All Forum Posts by: Bill Exeter

@Dov Klitnick there are no Federal, state or local penalties if you do not complete your 1031 Exchange (failed 1031 Exchange).  You would just pay the taxes that you would have paid if it was a regular sale.  Investors often do not know what they are going to reinvest in, so they set-up a 1031 Exchange and do their best to find suitable replacement property that meets their investment goals and objectives.  They realize that they will just pay the taxes if they cannot find property that meets their financial benchmarks.  

@Chris Ng is right. You can minimize your risk through a Reverse 1031 Exchange because you actually acquire and close on your new replacement property before you sell and close on the sale of your relinquished property. They are more complicated and there are more costs because the Qualified Intermediary has a lot more paperwork to prepare, has to set-up an single member LLC to acquire and hold or "park" legal title to either the relinquished or replacement property, has more liability because they are holding legal title, has to deal with a lender in many cases, etc.

@Alex Olson is right on.  Qualified Intermediaries do not have to be local; it is more of a personal preference.  I think the more important issues are whether they have government oversight (most do not), hold funds in a separate, segregated, dual-signature Qualified Trust Account, have both the experience and expertise and are more consultative and advisory than others to help the investor get through the 1031 Exchange, and have good Fidelity Bond, Errors & Omissions Insurance, and Fiduciary insurance.  

@Marcus Auerbach title insurance companies, title insurance agencies and escrow companies rarely serve as a Qualified Intermediary.  If they provide the service, it is an ancillary service through a sister or subsidiary company.  They are generally processors and not advisory or consultative in nature.  In today's world, you need more than just a processor.  The ability to bounce ideas and strategies off the QI is critical.  

@John Warren thank you for the shout out regarding @Lauren Speidel!  She is absolutely awesome!  

Join Bill Exeter, President and CEO of Exeter 1031 Exchange Services, LLC, and Daniel Raupp, Co-Founder and Managing Partner of Fortitude Investment Group, as they discuss 1031 Exchange transactions and why this tax deferral strategy can provide significant benefits for the real estate investor.

In this FREE 1-hour webinar, we will discuss:

• What is a 1031 Exchange?

• Requirements and rules associated with a successful exchange.

• Understand the role of a Qualified Intermediary.

• What are your Like-Kind replacement property options?

Hi @Matthew Holland, 

It is too late.  

The Purchase and Sale Agreement must be assigned to a Qualified Intermediary before the closing in order to avoid either constructive receipt or actual receipt.  Once the transaction has closed, you had constructive receipt of the funds because you had the right to the funds (even if the escrow officer did not disburse the funds).  In this case, you also received the funds so you had actual receipt of the funds.

You might want to speak with your tax advisor.  There are certain investments that produce tax credits that could offset your gain such as oil and gas programs, other energy programs, etc.  You might also look into a Qualified Opportunity Zone Investment Fund, which would allow you to defer the gain to 2026.

Hi @Al Skerrett, 

Yes, it can be done but buying replacement property through a foreclosure action at a Trustee's Sale, tax sale or some other type of auction is not always easy.  The first issue is not the settlement or payment but the actual transaction structure.  

In a regular 1031 Exchange, the Purchase and Sale Agreement is assigned to the Qualified Intermediary in order to integrate the purchase of the property into the 1031 Exchange.  There are generally no Purchase and Sale Agreements that can be assigned to the Qualified Intermediary in a foreclosure action, tax sale or other type of auction.   

When there are no Purchase and Sale Agreements involved, the Qualified Intermediary must go back to pre-Revenue Ruling 90-34 days where the Qualified Intermediary actually acquires legal title to each property involved in a 1031 Exchange.  This means the Qualified Intermediary would bid on the property at the Trustee's Sale (usually through you as its agent) and then acquire and take legal title to the replacement property if it is the winning bidder.

Once the property has been acquired by the Qualified Intermediary, the Qualified Intermediary would then convey legal title of the replacement property to the Exchangor in order to integrate the purchase of the property into the 1031 Exchange. It is not just a matter of drafting the 1031 Exchange documents, but how to structure it so that the replacement property will qualify as being acquired by the Qualified Intermediary and conveyed to the Exchangor.

The second issue is the settlement or payment for the property if successful at the auction.  Trustee's Sales, tax sales and various auctions are run differently.  Some require payment immediately, some provide a few days for settlement, some provide more time.  Some require cashiers checks on site, some allow wire transfers, some go through a closing or settlement process.  This issue can create logistical problems for the Qualified Intermediary, and the solutions depend upon how the specific sale or auction is being run.  

If the auction does involve Purchase and Sale Agreements and there is a settlement period, then it will really work like a regular Forward 1031 Exchange.  If not, then the purchase is structured as described above (much like a Reverse 1031 Exchange).  

Hi @Robert Iovine, 

You can only structure a 1031 Exchange for real estate that was held for rental, investment or business use.  It is all about the intent.  Real property acquired and held for sale (e.g., flips/rehabs, developments, conversions) will not qualify for 1031 Exchange treatment unless you acquire, rehab and then hold the property for investment purposes instead of holding for sale.  

Individuals and entities alike qualify for 1031 Exchange treatment.  Property held personally will qualify as long as it was held for rental, investment or business use.  Property held for personal use such as a primary residence, second home or vacation home do not qualify unless your intent and usage change to rental, investment or business (or perhaps a combination). 

Hi @Karla Merry, 

Is the LLC a single member LLC and disregarded entity where you are the sole member or is it a multiple member LLC that is treated as a partnership for tax purposes?

Hi @Jeromy Asido, 

Yes, since they would be using 1031 Exchange funds to pay for both of the replacement properties they would both have to be owned and reported by your parents.  The key is that they must be held long enough to demonstrate they intended to both acquire and hold the properties for rental or investment purposes.  

Advisors generally recommend at least one year when it is a plain vanilla 1031 Exchange.  In this case, they they want to gift you a portion or all of one property they might want to hold/straddle for at least three income tax returns to help demonstrate their intent.  

If any portion of the property they bought and paid for out of their 1031 Exchange funds is actually put into your name as owner, that portion or value would be considered taxable boot.  

Hi @Jeromy Asido, 

Your parents are selling a rental property and then structuring a 1031 Exchange.  They must acquire replacement properties that have a value (purchase price) that is equal to or greater than the rental property they sold.  They can add you to title as long as the percent they purchase/own in the new replacement property is equal to or greater than what they sold.  

The percent of both properties they purchase and own as part of their replacement properties must be owned and reported by them on their tax returns as rental/investment properties to satisfy their 1031 Exchange requirements.  They need to show that they had the intent to reinvestment and hold for rental/investment purposes.  You would report both properties on your tax return based on the percentage that you purchased and own.  

They can gift the property to you later if that is the intent, but the initial intent must be for them to acquire and hold as rental/investment property in order to satisfy their 1031 Exchange requirements.  

Hi @James Roane, 

It is not too late. The key is that you sold in your name, so the purchase of your new replacement property must be in a way that it is treated as if you bought the property for tax purposes. You can use a new LLC as long as you are the sole member, it is a single member LLC (SMLLC), and it is a disregarded entity. This means that it exists, but is ignored for tax purposes and you are treated as the real buyer for tax purposes.

You can acquire the replacement property in your own name and then later form a SMLLC/disregarded entity and convey legal title into the new SMLLC.  It will not hurt your 1031 Exchange as long as it is a disregarded entity, and you can do this immediately following the acquisition.