All Forum Posts by: Sean Ross

Hey @Jason W., here's a quick sampling from what some of our recent CA clients have been looking at exchanging into. The driving factors seem to always be

- bloated residential prices in every major city (hard to buy)
- uncertainty about office space and other commercial options (not sure if buying is smart)

Assets we've seen considered

• DSTs
• Raw land (ranchland and solar fields)
• Mineral rights
• passive TIC interests, usually with NN or NNN long-term leases and big-name tenants (CVS, 7-Eleven, Dollar General, etc)
• cooler residential markets, such as in Indiana, Missouri, and Arkansas

Keep in mind that if you exchange out of CA and into a different state, the California Franchise Tax Board will require that you file CFTB Form 3840 on an annual basis reporting as to the status of the proceeds you used in the 1031 exchange.  If you fail to do this then CA may decide that you suddenly owe state taxes. 

Hey @Cj Powderhorn, here's a quick sampling from what some of my recent clients have been looking at exchanging into.  The driving factors seem to always be

- bloated residential prices in every major city (hard to buy)
- uncertainty about office space and other commercial options (not sure if buying is smart)

Assets we've seen considered 

• DSTs
• Raw land (ranchland and solar fields)
• Mineral rights
• passive TIC interests, usually with NN or NNN long-term leases and big-name tenants (CVS, 7-Eleven, Dollar General, etc)
• cooler residential markets, such as in Indiana, Missouri, and Arkansas

@Adrianne G. let me take your questions in reverse order here. 

How much time to reinvest?
- 180 calendar days from the sale of your property.  More limiting is the 45-day restriction for identifying what you might buy next. 

Do you have to add contingency language to offers or contracts?
- Thankfully, no.  You should heed @Bill Exeter's advice about being careful with your closings, but consider the following scenarios:

1. You make an offer on the next property and disclose your 1031 exchange. The seller (or their agent) don't understand 1031s. This confuses them. It sounds complicated. They have 4 other offers on the table and go with those because they sound easier and more likely to close. 
   
2. You make the same offer, but the seller (or their agent) really understand 1031 exchanges. They know you have time limits and value minimums. They can use this as negotiating leverage against you. 

In each case, you risk a disadvantageous position.  We recommend leaving the 1031 language out entirely. Your Qualified Intermediary should help you properly disclose the 1031 exchange as you approach closing -- this is completely above-board and very simple to do. 

Are 1031s Your Only Option?
- No.  You can also pursue what is called an Opportunity Zone investment through a qualified opportunity fund. These can be complicated too, and carry different risks and limitations than 1031s.   For example, OZones are geographically restricted in each state. 

For most investors, 1031s are simpler and provide more reinvestment options. But this is not always true. 

@Clay Massey very cool to hear.  Toni is one of our best coordinators so you are in good hands!

@Clay Massey the property qualifies for a 1031 exchange provided it is "held for investment or use in a trade or business".  In your case you can suggest the property has been rented earlier and then held onto for appreciation, which the tax courts have ruled qualifies as a valid investment "use" for 1031 purposes. 

Whatever you reinvest into of course must have the correct usage as well. You should speak directly with an intermediary to discuss how to demonstrate the correct usage and intent. 

Let me cover the basic rules here and you can ask questions as they occur to you. 

The 1031 Law (speaking practically)
These rules apply to any exchange:

• Must complete within 180 calendar days of the sale of your relinquished property
  
• Must identify up to 3 replacement properties within 45 days
• Only complete tax deferral if the final value of the replacement property is worth at least as much as your net sale price for the relinquished property.
• If you trade down in value, the difference is taxable
• Keep the same taxpayer across properties
• You can exchange into (and out of) any state and many US territories
• There are lots of different assets that qualify as valid replacement targets in a 1031, so think broadly

@Bob Foglia yes, you can reinvest into anything classified as "real property" inside of a 1031 exchange. As long as the asset is held for business or investment purpose. 

