1031 exchange. Not full value - how is this handled?

Question

- Relinquished property sales price $205k (original purchase price of $97k)

- Replacement property #1 - $170k sales price

Question:  can I just be taxed on the difference or do I have to exceed $205k in replacement propertie(s) to receive ANY deferral?

Perhaps I'm not asking it right because I'm getting looping answers between my lawyer/CPA/intermediary.  I prefer to not buy another as my home market is sky high.  Thanks in advance!

Dave Foster · Answer

Account Closed, its a two part rule.  In order to defer all tax you must purchase at least as much as your net sale (that's the 205 minus closing costs but no the mortgage payoff).  Second, you must use all of the net proceeds from the sale (we don't know this but it would be the net sales prices minus whatever mortgage was paid off).  This is required to defer all tax.

If you purchase less than your net sale, or if you take some of the proceeds from the exchange, the IRS views that you are taking profit out first.  So you pay tax on the difference but shelter whatever tax is left in the remainder of your exchange.  This is called a partial exchange.

In your specific case you're selling for 205ish and buying for 170ish.  That means your buying 35k less than what you sold.  So the 35K would be looked as as profit you are taking out.  You would pay tax on the 35K but since your entire profit is around 108K (not counting depreciation recapture) you would still shelter the tax on the remaining 73K.

So there is still some pretty good motivation to do even the partial exchange.  However, if you wanted to shelter the remaining  you could also buy a second property.

Account Closed · Answer

@Sarah Brown     @Dave Foster  is good at explaining all the ends and outs.

Account Closed · Answer

Sarah, let us help.  1031 Exchange boot is used to buy fractional ownership in our portfolio properties - always absolute NNN, single tenant buildings and 100% debt free.  Small minimums, too.

Sarah Brown · Answer

Thank you @samshueh!   And again, @davefoster, your consult is so appreciated!  Perhaps I can have you as my intermediary on my next exchange.  Thank you both again!

Sam Shueh · Answer

Recapture your depreciation claimed from yr one.  205-170=55K may be what you owe.  There is also cost of sale(commission, last year improvement) you can subtract from 55K so you will pay say 35K which is a lot less FED Tax wise.

25% tax bracket x 35K= .....

Dave Foster · Answer

Hi Sarah,

LOL in one sense everything's a lawyer question isn't it?

Here's your dilemma.  The 1031 has to be a sale of property that you held with the intent to use productively as an investment and the purchase of a property that you have the same intent - to hold for investment.

To do a 1031 exchange and sell a property and buy a lot for investment in a 1031 is fine.  But it must be your intent when you buy the lot to hold for investment use.  Your intent can change but there is no statutory holding period.  Only what you can demonstrate for intent.  So you'll want to buy that lot thinking to use it for investment and then evaluate later and change your intent.  That's the first thing.

The second issue is actually easier.  Contributions into and distributions out of a corporate entity usually do not trigger a tax event.  So if you completed a 1031 buying an investment lot and then later changed your mind and decided to get it out of the LLC that would probably not be a taxable event.  Lots of people transfer property back and forth for financing, liability, etc.  Make sense?

Sarah Brown · Answer

Hi Dave!  Can I pick your brain again?  I'm buying a parcel to build my personal residence on in a year or 2.  Can I purchase the parcel with my exchange funds through our LLC & transfer ownership to personal at a later date and pay the tax then?  Are there restrictions or time requirements on mixing corp/personal transactions with an exchange or is this a lawyer question?

Dave Foster · Answer

@Ralph Massetti, I'll reach out via PM to discuss more thoroughly.  But for the group, there is absolutely nothing that prevents you from using an investment property for some personal use.

These types of rentals that are only periodically rented during the high season are very common.  What is key is that you reported the income appropriately and treated the property appropriately for tax purposes.

In that event what you have is an investment property you use some for personal use and you'll be purchasing the same.

Regarding ownership.  If you and your wife file a joint married tax return then you are both the tax payers for the property anyway.  So if you sell and she buys it will still be reported on the same tax return.  Caveat - this is only for federal 1031 code and there could be other impacts on state issues of community property, etc.

Ralph Massetti · Answer

Hi @Dave Foster. I think I can use your services. Question first....

I am under contract for the sale of a Denver Condo, which we owned about 2 years. We rented it out here and there. About 7 months total (90-120 days each), but it was vacant or had my daughter visiting in it the rest of the time.

I have about $70K in profit coming out in the sale.

Can I move it to a new property that we will only VRBO occasionally as well? I'm not sure if the relinquished or the new property will qualify as investment without permanent residents in them.

I close on the 13th of October and am already looking for new a property in Arizona for the funds (whether we can do a 1031 or not).

One more thing. "I" bought and sold the condo in Denver, but my Wife will be buying the replacement in AZ. Is that an issue?

Thanks so much.

Ralph.

Sarah Brown · Answer

Awesome!  Great news - thank you so very much!

1031 exchange. Not full value - how is this handled?

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