in between that can still murk up the transaction and documentation. Essentially now you're going to have to rely on your accountant to examine your process and agree with you. Then they'll have to use whatever documentation you have to ascertain whether it was a full or partial exchange and to put together the information they'll need for filing your form 8824.

And after all that is said and done, you'll still have the unenviable task of explaining the whole thing to the field agent who audits your return - if it gets audited. They may or may not agree. The auditor is usually looking for the form to also match the substance of what your'e claiming.

So possible but not recommended and even then you've got to have a helpful CPA at this point. Trying to diy a 1031 even in a simultaneous or straight swap transaction is pretty much like a surgeon operating on themselves. Or the attorney retaining himself as a client. Which by the way caused a $ 3 mil exchange to fail recently. A guy in IL I think it was used his son the attorney as his intermediary! His argument was that he didn't touch the money either.

I really appreciate the help!  One of the biggest issues with all of this, is that up until now me and my wife have been doing our own taxes and haven't had anyone to reach out to.  Another question I have in regards to the 1031.  Is there a certain size of transaction where these become more relevant as I am dealing with modest single family homes making a profit of $20k - $30k.  I ask because I recently spoke to an account and he had told me that he has only heard of using an intermediary for large transaction like $1mill+.

Hi @Jeffrey Haapapuro

It depends on how the legal documentation was drafted. Concurrent or simultaneous 1031 Exchange transactions can be structured without a "professional" Qualified Intermediary if they are properly documented. The key is whether or not the taxpayer has "constructive receipt" or "actual receipt" of the funds.

The fact that the sale of your Relinquished Property and the purchase of your Replacement Property closed on the same day is generally not sufficient to satisfy the requirements of structuring a 1031 Exchange transaction. This is because when the Relinquished Property closes you technically have "constructive receipt" of the funds as they are being transferred to the file for the closing of the Replacement Property. 

Concurrent 1031 Exchange transactions that do not utilize a "professional" Qualified Intermediary are generally structured so that one of the other parties to the transaction serve as the Qualified Intermediary. I am guessing that your particular situation merely involves a sale of property and then a subsequent purchase of property, which will not qualify for 1031 Exchange treatment.

Your tax advisor would likely be putting his or her license on the line by trying to report this as a 1031 Exchange transaction, unless any of the appropriate documentation was put in place. You should discuss this with your tax advisor to determine whether there is any possible argument that could be used to support this transaction as a 1031 Exchange.

@Jeffrey Haapapuro , Is it worth it is purely in the eyes of the investor.  If you bought a property for $10K and sold it for $50K that is $40K of profit - probably $6000 - $8000 in tax without a 1031.  An exchange costs you $750 - $1000.