1031 Exchange Questions - trying to figure out why or how to use

12 Replies

Hello,

I am a newbie when it comes to 1031 Exchanges, I have a couple of questions. I have always heard about them, but don’t really know anyone who has done it successfully. Here are my questions:

1) Can you have more than one 1031 exchange strand going? For example, two houses or more each worth $100k and you 1031 exchange each one separately into a $150k house and repeat every year?

2) What happens when you eventually sell a house/complex/entity that was 1031 exchanged? For example, you exchange up for years and then one day sell. Let’s say you started with $100k house or duplex and are now at a $1m house or complex after 10 years and just want to cash out are you taxed on everything or just the profit from the most recent exchange?

3) Let’s say you 1031 exchange up until you decide to just hold onto a property and keep it until the day you die. What happens after you die?

Thank you in advance!

-John

A 1031 exchange is a way to defer paying taxes. The tax liability doesn't go away. If you continue to exchange for a number of years and then just sell out you will be liable for the taxes associated with your final sale. I don't believe there is a provision of the code that says you are responsible for the payment of all back taxes cumulatively. The liability just rolls over and with each exchange it sort of starts fresh but since you are always exchanging up your liability will continue to grow. If you die your estate is responsible and at this point I would say speak with a 1031 specialist. 

I believe there is also a seasoning period before exchanging the property. I'm not sure if it is set in stone by the IRS, but I think they typically want to see that you held the property with intentions of it being an investment property. This may be 1 year or more to show you are seeking long-term capital gains.

My understanding is you can 1031 until you die. Your beneficiaries would receive the benefit of the 'Step Up in Basis" 

No one pays the taxes on gains 

As Bryan said,"exchange 'til you drop".  If you do sell out, Yes you pay all those previous taxes that you deferred until now.   A nod to reality.............."keep exchanging up every year"...your marketing and sales costs will eat up a year's worth of appreciation.

Hi @John

Let me try to answer your questions one by one:

1)  Yes, you can be involved with more than one exchange at a time and you can exchange more than one property at a time in the same exchange.  In other words, you can sell two and buy one; sell one and buy three.  So yes, you can sell a single family and exchange into another property for equal or more in value ($150K).  However, you do have to be careful about how often you exchange the same property as you do not want to be seen by the IRS as a "flipper".  You must be able to demonstrate that you had the intent to hold your relinquished and your replacement properties for rental, investment, or business use in the event you are audited. 

IRS Treasury Regulations do not require investment property to be held for any specific period of time for 1031 Exchange purposes. However, one of the best ways to demonstrate your intent to hold for rental, investment or business use is to do just that - hold your properties for a sufficient period of time so that you can easily prove your intent to hold for investment. Most 1031 Exchange experts and advisers recommend you hold property for at least 12 months to clearly demonstrate your intent to hold for investment purposes, although a number of IRS Rulings have alluded to 24 months. 

Holding your rental, investment, or business use property for less than 12 months does not mean that your 1031 Exchange will be disqualified, but it might be significantly more difficult to prove your intent to hold for investment purposes under an audit.

2) If you eventually sell a house/complex/entity that was part of a 1031 exchange and cash out, you will realize all of the taxes that have been continuously deferred since the first property in which you started the exchange process with.  

3) After you pass away, your heirs will inherit your property and receive a step-up in cost basis equal to the fair market value of the property at the time of your death.  Your heirs can immediately sell the property without incurring any capital gain and/or depreciation recapture income tax liabilities.

Hope that helps you.  If you have additional questions please feel free to give us a call or private message.

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | [email protected] | (619) 239‑3091 | http://www.Exeter1031.com

Originally posted by @Rob Beland :

A 1031 exchange is a way to defer paying taxes. The tax liability doesn't go away. If you continue to exchange for a number of years and then just sell out you will be liable for the taxes associated with your final sale. I don't believe there is a provision of the code that says you are responsible for the payment of all back taxes cumulatively. The liability just rolls over and with each exchange it sort of starts fresh but since you are always exchanging up your liability will continue to grow. If you die your estate is responsible and at this point I would say speak with a 1031 specialist. 

