All Forum Posts by: Bill Exeter

Hi @Cj Powderhorn, 

The general formula to determine the amount of taxable gain that you have is your gross sale price - routine selling expenses - adjusted cost basis in the property = taxable gain.  You can multiple the amount of taxable gain by your tax bracket/rate to determine the estimated amount of tax that you would pay.  Most Qualified Intermediary fees are between $700 and $1,200, so compare the amount of tax liability to the fee and then you can determine if it makes sense to do a 1031 Exchange or just pay the tax.  You tax advisor can drill down and get much more specific with your numbers.  

Hi @Gary Jellis, 

It all boils down to your intent.  You must have the intent to hold the replacement property for rental, investment or business use to qualify for 1031 Exchange treatment.  The shorter the hold the more difficult it might be to prove that you really had the intent to hold for rental purposes.

Most advisors recommend at least a one year hold.  I would argue this is true if it is a plain vanilla 1031 Exchange.  If you convert to your primary residence, it might be safer to prove intent if you had a longer holding period.  I would use 2 years so that it straddles three income tax returns to make it much easier to prove intent.  There are reasons such as business, economic, and medical, that can change intent.  There could be a financial argument such as during COVID-19 where someone lost a tenant, etc., and they had to sell their primary residence and move into their rental to survive the economic challenges if they lost their job.  It all boils down to your intent, what you can prove if you are audited, and what/why your intent changed. 

Hi @Eddie Mendoza, 

A primary residence does not qualify for 1031 Exchange treatment, only properties held for rental, investment or business use qualify for 1031 Exchange.  The sale of a primary residence falls under Section 121 of the Internal Revenue Code (121 Exclusion).  You can exclude up to $250,000 (if single) or $500,000 (if married) in taxable gain as long as you have owned and lived in your primary residence for at least 2 out of the last 5 years.  

Hi @Carl Griggs, 

It is extremely important that you consult with a tax advisor.  You have a number of issues here, and I think you are creating a number of unintended consequences. 

Your parents signing over their house to you will be considered a gift, will require the filing of a gift tax return (probably not trigger any gift tax), and will reduce your parents lifetime gift exclusion.  Their cost basis will become your costs basis and you will not be responsible for their taxable gain. 

Your parents signing over their house to you would likely eliminate their ability to elect the tax-free exclusion of $500,000 under Section 121 (121 Exclusion).  

Your intent is to acquire the property, fix or rehab it and then sell it.  You would be subject to ordinary income taxes instead of capital gain taxes since your intent is to buy, rehab and sell.  

Properties acquired with the intent to rehab and sell are held for sale and not held for investment as required for a 1031 Exchange transaction, so you would not qualify for a 1031 Exchange.  

These are just the ones that I thought of off the top of my head.  

Why not just lend them the money to do the rehab?  If you are worried about your funds, secure the loan with a promissory note secured by a mortgage or deed of trust.  

Hi @Jacob Temple, 

The tax code and regulations do not have any "holding period" required.  There is no "safe harbor."  Many speak of 1 year, 1 year and a day, 18 months, 24 months, etc., but these are merely opinions.  The tax code and regulations do require that you have the intent to hold for rental, investment or business use.  The longer you hold for rental purposes the easier it is to demonstrate that you did have the intent to hold for rental purposes.  The issue is really what can you demonstrate or prove under an audit.  I think at a minimum you would want to hold for at least one year, which would straddle two (2) tax years, but the longer the better. 

Hi @Alex Gronbach, 

The 1099-S should come from the closing agent.  Unfortunately, tax software packages like Turbo Tax do not work well with more complicated transactions like 1031 Exchanges, 121 Exclusions, etc. I would highly recommend a CPA when you are involved with these type of transactions. 

Hi @Ray Slack, 

Operating expenses like prorated property taxes are not routine selling expenses and are therefore not "permissible 1031 Exchange" expenses.  They can be paid at/through closing, but the expense will be considered taxable boot since it is an operating expense.  You are essentially using sale proceeds to pay for an operating expense instead of reinvesting in replacement properties.  

The solution is easy if you have the cash.  You can pay the item before selling/closing so that it is not an issue.  Or, if you are already in the closing process, you can contribute out-of-pocket cash into the closing to cover the non-permissible expenses.  

Your Qualified Intermediary should be able to walk you through your closing/settlement statement and identify those items that are permissible vs. non-permissible so that you can decide if you want to contribute out-of-pocket funds into the closing to offset the taxable boot. 

Hi @Jack B., 

This market is/has been exceptionally difficult when trying to locate and identify replacement property as part of a 1031 Exchange transaction.  There are certain back-up strategies that you can look at such as: 

• Net Lease Properties (Triple Net Lease) 
• Delaware Statutory Trusts (DSTs) 
• upREITs (1031/721 Exchanges) 
• or, if your exchange fails, a Qualified Opportunity Zone (QOZ) 

The Qualified Opportunity Zone is not an option for your 1031 Exchange because they are structured as "funds" generally in the form of a multiple member LLC, which would be treated as a partnership for tax purposes. Partnership interests are specifically excluded from 1031 Exchange treatment. However, they can be a great tool should your 1031 Exchange fail. You could at least defer your taxes to 12/31/2026.

Hello everyone, 

Here is the California Proposition 19 ballot title: The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act.  This was a name that was carefully crafted by the Democratic politicians who have been in control of the California legislature for about three (3) decades.

It was not submitted or introduced by the California Association of Realtors as someone had indicated.  It was introduced by our democratic controlled legislature who approached CAR and obtained their endorsement because this will result in many more real estate sales (and commissions). 

Here is my first comment.  Everyone that reads this needs to remember that the current politicians did this to us, and they keep doing it to us because we keep voting for them.  It is the definition of insanity (keep doing the same thing over and over and expecting a different outcome).  We keep voting for the same democrats that have ruined California hoping for a better result.  It is time that we all showed up at the polls and voted the current politicians out.  It is high time that everyone gets involved.  We need to tell them that enough is enough.  If we do this, we can take back California and then undo these ridiculous propositions.  OK, enough politics.  

Yes, you can 1031 Exchange out of California in order to avoid the Proposition 19 problems.  However, remember that California has the California Claw Back until someone decides to challenge California on the grounds that it is unconstitutional. 

Hi @Roseann Stevens, 

You can certainly do this. It is a related party transaction, so the relinquished property that you sell to your daughter must be held for two years and the replacement property that you acquire must be held for two years. You need to also rent for fair market value (FMV). There is one tax court ruling that allowed the related party to pay 20% below FMV because the related party was managing the property. The IRS disallowed the 1031 Exchange, but the court upheld it saying that the 20% discount was fair as compensation for property management services.

I should point out for others that read these comments that buying property from a related party in a 1031 Exchange does not usually work.  There are some exceptions.