In this issue – Toija’s Q and A
There are many 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.)
Q – Inventories are so limited right now. I found a perfect Replacement Property. Can I close on it before closing the sale of my old?
A – Yes, but…. This is a Reverse Exchange and while the rules do permit them the Exchanger cannot own the old and the new properties at the same time. A reverse exchange will require the ownership of one or the other to be parked with an Exchange Accommodation Titleholder (EAT). There will be additional fees and expenses for this parking arrangement – double closing costs, EAT fees, etc. – and a certain amount of hassle-factor. And the EAT can only own the property for 180 days.
Q – The new property has deferred maintenance and needs $130,000 in repairs. Can I use funds from my exchange account to do the work?
A – Yes, but…. While exchange rules do contemplate Improvement Exchanges what they don’t allow is the Exchanger to be the owner of the new property while the work is taking place. There are various ways to structure an improvement exchange. In its most full blown version the property would be parked with an EAT incurring the expense, hassle-factor and 180-day time limitation. (See above.)
Q – I need $30,000 for a trip down the Rhine. Can I take that cash and just have a “partial” exchange?
A – Yes. To get the best tax deferral the Exchanger would reinvest all sale proceeds into the new property and they would obtain debt on the new property that is equal to, or greater than, the debt on the old property. However, there are countless reasons why Exchangers might want to take some cash out or take on less debt. The Exchanger will owe tax on the cash they pull out or the “debt relief” but this can still be a nice exchange.
To complicate this answer a bit…one exception to the requirement for equal debt…cash added in by the Exchanger will offset the requirement for replacement debt. For example, the Exchanger pays off a $30,000 mortgage on the old property. If they bring additional funds of $30,000 to the purchase of the new property they will not be taxable on the debt relief.
It is important to understand that some partial exchanges can be so partial that they don’t benefit the Exchanger. Consultation with the tax advisor and Beutler Exchange Group, LLC is essential.
Q – Can I exchange out of my second home in Phoenix for a second home in Hawaii?
A – No. While seemingly “like-kind,” 1031 is not available for personal use properties (second homes) or inventory properties (new construction, newly created lots and flips). 1031’s are for investment properties (rentals and commercial buildings) and trade or business properties (farms and ranches).
If the Exchanger is willing to be patient the Phoenix house can be converted into a rental (24 month rental period and very limited personal use) then they can exchange into a rental in Hawaii (24 month rental period and very limited personal use).
These examples are meant to be illustrative. Before proceeding with any 1031 exchange, consultation with tax and legal advisors and Beutler Exchange Group is essential.
- Washington Realtors EdCon 2014, October 7, Hilton Seatac
- RMLS Trade Show, October 9, Florence Events Center
- WFG National Commercial Services Luncheon, October 16, Portland Golf Club – Registration firstname.lastname@example.org