1031 Requirement - Value, like kind, debt replacement

[Jeffrey Andrew hamula]

Long time lurker, first time post. Bought a home as my primary residence for 400k in 2008 in UT. I added 65k in improvements, and started renting it out in June 2014 when I moved to NC. My tenant in UT wants to purchase the home for market value which is about 550k in April, I have a mortgage balance of 300k. I think I have 90k in CAP GAINS, if I did the math right. Looking at my options of the 1031, I am not clear on what options there are for me. I am interested in a property (home or condo) vacation rental near beach, mountains, or on a lake that I can personally use. Several questions 1) Do I have to replace like value (550k) in the 1031 or can I do a condo for 250k? 2) Do I have to replace the currently financed amount of ~300. 3) Do I have to do all the transactions within the time frame? For example, 4) Can I buy land with the proceeds for ~250 in the first 45 days, and build a structure with a construction loan and then "term it out" later with a refi? 5) Or, can I buy a 400k home that needs work and put 100k into it? 6) How would you do multiple condos (assuming a total of 550k), 7) should I stop being a land lord and pay the cap gains??? 8) What is the long term strategy to get out of the tax liability, move into the property?

[Dave Foster]

@Jeffrey Andrew hamula, LOL . I've got 8000 pages of case law to be used to answer all those questions.  Here's a short stab at it before this forum response turns into a text book :)

1. You can 1031 any kind of investment real estate for any other kind of investment real estate.  You can use the replacement some for personal use.

2. In order to defer all tax you must purchase at least as much as you sell and use all of the net proceeds in the purchase or purchases.  Any cash you take or any amount you purchase less than you sell is treated as taking profit.  You pay tax on that amount but shelter the rest of the gain in the 1031.

3. You do not have to specifically replace debt for debt.  You can purchase less than . you sell (a form of taking less debt) but you pay tax on the difference.  Or you can purchase at least as much as you sell but use your own cash instead of taking out new debt.  Debt is not a requirement but most folks don't have access to cash to replace it with so they take out new loans.

4. You have 45 days after the closing of your sale to simply shop and produce a list of potential properties.  You have 180 days from the closing of the sale to complete your purchases.  You can close on your replacement properties at any time after the closing of your sale and before day 181.  You do not have to close on them simultaneously.

5. Buying land and then building on it can be done as a special process called a reverse exchange.  The QI or builder must hold title to the land while you are building it.

6. Buying a property that needs significant improvement can be done as a special process called an improvement exchange.  The QI must hold title to the building while it is being improved.

7, If folks are actually reading this entire long winded response gimme an upvote.  Let's see who's actually reading.

8. The number of replacements doesn't matter.  The valuation is what's important.  You can allocate your proceeds in whatever way you want - as equal down payments or cash for one and leverage for others.

9.   In addition to the cap gain of approx 90K which would be a tax of around $18K you also have approx $65K of depreciation recapture.  This is taxed at 25% so you're looking at a total tax of $34K.  If you want to pay that the government will welcome the slow down on the national debt clock (not so much).  But if you want to use that $34K to make money for yourself the 1031s the ticket. You don't necessarily have to remain a land lord.  There are other real estate investments you can move to.

10. 1031 till you drop.  When you drop your heirs get the property tax free.  At some point in time 1031 into a nice vacation home you use till you drop.  At some point in time 1031 into a nice house you later convert into your primary residence.  1031 into totally passive 1031 compliant instruments that simply provide cash flow to you from not only your principle but also all the deferred tax.

Whew! did I cover it all?