All Forum Posts by: Sean Ross

Congrats @Mike Berkaw!

To reiterate what @JASON V. said, there is no requirement that property purchased in a 1031 exchange has financing, even if the property sold was encumbered with a mortgage. 

Here are the related rules:

• property received should be at least as valuable as the property sold
• the value of any debt paid off during sale should be replaced, but that can be replaced with new debt or outside cash
• the intent for both properties should be for long-term business or investment use

@Alecia Loveless is the property you need to purchase with all-cash going to be used for investment as well?

@Will Stewart, thanks for posting and good question. 

You must file your Form 8824 with your tax return for the tax year in which you transferred the property given up.  So in your case this will be your S Corp's 2020 return. 

If you can't complete the Form by the deadline (although that deadline was extended to May 17 this year), then you have to file an extension using Form 4868 in order to include your Form 8824. 

Go ahead and post here or DM me if you have questions about filling out the form. 

@Joe Rest this is a very good and very common question.  Your 3 points are on target. 

Let me outline the basics and elaborate briefly:

• You must reinvest up to your net sales price (after closing costs).  So if your net sale is $285K, then you must purchase up to $285K.  
  
• All net proceeds must go into the replacement property. 
  
• You said you have no mortgage, but for others out there any debt paid off must be replaced with new debt (traditional, hard, or seller-financed), or with new cash, or some combination.
  
• To the extent that you miss any of these marks, the difference is taxable. 

It would be much simpler if you could just reinvest the profits.  Unfortunately, any cash you take from the sale will be interpreted by the IRS as dollars representing your gain or recaptured depreciation. You can't argue with them and say "but these funds only represent dollars I put into the property" because money is fungible -- your word against theirs, and they are judge, jury, executioner, etc. 

If this kills the idea of a 1031 for you, perhaps look into a Qualified Opportunity Zone.  The rules here can be complex, but the upshot is that you only have to reinvest your gains. 

Let me reiterate what @Account Closed

I work with the government relations wing of the Federation of Exchange Accommodators. There are dozens of good industry groups, such as the DST Sponsor that Phil mentioned, that are fighting the good fight on The Hill to keep 1031s around.

Biden never specifically said he would eliminate 1031s.  One of his policy aides did release a working paper back during the campaign that referenced disallowing 1031s for high-income earners.  How that would work is up for much debate. 

I think the odds of 1031s staying around are good, but certainly nowhere near 100%. 

IF a bill is passed that does eliminate or significantly hampers 1031 exchanges, it would probably go into effect in the next calendar year or two (i.e. Jan 1 2022 or 2023). However, it is possible for some provisions to go into effect immediately or even retroactively.  There is some precedent here.  Odds of this are slim, but it's possible. 

The capital gains rates are almost certainly going to go up substantially for high-income taxpayers. 

These changes won't come through during the "Infrastructure" Bill.  They are likely to be on the table as a "pay for" for the following large spending bill, however. 

@Juan Sandoval, the deadlines for 1031 exchanges mentioned by @Anna Laud tend to be the hardest part of the exchange process.  And most markets are hot now, so inventory tends to be low.  

A few words of advice:

• if you do an exchange, try to lock up the property you want to buy before you sell (or very early in the process).  You can negotiate the contract before selling in a 1031.  Those 45 days in your identification window go by very, very fast. 
• To "identify" a property, all you have to do is provide an address to your 1031 company.  You don't have to make an offer for this to count.  The property doesn't even have to be for sale! 
• Don't tell sellers or their agents that you're doing a 1031 exchange. It might scare off those who don't understand them, and it will hand unnecessary leverage to those who do. 

Happy to answer any other questions you have. 

@Michael Lyons , to answer just one part of your post, yes you can 1031 exchange out of two properties and into one larger property.  

Just keep in mind the following rules

• value of the replacement property must be at least the combined value of the two properties being sold
• all of the net proceeds must go into the replacement as a down payment
• you must sell both before you buy
• you must sell both and buy within 180 calendar days of the first sale closing, and you must identify the replacement within 45 calendar days of the first sale closing

@Daniel Trzaskos I've seen this scenario hundreds (thousands?) of times.  The advice given by your 1031 firm is fairly standard practice -- the "drop and swap" as Dave mentioned. 

There are some state governments that look more or less fondly on this strategy. The West Coast is particularly unkind, though there have been some major court victories there recently.  

The IRS also raises its hackles about this every other year or so, but they still allow the vast majority. They're very aware that this takes place and has done so for decades. 

The reason a "drop and swap" works is because partnerships can dissolve, distribute out their assets pro rata, and then carry on ownership of the properties as co-tenants. This distribution is tax-free under IRC section 731. 

However, a lot of real estate loans prohibit the partnership from distributing assets this way. And the closer to closing you engage in the dissolution, the more suspicious it looks to tax authorities. 

Your CPA is probably correct to be cautious, but my experience says that most CPAs (even very talented ones) can't be experts in the nitty gritty of every code section.  

Appreciate the tag, @Alex Olson. 

@Justin Franklin would this be your first 1031 exchange?  BP has a lot of strong voices in this space. To reiterate what @Dave Foster said, make sure that your 1031 intermediary is established prior to your sale closing. You want to get those ducks in a row early. 

A few notes as you look around:

• Whatever you buy in your 1031 exchange must be at least as valuable as what you sell.  If you miss this mark, the difference is taxable. 
• Don't disclose to potential sellers that you're in a 1031 exchange.  It'll scare off those who don't understand them, and it'll provide leverage to those who do. 
• Check for client reviews and agency ratings for the intermediary you elect to work with.  See if you can get them on the phone.  There are horror stories every now and then about a 1031 guy who runs off with clients funds...no good!

@Stephen Cucc, I've done hundreds of "reverse" exchanges. Happy to help here in any capacity. 

I'll outline a little bit here for you now:

Trading down in value
- to the extent your purchase property is less valuable than your sale property, you'll pay taxes on the difference. 

- your closing costs will help here, as they reduce the net sale price when you sell and increase the net purchase price when you buy

- you can always purchase a second asset to close the gap as well

Reverse 1031 exchange
- if at all possible, try to push forward the purchase closing or speed up your sale. Regular exchanges are less expensive, less complicated, and carry fewer tax risks. 

- the main reason that reverse 1031s are tough is that the IRS won't let you be on title to both properties (upleg and downleg) at the same time. 

- your 1031 intermediary can set up a new holding company to either purchase the property you want to buy or the property you want to sell to execute a "reverse" exchange. Ultimately the format will come down to timing and financing considerations.

- if you're working with a lender for your purchase, make sure that your QI can discuss the structure with them.  These types of deals tend to scare off traditional lending sources.