Repair Holdback on a 1031

[Jeff Greenberg]

An investor has 400 k that needs to be exchanged. We have identified two properties with a combined asking price of 1 mil. 25% down and closing costs would get us around 275k. The two properties could use 125k or more capex.

The questions are

1) Is there a way to use some of the exchange funds for capex and not be hit with the tax hit?

2)Will he have to use all 400 k for down and closing?

3)What are the restrictions as far as closing costs that can be included?

4)Does the % ownership of the property have to be equal to the capital insertion if there was going to be an additional owner on title?

Thanks

[Bill Exeter]

Originally posted by @Jeff Greenberg:

An investor has 400 k that needs to be exchanged. We have identified two properties with a combined asking price of 1 mil. 25% down and closing costs would get us around 275k. The two properties could use 125k or more capex.

The questions are

1) Is there a way to use some of the exchange funds for capex and not be hit with the tax hit?

2)Will he have to use all 400 k for down and closing?

3)What are the restrictions as far as closing costs that can be included?

4)Does the % ownership of the property have to be equal to the capital insertion if there was going to be an additional owner on title?

Thanks

Hi Jeff,

1) Yes, you can structure an Improvement 1031 Exchange (also known as a Build-To-Suit or Construction 1031 Exchange). The Qualified Intermediary must acquire and hold (referred to as "parking") title to the replacement property and the balance of the 1031 Exchange funds can be used toward capital improvements (not repairs or maintenance) during the rest of your 180 day exchange period. In order to qualify as tax-deferred, the capital improvement must be paid for with the 1031 Exchange funds and constructed/completed by the end of the 180 day exchange period.

2) Yes, if he wants to defer all of his taxes. If he ends up with any cash left over it will be taxable cash boot.

3) Charges on closing statements can be broken down into four categories: (i) selling/closing costs; (ii) lender/financing costs; (iii) operating items; and (iv) other. The only charges/costs that are permissible 1031 Exchange expenses are the selling/closing costs, which generally include the following: real estate broker's commission, title insurance costs (unless lender related), escrow fees, closing attorney fees, recording costs, Qualified Intermediary fees, etc.

4) If the investor completing the 1031 Exchange is going to acquire a fractional interest in the replacement property, the acquisition must be structured so that the fractional interest satisfies his/her 1031 Exchange values (i.e. his/her percentage ownership equates to them having traded equal based on their net sale price and all of their equity is reinvested) and it must be considered an interest in real estate (i.e. as tenants-in-common and not a partnership interest).