All Forum Posts by: Bill Exeter

Hi @Marty G., 

The 1031 Exchange allows you to sell your current property that is held for rental, investment or business use and defer the payment of the Federal and state capital gain, depreciation recapture and avoid the Medicare Surcharge taxes by reinvesting in other replacement property that is also owned and held as rental, investment or business use property.  

You mention vacation use.  It is held as a vacation property used solely for personal use?  If so, it would not qualify for 1031 Exchange treatment since it is used for personal use.  However, if it is used as a vacation rental then it would qualify for 1031 Exchange treatment.  

They key requirement is that the property that you sell and the property that you acquire through a 1031 Exchange must be held for rental, investment or business use.  Personal use such as a primary residence, second home or vacation property will not qualify. 

Here are the answers/comments to your questions: 

No, you do not have to identify the replacement property before you list the current house for sale.  You have 45 calendar days after the close of the sale of your current property to identify the replacement property (ies) that you intent to acquire.  There are three (3) identification rules, and you only have to comply with one of them.  

You have 45 calendar days after the close of the sale of your relinquished property to identify potential replacement property to acquire as part of your 1031 Exchange.  Your 1031 Exchange fails if you are not able to acquire any of the properties that you identified during your 45 calendar day identification period and you would pay the capital gain and depreciation recapture taxes that would have paid as if it was a regular sale.  There are no penalties for a failed 1031 Exchange other than you have to pay the taxes. 

You must trade equal or up in value based on the the sale price of the house (not the gain, profit or equity).  This means the purchase price of the new replacement properties must be equal to or greater than the sale price of our current property.  You must also reinvest all of the cash or equity that comes out of the sale of the relinquished property. 

The 1031 Exchange must be set-up through a Qualified Intermediary before the sale of your relinquished property closes.  The Qualified Intermediary or QI will hold the net proceeds from the sale of your relinquished property in order to avoid the constructive or actual receipt of the proceeds by you. The Qualified Intermediary or QI account is similar to an escrow, but does not replace the escrow.  

Hi @Dave Spooner, 

We have been very active in educating members of Congress and the administration about the benefits of 1031 Exchanges and the unintended consequences of eliminating or restricting the use of 1031 Exchanges.  We were 90% sure that the initiative was not going to be included in the House Ways and Means Mark-up based upon conversations that we and others have had.  While it is  still possible that it could be resurrected during the negotiations for this Bill, it is very very unlikely.  Having said that, these threats to 1031 Exchanges come up everything 3 to 5 years and we must remain vigilant in our efforts to "save the 1031 Exchange."  We expect these to fizzle at this point. 

GOOD NEWS! HOUSE WAYS AND MEANS COMMITTEE MARK-UP has been released. At this point, here is what we know: 

• 1031 Exchanges were NOT included in the mark-up, so no changes to 1031 Exchanges.
• The step-up in cost basis was NOT included in the mark-up, so no elimination of the step-up in cost basis.
• Capital gain taxes for the 20% bracket will be increased to 25% (good news for us, because people that used to just pay the tax will now want to do a 1031 Exchange).

There is always a chance the above could change, so stay tuned. 

Hi @Sam Yin, 

It would be simpler if the parents did the 1031 Exchange on their own, but the children would not be building their own equity, net worth or have pride of ownership.  In addition, if the child owns part of the property as their primary residence they would be able to take advantage of the $250,000/$500,000 tax free exclusion on the portion of their taxable gain when they sell.  They could also inherit the portion of the property that the parents own upon their death and receive a step-up in cost basis.  There are lots of moving parts, and no one answer is right for everyone. 

The living trust is important to protect the children from probate, but does not provide any tax benefits by itself.  

Again, lots of moving parts, so it is important to do careful legal, tax and financial planning before jumping into one strategy. 

Hi @Calvin Chan, 

Yes, your parents can sell investment property, complete a 1031 Exchange by acquiring property that your family will live in, and charge your fair market rent. It is important that you pay your parents fair market rent for the portion of the property that your parents will own. 

Yes, you can be on title, too, as long as the percentage of the purchase price that your parents buy is equal to or greater than the sale price of their relinquished property. They need to be able to trade equal or up in value to satisfy their 1031 Exchange reinvestment requirement.  You can be on title for the balance of the purchase, generally as tenants-in-common. 

Yes, you can be on the loan, too. 

For example, if your parents bought 75% of the property and you bought the remaining 25% of the property you would need to put 25% of the down payment, be responsible for 25% of the debt, etc.  

Hi @Jeff Cantrell, 

Yes, once you have closed on the acquisition of the new replacement properties it is too late to structure a Reverse 1031 Exchange transaction.  The Reverse 1031 Exchange and the corresponding parking arrangement must be set-up before the acquisition closes.  

Hi @Jared Asch and @Will Fraser, 

Will is right on the money.  It is all about demonstrating that you did intend to convert your primary residence into a rental property and then later selling.  The day you move out of your primary residence and convert into a rental property begins a three year window in which you have to both rent and demonstrate your intent to convert to a rental and then ultimately sell and close on the sale before the end of the three year window.  

For example, you could move out, convert to a rental property, rent for two years (straddles three tax years), then list, sell and close before the end of the next one year period.  This would allow you to qualify for both the 121 Exclusion ($250,000/$500,000 tax free exclusion) and the 1031 Exchange.  

Hi @Neesa Patel, 

There are two basic requirements.  First, the properties that you sell and then reinvest in must be held for Qualified Use.  This means they must be held for rental, investment or business use.  Second, the properties must be like kind.  Like-kind literally means real estate for real estate.  You can sell and then reinvest into any kind or real estate as long as it was/is held for some type of rental, investment or business use. 

@Justin Bauer makes a good point.  You and your advisors can determine how to allocate the sale price between the real estate and the business (non-real-estate) so as to get the biggest tax savings. 

Hi @Caleb Franks, 

If you did not do a prior 1031 Exchange into these properties and your combined taxable gain is only $10,000, you may not want to worry about doing a 1031 Exchange.  You will likely pay about 50% of your tax liability in a 1031 Exchange fee.  

Having said that, if you still want to proceed you can do a 1031 Exchange with property acquired and held under a land contract but it gets a little tricky.  Generally, under a land contract legal title is still held by the original seller of the property and is not conveyed to you as the buyer until the underlying debt it paid off.  Prospective new buyers would have to address that issue.  

Hi @Akyl-Lateef Hewitt, 

You can Google topics like choosing a safe, sound and reliable Qualified Intermediary.  You will find numerous articles and websites that provide great detailed information.