All Forum Posts by: Bill Exeter

It is great to meet both of you as fellow San Diegans.  Our national corporate headquarters is in Mission Valley, San Diego, CA and my wife and I also live in La Mesa, CA.  I look forward to bumping into you guys at a networking event once we are past the COVID-19 stuff.  

Hi @Debbie C., 

The California Franchise Tax Board issued Notice 2019-05 stating installment sale "arrangements" designed to defer taxes when a 1031 Exchange fails will not defer taxes. Here is a quote right out of the Notice: 

"FTB is aware of arrangements in which a taxpayer or QI attempts to convert proceeds from a failed like-kind exchange, or the unreinvested portion of proceeds from a partial like-kind exchange, into an installment payment structure such as an installment note or similar arrangement in which payments are to be paid out over two or more years (the "Transaction"). These arrangements do not allow for a deferral of gain recognition under Internal Revenue Code ("IRC") sections 453 and 1031 since, among other reasons, these sections and the federal doctrine of constructive receipt do not support such a deferral of gain recognition."

You need to be very careful with these types of arrangements, especially if you are a California resident. 

Hi @Nagendran Manidas, 

It sounds like your business model is a buy, build and sell strategy, which will not qualify for 1031 Exchange treatment.  The property that you buy is actually held for sale (build and sell as inventory).  Properties must be acquired with the intent to hold for rental, investment or business use to qualify for 1031 Exchange treatment.  

Hi @Danielle Morton, 

You have to be careful that you do not create unintended consequences.  

Contributing the property into the LLC (Section 721 of the Internal Revenue Code, tax free contribution) would not be a taxable event. However, adding you and your brother as members to the LLC would likely be deemed a gift for income tax purposes and would likely require the filing of a gift tax return. It would likely not trigger any actual tax due, but it would likely reduce your parents lifetime gift exclusion. You and your brother would effectively become responsible for 50% of the taxable gain upon sale of the property since 50% of the property was effectively gifted to you. You should discuss this with your CPA to see how it would affect your parents and you and your brother before you proceed (critical).

However, if your parents retained ownership of the property and did not gift any portion to you and your brother then you and your brother would receive a step-up in cost basis upon your parents death and the capital gain and depreciation recapture taxes would go away.  This tax free transfer is a powerful tool/advantage. 

Perhaps they could compensate you in some way that is tied to the performance of the property so it would be similar to owning 50% of the property, but you would still be able to obtain the step-up in cost basis.  

Hi @Patricia Hinojos, 

Yes, heirs that inherit property generally receive a step-up in cost basis (but not always).  If they received a step-up in cost basis, they would likely be able to sell the property and not incur any taxes unless it has increased in value since they inherited the property.  

It is important that you meet with your CPA to make sure that you hold title properly so that you will qualify for a step-up in cost basis upon your death.  This helps protect your heirs from missing the step-up in cost basis under certain circumstances. 

Hi @Garrett Smith, 

The majority of syndications are structured as some type of partnerships (GP, LP or LLC), which means what you are really buying is a partnership interest and not an interest in real estate so it would not qualify for 1031 Exchange treatment. You need to actually buy something that is classified as a direct interest in real property.

@Brandon Bruckman is right on the money.  Syndications that are structured as tenant-in-common interests (TICs) or Delaware Statutory Trusts (DSTs) would qualify for 1031 Exchange treatment.  I would reach out to Brandon if you are looking for more information on DSTs. 

Hi @Carlos Silva, 

It will still work as long as the LLC that you use to acquire the replacement property is a single member LLC and a disregarded entity where you are the sole member of the LLC. The disregarded entity means that it is ignored for tax purposes and it is treated as if you bought the replacement property for tax purposes.

Hi @David Smith,

The 1031 Exchange is still a very viable tax-deferred strategy as mentioned above. You would still defer the Federal capital gain and depreciation recapture taxes, and you avoid the Medicare Surcharge or Obamacare tax.

Hi @Carlos Silva,

Yes, like-kind actually refers to real estate for real estate, so as long as you sell and then reinvest in some type of real estate that is held for rental, investment or business use it will qualify for 1031 Exchange treatment.  This allows you to diversify or reposition nicely. 

Hi @Dan Snyder, 

Clearly your intent was to rent the property upon your grandparents passing.  You need to make sure that you follow through with this intent.  Report it as investment property on your 2020 tax return and for the first part of 2021.  List it as investment property on any loan applications, financial statements, etc.  You need to report it, file it and treat it as investment property in order to demonstrate your intent to hold for investment purposes should be you be audited.  The shorter the holding period as investment property the more difficult it is to prove intent.  It is easier to demonstrate intent if you have actually rented it out, but it does not have to be rented nor generate cash flow as long as it is held for investment purposes.  You also have a good reason for selling early, not renting, etc., so your position statement is that you repositioned in other rental property due to what happened with your grandparents.