All Forum Posts by: Whitney Nash

Hello, @Rachel Joey

Yes, you can sell one or more and buy one or more in either direction. As @Jeff Nash mentioned, for full tax deferral you will want to ‘exchange up’. There are three numbers to keep in mind for this. You want to 1) buy equal or greater the value than what you sold (cumulatively over all properties sold and purchased). This means that if the two that you are selling both sell for $400k each, (less allowable closing costs) you need to buy replacement property worth a little less than $800k (because of the closing costs of the two relinquished properties.) 2) you need to obtain equal or greater debt on the replacement property to what was on the relinquished properties combined. This can be accomplished by getting a loan or bring cash to the table. 3) You will want to put all of the sales proceeds into the exchange and then use all of them towards the purchase of the replacement property. Any difference is taxable. 

So, in your example, you’ll want to use all of your $500k proceeds towards the purchase, but you will need the purchase price to be equal or greater than the combined price of what was sold, less closing costs. 

Hello @Steven Embree II

As far as doing a 1031 exchange goes, you and @Jeff Nash are correct in that the 25% used as your primary residence would qualify for the 121 exclusion and you can take that gain, up to the limit, tax fee to use for anything you want. The other 75% of the property would qualify for a 1031 exchange. You and your tax preparer would need to determine the amount attributable to the primary residence and the rest would be used in the exchange. As far as the VA loan on the current property goes and the possibility of being penalized for that, I'm not sure. I would get a second opinion from another lender or expert in that field. If you are worried about getting a VA loan for your next property and they require primary residence use only, then you may want to use the 25% of gain attributable to your current primary residence towards the purchase of your next primary residence. Then, use the 75% in the 1031 exchange towards a different property that will be held for investment and satisfy the 1031 rules for reinvestment.

Hello @Steve Boorstein

The 1031 rule for use states that the real property must be "held for investment or for productive use in a trade or business for a period of time". So, yes, you can buy a replacement property that will be used for your business. This happens all the time. 

Hello @Rachel Mazzanti

If the LLC owns multiple properties and you only want to do a 1031 exchange for one of them, that is completely fine so long as the 1031 requirements/rules are followed.

Hello @Sattir Bitti

Yes, you can sell more than one and/or buy more than one. Your scenario qualifies. Here are a couple things to keep in mind: You want to time everything so that you close on both properties that you are selling before the closing date of what you're buying so that the funds are there for purchase (and to avoid having to do a more complicated and more expensive reverse exchange.) Also, you want the replacement property to be worth equal to or greater than the cumulative value of both properties being sold (less allowable closing costs). The same goes for debt offset. You'll need to factor in the amount of debt on both properties that you're selling and get either a loan or bring cash to the table that is equal to or greater than the cumulative debt paid off for the new purchase. 

This can be a great strategy to diversify and grow your RE portfolio and overall wealth. 

@Sattir Bitti that is the way I understand it, yes, but again I would talk to your tax preparer to confirm that a 1031 is in your best interest. The deferral of depreciation recapture is also a good benefit of doing the 1031.

To answer your other question, the replacement property needs to be of equal or greater value (less qualifying closing costs) than the value (sales price) of what you sold. FYI - You will also need to acquire equal or greater debt (loan or cash you contribute) on the replacement property than what you have on the relinquished property and use all of the remaining proceeds towards the purchase for full tax deferral.  

Hello @Sattir Bitti

If you have some PALs on a passive investment and significant gain, you can carry the loss over to future investments acquired through a 1031 exchange. (In a regular sale of the property, the loss is deductible.) It can continue to be be carried over by doing multiple exchanges over time until a property is sold outside of an exchange. There is a way to deduct the loss and also do a 1031 exchange by taking cash, or boot, out of the property at the time of the sale instead of carrying it over. In this case, you can deduct the loss and get tax free cash. 

Here's an example to illustrate how this could work. Sell a rental property for $500,000 with a tax basis of $100,000 and $50,000 of suspended PALs. If you sold the property outright, your $400,000 gain would be reduced by the $50,000 of PALs, leaving you with a taxable gain of $350,000. If you did a 1031 exchange instead, you could receive $50,000 at the closing, exchange the rest and fully defer the gain. The $50,000 cash boot would be taxable, but it would be reduced by the $50,000 in PALs which would result in no gain being recognized.

If you have substantial PALs that would offset the bulk of your gain, then you might be better off selling the property outright and not doing a 1031 exchange. Each situation will have different circumstances, and your tax implications can vary. I highly recommend having your scenario evaluated by a tax professional to see which direction might be best for you.






 

Hello @Nicholas Rella

Unfortunately, no, you can not use 1031 exchange funds on property that you already own/towards debt. The replacement property must be ‘real property' that is ‘new to you'. This includes your LLC since it is tied to you.

Hello @Dorian Gray

As others have stated, it is possible to do this and it is legal as far as capital gains tax is concerned, (and again, depreciation will still need to be recaptured). You just want to make sure that you take into consideration and keep track of the time that you live in the property for personal use after it being a rental for the obligatory amount of time because the proration is viewed differently since it will be a 1031 replacement property instead of living in it first and renting it out after. Two things are taken into account when determining the amount of cap gains that can fall under the 121 exclusion: the amount of time it is lived in personally and the amount of gain on the property. Here is an example to help you see the numbers:

When someone files their tax return and completes the worksheet to determine if there is a taxable gain, it asks if there was 'nonqualified-use' (non-use) time before it was 'qualified-use' (personal-use). As I stated, the amount of gain and the amount of time it was personal-use after it was non-use matters. If you live in it for 5+ years after the non-use period ends, then you'll get the full benefit of the 121 exclusion no matter the amount of gain, up to the limit ($250k or $500k). If it was personal use between 2-5 years, then you can only claim a portion of the 121 exclusion depending on the amount of gain. So, the longer it is personal-use, the more you can exclude. Also, the higher the gain, the more you can exclude. Here are two scenarios: If you have $1m or more in gain, then you can get the full $500k (MFJ) exclusion even if you only live in it for 2 years. If you have $250k of gain and live in it for 3 years after 2 non-use, then you can only exclude $150k of the gain.
(This was determined by running hypothetical scenarios through Worksheet 3 of IRS Publication 523 (2021) and is for illustrative purposes only.)

You can buy one or more properties with a 1031 exchange. For full tax deferral, you just want to make sure that you are "exchanging up". You will want to buy replacement property that is of equal or greater value than what you sold, have the same or greater amount of debt on the new property, (either as a loan or cash you bring to the table), and you will want to use all of the proceeds from the sale to go towards the purchase. You can do this with one property, or spread the amounts out over more than one property because they are seen as cumulative.