All Forum Posts by: Bill Exeter

Hi @Randy Stark, 

Yes, you can sell any type of real estate and exchange into any type of real estate as long as the real property is held for some type of rental, investment or business use. Like-kind simply means you must exchange real estate for real estate. It does not mean SFR for SFR or MF for MF. It is a very broad definition.

The Qualified Intermediary does not need to be in the state where the investor or the properties are located.  It is merely a personal preference.  

@Zachary Beach, 

California has always taken the position that if you sell California real estate and 1031 Exchange into replacement property located outside of California you will owe California state tax when/if you sell the property and cash out/pay the tax.  A relatively new reporting requirement was enacted effective January 1, 2013 that requires an investor that has completed a 1031 Exchange into out of state property to report the status of that property (or any subsequent property that they 1031 Exchange into) to the California Franchise Tax Board.  However, as long as you keep deferring the tax through a 1031 Exchange or other tax strategy, or you hold the property until you pass and your heirs receive a step-up in cost basis, California will never get their tax. 

@Ross Asher, 

Yes, you can sell one relinquished property and 1031 Exchange into multiple replacement properties.  You can also sell multiple relinquished properties and 1031 Exchange into one replacement property.  The 1031 Exchange is a great way to diversify, consolidate or reposition your real estate portfolio without incurring taxes. 

@Peter Morgan, 

Yes, the duplex is considered split use.  The taxable gain would be allocated between the primary residence and rental property portions generally via square footage.  The taxable gain allocated to the primary residence would be tax free up to $250,000 if you are single or $500,000 if you are married and have owned and lived in the property as your primary residence for at least 2 out of the last 5 years.  The taxable gain allocated to the rental property potion would qualify for 1031 Exchange treatment. 

Hi Matt, 

The IRS actually has issued three (3) separate Private Letter Rulings on the topic.  They effectively did allow these three (3) taxpayers to build on property they already owned.  Here are three three Private Letter Ruling citations: 

Private Letter Ruling Number 2014-08019
Private Letter Ruling Number 2003-29021
Private Letter Ruling Number 2002-51008

The transaction involves the sale of your relinquished property through a Qualified Intermediary. An Exchange Accommodation Titleholder or EAT would enter into a 32 year ground lease for the land that you want to build on. This 32 year ground lease begins to create an interest in real estate that did not exist before, which is the key. The EAT would then begin to complete the improvements on the land that you already own in the name of and on behalf of the EAT. The 32 year ground lease plus the improvements made to/on the land creates/represents the new real estate interest that you will be identifying and acquiring as your replacement property in your 1031 Exchange.

There is no way to do this kind of 1031 Exchange without risk since all we have are three (3) Private Letter Rulings.  

Hi @Jeff Vierra, 

The exact amount is 1/3 of the Net Sale Price.  You would take 1/3 of $2.0 million - about $666K - and then subtract 1/3 of the routine selling expenses such as broker's commission, title, escrow, documentary transfer taxes, recording fees, etc., to arrive at your Net Sale Price that would be around $625K.  This would be your required reinvestment amount if you want to defer all of your taxable gain.  

Hi @Nicholas Lovric, 

The above post misunderstood your question.  I think your question is that the seller wants to sell with seller financing and does not want to do a 1031 Exchange and they are concerned about how the seller carry back note would be taxed.  

Seller carry back notes or installment sales are taxed under Section 453 of the Internal Revenue Code.  Generally, any cash received at closing would trigger depreciation recapture and/or capital gain taxes to the extent of the cash amount received.  The balance of the capital gain is generally deferred over the term of the seller carry back note.  

However, if the seller carry back note is greater than $5.0 million there are special considerations.  

It is very important that the seller consult with his or her CPA and have them run the numbers.  There are many factors that come into play that could change the answers above.  

Yes, you NEED to do it.  It is required, and the IRS will still tax you on depreciation recapture in the future if/when you sell and cash out even if you did not deduct the depreciation.  Passive activity losses are generally carried forward and will offset future taxable items.  You need to get a good CPA with a solid real estate background.  

Hi @Michael Gust, 

The sale of any assets held inside of an Individual 401(k) Plan are already tax-deferred (or tax-free if a Roth) so there is no need to structure a 1031 Exchange.  The only time that you might consider structuring a 1031 Exchange on the sale of an asset held inside of a retirement account would be to avoid UBIT or UDFI taxes.  

Earnings, profits, gains from assets held inside of a retirement account are just that.  They are not contributions to the plan, but profits made on the investments that you made inside of the plan. 

Hi @Nick Gray, 

@Sean Ross is right on the money.  It all boils down to intent.  You would need to demonstrate that you had the intent to hold for rental, investment or business use.  The good thing here is that you are retaining 70% of the asset, so clearly your intent is to hold.  Your business purpose for selling 30% is to free up capital for another investment.  

You mention limited partners.  What would you be selling?  You would need to sell an interest in real estate in order to qualify for 1031 Exchange treatment.  Selling a membership interest or partnership interest in an entity would likely not qualify since it is not treated as buying real estate for tax purposes. 

Hi @Henri Chow, 

It is very difficult to automate something that is this technical in nature.  Investors do not know what they do not know.  The best way to understand the transaction and to "read between the lines" in order to catch possible issues is to talk to the investor, to actually have a conversation.  There are all sorts of nuances that cannot really be "caught" with an online approach.  

We have a pretty sophisticated process.  We have sophisticated trust accounting systems, CRM systems, etc., but we would never try to automate the onboarding process.  There are just too many things that can only be discovered by an old fashion phone call with the client.  

Hi @Henri Chow, 

As a Qualified Intermediary, here is what I can tell you.  This has been tried a number of times before and has always failed.  The 1031 Exchange process is complicated.  Investors do not know what they do not know.  They complete "fill-in" fields through an online Qualified Intermediary, which often had incomplete or inaccurate information.  They complete their identification of their replacement property through "fill-in" fields, which often violates one of the identification rules. Etc.  It boils down to the old adage: garbage in, garbage out.  Of the two QIs that I know of, one spent so much time correcting information that she finally stopped offering the online solution, while the other ended up in litigation because one of the 1031 Exchange transactions that he administered was disqualified by the IRS and the investor sued him.  Easier and cheaper are no substitute for experience and expertise when it comes to the administration of a 1031 Exchange.  

Hi @Mel K., 

Land Trusts, if properly structured, a both pass-thru entities and disregarded entities.  The beneficiaries would be provided a financial statement of some type showing their portion of income, expenses, etc., to be reported on the beneficiaries' own tax return.  Land Trusts do not file tax returns, do not provide K-1s (those are for partnership tax returns), etc.