All Forum Posts by: Bill Exeter

Hi @Shannon Bae, 

The relinquished property sold and the replacement property acquired must be held for rental, investment or business use to qualify for 1031 Exchange treatment.  Properties held and used as a primary residence, second home for personal use, or vacation home for personal use, etc., will not qualify for 1031 Exchange treatment as they do not satisfy the Qualified Use requirement.

The sale of your primary residence falls under Section 121 of the tax code.  It is often referred to as a 121 Exclusion.  This allows the property owner to exclude up to $250,000 in taxable gain (per person, $500,000 for a married couple) from the sale of the primary residence if they have owned and lived in the property for a total of 24 months out of the last 60 months (2 out of last 5 years). 

However, the intended use of a property can be changed.  You could move out of your primary residence and convert it to rental property, rent the property out for a sufficient period of time to provide intent to convert and hold as rental property, and then it would qualify for 1031 Exchange treatment.

The IRS issued Revenue Procedure 2005-14 that specifically covers this.  Here is how it could work.  Let's say that a husband and wife own a primary residence, they have owned the primary residence and lived in it for over two (2) years, and the primary residence has $750,000 in taxable gain (profit).  They could move out of the primary residence, convert it to rental property, rent for about two years to demonstrate intent to convert and hold as rental property, and then sell.  They would be able to exclude $500,000 in taxable gain ($500,000 out of the $750,000) and they would also be able to complete a 1031 Exchange and defer the balance of the taxable gain ($250,000) into rental property.  The taxpayer(s) have a three (3) window beginning on the day they move out of the house and convert to rental property to complete this transaction and still qualify for both the 121 Exclusion and the 1031 Exchange. 

Hi @Andrew Shofer, 

Actually, the definition of like-kind literally means that you are selling real estate and must acquire real estate. It does not mean SFR to SFR or Condo to Condo. The only requirement is that the real estate you are selling and then buying must be held for some type of rental/lease, investment or business use. Personal use would not qualify, but all other rental/investment or business use would qualify.

Hi @Christina Merlo, 

Generally, the person that handled the estate would know.  The person is often a family member, so they may have to inquire with the tax or legal advisor that helped file the estate returns. 

Hi @Christina Merlo, 

Yes, you can sell and exchange your "share" as long as you own it as an individual (e.g., tenants-in-common).  You would need a Qualified Intermediary that can set-up your 1031 Exchange before the sale closes next week.

You should first determine the amount of your taxable gain.  You may have received a step-up in cost basis when your father passed and left you the houses, so you may not have much taxable gain depending on when you inherited the property.  

Hi @David C., 

You need to be very careful here.  As a trust company, we administer lots of Title Holding Trusts (Land Trusts) and I can tell you that an assignment of a beneficial interest in a Title Holding Trust (Land Trust) in most jurisdictions is considered to be a conveyance of title just like you recorded a deed.  The difference with the Title Holding Trust (Land Trust) is that nothing is recorded.  

This does not mean that it legally avoids the transfer tax.  It only means that nothing is recorded and the person that did it was just not caught.  They key is understanding the local laws, regulations, etc., and defining what is considered a conveyance of title for transfer taxes.

As I stated above, an assignment of a beneficial interest in a Title Holding Trust (Land Trust) in most jurisdictions is considered to be a conveyance of title just like you recorded a deed.  Using the Title Holding Trust (Land Trust) to avoid the transfer tax is likely tax fraud. 

Hi @Juan Sandoval, 

Yes, it can be done.  The easiest way to do this is to have you and your partner acquire the property together at closing as tenants-in-common.  This means that each of you would be acquiring an undivided percentage interest in the property as individuals. This would not harm your 1031 Exchange.  Your attorney would draft a tenants-in-common agreement to govern the relationship.  Your attorney can review IRS Revenue Procedure 2002-22 for more information on the general requirements.  

You will have problems if you buy the entire property and then later have another partner buy a portion of the property from you.  It will trigger part of your taxable gains because you have sold part of the property to another party.  

Having another party invest in the deal via a separate partnership creates all sorts of challenges, including those that you pointed out regarding passing profits, gains and losses through to the investor. Setting up a multi-member LLC, deeding the property into the LLC, and then bringing on additional partners creates a partnership. This means that you have effectively sold your relinquished property as an individual and then bought a partnership interest (as opposed to a real estate estate interest).

Partners can be a great way to build your business faster, but they also create complexities, too.  You need to be very careful before proceeding to make sure that you do not trigger any unanticipated consequences. 

Hi @Jabbar Adesada, 

Be extremely careful here when attempting to use the Title Holding Trust (Land Trust) as a means to avoid or reduce the risk of triggering the due on sale clause.  When anyone tells you that it can minimize or reduce the risk of the due on sale clause, they have likely crossed over into the "lender fraud" area.  

What they really mean is that the lender will likely never find out, but it does not change the fact that if the lender documents define the due on sale clause to include a transfer of a beneficial interest in the land trust it will trigger the due on sale clause.  You must refer to your loan documents. 

Hi @Julie Sisnroy, 

Yes, as long as the new LLC is a single member LLC and disregarded entity and you are the sole member of the SMLLC it will qualify as the same taxpayer for 1031 Exchange purposes.

Hi @Christian Luong, 

There are certain "permissible selling/exchange expenses" that can be paid without incurring taxable boot.  Costs to get a relinquished property ready for sale are not on the permissible list, so roof repairs would trigger taxable boot.  It would not hurt your 1031 Exchange, but you would pay tax on the $12K paid out of net proceeds. 

Generally, a credit given to the buyer would be treated as a reduction of your sale price.  It would not trigger a taxable event, but just reduce the amount that you effectively sold the property for.  

You should always check with your CPA for ways that might be better for you personally to address these costs.  Often, it can be more beneficial from a tax perspective to pay with out-of-pocket funds.  

Hi @Nathan Diones, 

Thank you for the shout out.