If you 1031 into a different property, here is a quick list of your options:

• single-family residential
• multi-family residential
• commercial
• resort
• farm or ranch
• storage facility
• net-lease management
• unimproved land
• water rights
• oil rights
• timber rights
• properties with a TIC structure or other fractional interests
• options to purchase
• conservation easements
• Delaware Statutory Trusts

@Colin Williams owner carry financing in a 1031 exchange gets complicated. You have to decide whether to keep the note out of the 1031 (and only exchange the $650K) or find a way to include it. 

Most of the time, the note is not included. 

The capital gains taxes on the value of the note are paid in the year that you receive mortgage payments. This is all covered under IRC Section 453. Interest in the note is also taxable. 

Here's why it's complicated. Even if you reinvest into another property worth $1.35mm, the IRS will also tell you that part of what you "traded for" in your 1031 exchange is a promissory note, which is not like-kind to real property. This creates a "boot" situation.

In order to include the Note, you need to either 

1. Make the Note payable to your qualified intermediary. The QI can then sell the note (to you, to a related person, or on the secondary market) and then the QI will add that cash to your 1031 escrow account;
2. Convince the seller of your replacement property to accept the Note as compensation in your purchase; 
3. Make the Note payable to your QI and, if the term is short enough or there is a balloon payment within your 1031 period, the payments made by the borrower can be added to your 1031 account

There's potentially more to cover, but I'll leave it there if you have questions. 

p.s.one much easier option is to make a new cash loan to the buyer of your property. This loan is kept out of the transaction. Then they can use all cash to buy your property and you still retain a Note that does not affect your 1031. 

@Jason Woods this is a very good question that gets too little attention. 

Option #1 - This is a really big tax bill to swallow, and if you're keen on possibly reinvesting then this should only be a last resort. The math just doesn't work. Unless you absolutely want to get out of the REI game, need the money fast for something totally unrelated...I'd skip this. 

Option #2 - You can 1031 into a DST, which is a fine option. It's passive, there are lots of good DST sponsors with great track records and good premium property portfolios. But DSTs have their limitations too -- so you could go another "passive" route that is friendly to 1031 exchanges. A TIC partnership in a NNN property is probably the second-most common here. Just speak with an intermediary to get a lay of the land.

Option #3 - Unlike 1031s, the OZone doesn't defer your depreciation recapture. So you'd pay that. But!  You only have to reinvest the gain (whereas in a 1031 you must buy replacement property of equal value to what you sold) and you might get some psychic value out of reinvesting in a distressed area.  But fund sponsors vary a lot, there's relatively little performance history, and you don't get permanent deferral (which is possible with 1031). 

We could advise better if you wouldn't mind highlighting what variables matter most to you...?

@Benjamin Aaker I want to tie together a couple of different threads here. 

You could sell and redeploy you equity into a different investment as @Alex Olson advises (using a 1031 exchange to defer all of your potential tax payments), but remember that the rules for 1031 exchanges don't give you a lot of time to find a replacement asset.  

So I also want to echo what @Lien Vuong says here. Take the time to learn about your potential reinvestment options.  

If you 1031 into a different property, here is a quick list of your options:

• single-family residential
• multi-family residential
• commercial
• resort
• farm or ranch
• storage facility
• net-lease management
• unimproved land
• water rights
• oil rights
• timber rights
• properties with a TIC structure or other fractional interests
• options to purchase
• conservation easements
• Delaware Statutory Trusts

So you can use your proceeds as a down payment on any of these as long as your intent is to hold them for long-term use (investment or business).

We are seeing a LOT of money flow out of SFR and office space into DSTs and NNN options right now.

@Patricia Hinojos yes, an asset received through inheritance receives a step up in tax basis equal to the FMV at time it is bequeathed. The inheriting party may indeed dispose of the asset at that time without need of a 1031 exchange.

I've read Garrett's post a few times and don't believe that fact pattern fits. Perhaps I am missing something and need stronger coffee?