All Forum Posts by: Bill Exeter

Hi @Heyward Lovett, 

I am assuming that you are the sole member of the LLC. You can not rent to yourself in order to make it qualify since the LLC is likely a single member LLC and a disregarded entity owned 100% by you.

Hi @Heyward Lovett, 

You are not allowed to live in the property.  The 1031 Exchange requires that you sell and acquire Qualified Use Property, which means property held for rental, investment or business use.  Property use for a primary residence, second home or vacation property for personal/family use will not qualify.  You can always change your intent/usage down the road.  You will get varying opinions on this from 1 year, 1 year and one day to 2 years.  I would lean more toward straddling three tax returns if you decide you want to move into the property.  It all boils down to being able to proving your intent to hold for rental, investment of business use should you be audited. 

Hi @Gayle Eisner

I assume that your home is a SFR. We refer to this as a split use property and you would qualify for both the Section 121 Exclusion ($250,000) as long as you can say that you have owned and lived in the property as your primary residence for at least 2 out of the last 5 years and a 1031 Exchange as long as you have rented it long enough to document intent to rent (probably 1 year - or more - straddling two income tax years - or more).

Generally, your tax advisor will allocate the sale price, taxable gain, etc., between your primary residence usage and your rental property usage on a prorata basis using square footage. The amount of taxable gain allocated to your primary residence portion would be tax free up to $250,000 and the rest would be taxable. The amount of taxable gain allocated to your rental property portion would be tax deferred if you structured a 1031 Exchange.

Hi @Gayle Eisner, 

I assume that your home is a SFR. We refer to this as a split use property and you would qualify for both the Section 121 Exclusion ($250,000) as long as you can say that you have owned and lived in the property as your primary residence for at least 2 out of the last 5 years and a 1031 Exchange as long as you have rented it long enough to document intent to rent (probably 1 year - or more - straddling two income tax years - or more).

Generally, your tax advisor will allocate the sale price, taxable gain, etc., between your primary residence usage and your rental property usage on a prorata basis using square footage. The amount of taxable gain allocated to your primary residence portion would be tax free up to $250,000 and the rest would be taxable.  The amount of taxable gain allocated to your rental property portion would be tax deferred if you structured a 1031 Exchange. 

Hi @Norma E. Vega Sanchez, 

One of the first things that you need to do is decide what you want to invest in through your Self-Directed IRA. What is your investment strategy or business plan?

Once you have decided that, then you can begin to interview IRA Custodians to determine who has the specialties that will help support your business plan. For example, there are many that "accept" real estate, deeds of trust, mortgages, or tax lien certificates, but do not really have real estate expertise and experience. You need to choose the right fit for what your investment strategy will be.

Hi @Allen Magtibay, 

There are a lot of issues involved here. How to hold title? How to deal with the LLC? How to structure a 1031 Exchange? Can the related party issues be overcome? Tax issues. Reassessment issues. Individual sibling tax issues that might affect the overall decision or the way the transaction is handled. You need to consult with a tax advisor well versed in real estate and then also consult with an attorney to be safe.

I wanted to expand on the related party issues from the perspective of the taxpayer/investor doing a 1031 Exchange.  You can sell to a related party without much of a problem.  The only issue to worry about here is a 2 year holding period.  Buying from a related party is more problematic and in most cases will not work.  There is the same 2 year holding period, but then we have to address "basis swapping" issues under IRS Revenue Ruling 2002-83.  There is a specific ruling that allows family members to exchange between themselves when the goal is for each of them to end up with 100% of one of the properties.  These issues are complex and should only be done with advice from tax and legal counsel.  

Hi @Carly Turow, 

You are absolutely correct!  The closing agent will wire transfer the net proceeds from the sale to the 1031 Exchange Qualified Intermediary.  The QI should deposit and hold the funds in a separate, segregated, dual-signature Qualified Trust Account just for your 1031 Exchange.  

Your 1031 Exchange funds will then be wired to the closing agent for your replacement property when you are ready to close on your acquisition.  

Hi @Carly Turow, 

Properties acquired for rehab and sale (flipping) or development and sale will always be taxed at ordinary income tax rates and will vary based upon the individuals income tax brackets.  Properties acquired and held for less than one year will also be taxed at ordinary income tax rates.  Properties acquired and held for rental, investment or business use and that are held for more than one year will generally be taxed at long-term capital gain tax rates (Federal capital gain 14% to 20%, Federal depreciation recapture 25%, Medicare surcharge of 3.8% may kick in, and then any state taxes that might be due).  

Properties acquired and held for rental, investment or business use can also qualify for 1031 Exchange treatment.  This allows the investor to sell the rental, investment or business use property and defer the taxes discussed above by reinvesting through a Qualified Intermediary into other rental, investment or business use properties. 

The 1031 Exchange must be set-up before you close on the sale of your relinquished property.  The 1031 Exchange only applies to properties that were acquired with the intent to hold for rental, investment or business use.