1031 Exchange - Fail to Purchase All Identified Properties

[John Nguyen]

Hello everyone, 

Hope if anyone could help me with this situation.

First-timers doing 1031 exchange. My brother and I sold a rental property for$345,000 in August 10. Purchased at $220,000.

Sold               $345,000

First Mort      $163,000

HELOC $47,000

Selling Cost     $15,0000

Net Proceed  $120,000  (50/50 split )

Each has $60k in separate 1031 exchange fund. We were able to identify 2 properties (A & B). 

Property A - listed at $229k and in contract at $225k - solid deal with loan $169,000 and total down payment is $56k ($28k comes from each of our separate 1031 exchange fund)

We are both in the loan and title for property A and B per QI instruction.

Property B - listed at $275k - missed the opportunity - backup offer at $265k) (almost no chance to purchase it)

What happens if we can not purchase property B? What tax consequences on each 30k remaining in each of our 1031 exchange.? What tax estimate on cash and mortgage/HELOC boots?

Any solutions to defer tax?

Can we buy any other properties with remain fund?

How long do we have to hold new replacement properties before doing another 1031?

Thank you very much BP Community!

[Dave Foster]

@John Nguyen, on these exchanges you don't have any other options.  Closing on 8/10 you are well past your 45 days so only the two identified properties will work.  

Your net sale was $330K ish (contract minus closing costs).  And your purchase is $225.  For the two exchanges combined that means your buying $105K less than what you sold.  In the eyes of the IRS that $105K is profit.  So if your real gain was $105K or less you will pay tax on all of it.

There are a couple of things you can do to mitigate.

1. Your QI set this up as two exchanges yet you are buying the properties together???  All that would have done normally is double the 1031 exchange fees to them which is kind of hinkey.   But in this case it might work for you.  

Since you're doing two exchanges if one of you were to purchase that property solely from their exchange account you would have sold $165K of real estate and purchased $225.  So for that exchange 100% of the gain associated with that half would be deferred.  

You may want to do some calculations because doing an exchange that defers half may benefit you more than buying the property with both exchanges and having no tax deferral.  

I do have a calculator like @Milton Rivera is talking about at www.the1031investor.com.  Run the scenarios based on doing it from both vs one exchange.  You may find some good news there.

2. Since your exchange started in August the 180th day will fall in 2019.  If your QI holds your proceeds until the end of your exchange period you will not receive the funds and recognize the gain until 2019 if your accountant reports it on 2018 tax return with installment sale treatment.  So you will not have to pay the tax until April of 2020.  So you'll pay it but it can be delayed a while longer.

There is no statutory holding period only that your intent when you purchased that property was to hold for productive use.  Most folks feel comfortable with a year but there could always be circumstances where a shorter (or longer) holding period would be appropriate to demonstrate your intent.