Announcing – Beutler Exchange Group, LLC now documents Reverse and Improvement Exchanges!
Besides reverse and improvement exchange questions there are many other commonly asked 1031 questions. What follows is a sampling of those questions and a brief version of some very complicated answers. (This is tax law. There are no simple answers.)
DROP AND SWAP EXCHANGE
Q – The sale of our medical building is closing in two weeks. My partner wants his sale proceeds and will pay tax. Can I do an exchange with my share.
A – No. The Caller owns a partnership interest and, by definition, 1031 prohibits the exchange of partnership interests andLLC membership interests. The partnership can do an exchange but not the individual partner.
Follow-up Q – But people used to do it all the time.
A – Yes, but… Before the real estate bubble burst interests in partnerships were routinely dropped right at the closing table and then exchange documents were signed, aka a “drop and swap.” And tax authorities paid little attention. However, beginning with the 2008 partnership return the IRS added questions to detect these exchanges. This heightened attention has curtailed the use of drop and swap.
Follow-up to the Follow-up Q – What can I do?
A – Most tax and legal advisors would recommend dropping out of the partnership/LLC in a tax year prior to selling so that there is some seasoning before the exchange.
ADDING A SPOUSE
Q – Can I add my husband to the title of the Replacement Property?
A – The answer is more complicated than you might imagine. A basic requirement of 1031 is that the Taxpayer that owned the old property be the Taxpayer to own the new property. Not uncommonly the financials of a spouse are necessary to obtain financing for the new property. A couple of ways to bring them in: 1) Add them to the title of the old property before it is sold so they participate throughout the exchange, or 2) Have them pay a pro-rata share of the down payment and take title as a tenant-in-common with the Exchanger. Consultation with the tax advisor and Beutler Exchange Group, LLC is essential.
Q – Can I exchange a food cart for a commercial building to house my new restaurant?
A – No. Real property is like-kind with real property. While the use of the food cart and restaurant are essentially like-kind, the food cart (personal property) is not like-kind with the real property. Likewise, if the Exchanger sells a rental house to buy an operating farm, that comes with farm equipment, the farm equipment will not be like-kind with the rental house. The house is like-kind with the farm but the equipment would be “boot” and receipt by the Exchanger would be taxable.
Q – I get 18 months to reinvest, right?
A – Sadly, no. From the time the sale of the old property closes the Exchanger has 180 days or the date their tax return is due, whichever comes first, to close on the new property. And even more challenging, the Exchanger has only the first 45 days of the 180 to identify the new property.
Follow-up Q – Surely there is a way to get an extension!
A – In fact, there is a way. If the Exchanger is “lucky” enough to be affected by a federally-declared disaster (hurricane, flood, tornado, etc.) they will be eligible for extensions of 120 days on the 45-day deadline and 120 days on the 180-day deadline.
These examples are meant to be illustrative, only. Before proceeding with any 1031 exchange, consultation with tax and legal advisors and Beutler Exchange Group is essential.
- Halloween – aka 10-31 Day!
- Corvallis 1031 class - November 6, 10:00 am. Contact Cheryl Summers, Ticor Title. firstname.lastname@example.org
- Silverton 1031 class - November 6, 3:00 pm. Contact Marlene Welllin, Ticor Title. email@example.com