I wanted to clarify certain parts of this post.

The tax liability can go away if you continue to exchange until you pass on.  When you pass on your heirs will receive a step-up in cost basis, which means the capital gain and depreciation recapture taxes will completely go away.  The estate would be responsible for any estate taxes, but there would be no capital gain or depreciation recapture taxes with the step-up in cost basis.

The actual taxes that you pay will be based upon the sale price, the selling expenses and the adjusted cost basis at the time that you sell your final property (assuming that you cash out and pay the taxes and don't hold until you pass).  This means that all of your accumulated gains and losses are netted together and taxes upon the final sale/disposition.  So, effectively it is all cumulative back taxes. 

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | [email protected] | (619) 239‑3091 | http://www.Exeter1031.com

Originally posted by @Wayne Brooks :

As Bryan said,"exchange 'til you drop".  ...

 I have heard it stated more poetically: "Swap 'til you drop".

Originally posted by @Bill Exeter :
Originally posted by @Rob Beland:

A 1031 exchange is a way to defer paying taxes. The tax liability doesn't go away. If you continue to exchange for a number of years and then just sell out you will be liable for the taxes associated with your final sale. I don't believe there is a provision of the code that says you are responsible for the payment of all back taxes cumulatively. The liability just rolls over and with each exchange it sort of starts fresh but since you are always exchanging up your liability will continue to grow. If you die your estate is responsible and at this point I would say speak with a 1031 specialist. 

I wanted to clarify certain parts of this post.

The tax liability can go away if you continue to exchange until you pass on.  When you pass on your heirs will receive a step-up in cost basis, which means the capital gain and depreciation recapture taxes will completely go away.  The estate would be responsible for any estate taxes, but there would be no capital gain or depreciation recapture taxes with the step-up in cost basis.

The actual taxes that you pay will be based upon the sale price, the selling expenses and the adjusted cost basis at the time that you sell your final property (assuming that you cash out and pay the taxes and don't hold until you pass).  This means that all of your accumulated gains and losses are netted together and taxes upon the final sale/disposition.  So, effectively it is all cumulative back taxes. 

Hi Bill,

Thank you for your responses! I also checked out your website www.exeter1031.com and it had answers to almost every question I could think of and even those I didn’t think of.

-John

Thanks John

Please let me know if I can ever be of assistance to you.  Always here to answer questions or assist with any 1031 Exchange needs.

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | [email protected] | (619) 239‑3091 | http://www.Exeter1031.com

@Bill Exeter

Isn't there a time frame for you to buy another property once you enter a 1031?  sorry but I have very limited knowledge of 1031's so this may be a basic answer.    I am eventually wanting to get into apartment complexes so  a 1031 is something I am wanting to look into

@Wayne Brooks

Never apologize for asking questions.  Always happy to assist.

There is a very specific timing rules involved in a 1031 Exchange. These deadlines include the 45 calendar day identification deadline and the 180 calendar day 1031 Exchange deadline. 

You have 45 calendar days to identify your potential replacement property. It should be identified to your Qualified Intermediary no later than midnight of the 45th calendar day following the close of your relinquished property sale transaction.  This deadline is exactly 45 calendar days. If the 45th calendar day lands on a Saturday, Sunday or legal holiday, the deadline is not extended to the next business day.

You also MUST complete the entire exchange within 180 calendar days.  (aka close/take legal title to all replacement properties you have identified within your 45 day identification period)

These deadlines cannot be extended under any circumstances. (Unless the properties or taxpayer involved in the 1031 Exchange are located within a natural disaster area designed by the President of the United States.)

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | [email protected] | (619) 239‑3091 | http://www.Exeter1031.com

"What happens after you die?" Sorry, that's beyond the scope of this forum. Please contact your nearest spiritual advisor.

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