Partial release question

[Derek Cheng]

Hi
I purchased four properties under one mortgage two years ago. I am looking to sell one of them.  Lathe mortgage company told me it would be a partial release. (I hope that is the correct terminology). 

my questions are

1. Is that right term? The mortgage person didn’t give me much confidence. 
2. how does the payoff statement work?

3. They asked  for a payout statement with a 30 day good through date. Is that the proposed date of a sale?

4.What do I do with funds? Would it be a 1031?

thanks for your help

[Randall Alan]

Quote from @Derek Cheng:

Quote from @Randall Alan:

Quote from @Derek Cheng:

Hi
I purchased four properties under one mortgage two years ago. I am looking to sell one of them.  Lathe mortgage company told me it would be a partial release. (I hope that is the correct terminology). 

my questions are

1. Is that right term? The mortgage person didn’t give me much confidence. 
2. how does the payoff statement work?

3. They asked  for a payout statement with a 30 day good through date. Is that the proposed date of a sale?

4.What do I do with funds? Would it be a 1031?

thanks for your help

@Derek Cheng

 We have done a similar transaction.  We had to reappraise all the properties so the lender had a current value so that the lender knew they still had enough collateral for their loan after releasing the property.  

A payoff statement simply states what the bank has to receive in order to release their lien on the property.  The payoff statement is what the title company uses to prepare / calculate the closing payments on the sale of the property.  

A 1031 exchange is a relatively complex transaction where you exchange one property for another to let you defer the taxes owed on your sale (but they are still eventually owed unless you die before eventually selling the property.).   1031’s  comes with many rules, such as you can’t ever come into possession of the money from the closing - it has to be paid to an intermediary.  If you touch the money, you will owe the taxes on your sale. 

If your goal is to do a 1031 exchange, find a company that specializes in them.  Google your area for a company that offers that service.  You can’t do it yourself.  If you ask your title company they may do it themselves or will most likely be able to refer you to an agent. 

Randy

 Hi Randy 

Thanks for the response. A couple of follow up questions

1. If i were to sell the property, would i be able to keep the funds without paying any sort of taxes or would 1031 be the best vehicle to minimize taxes. (i have done one in the past and im just wondering if it was necessary to continue to grow my portfolio)

2. the payoff statement. How should i respond to the question proposed by the lender:

"We can generate payoff statement for you if you provide the following information:

1. Payoff good through date."

I guess im not sure what the order of operations is to sell this property and where the payoff statement fits in. Do I need an AOS first or can i prepare for this as I list the property?

Thanks again

@Derek Cheng

On the payoff statement,  they are simply asking “when are you closing?”  The payoff statement has to include the interest on the loan up to the date of closing (ie the date they will get their money to pay off that property).  This is a question for the title company to answer for you.  

On the taxes and 1031 - if you sell the property and keep the money, the taxes on the gain on the property will be owed when you file your next tax return.  15% long term capital gain taxes would likely be the rate unless you have only held the property for less than a year (in which case it is your regular income tax rate on earned income.  There is also a 20% rate that applies if you have an income above $492,300 for 2023.  You also have to add in depreciation recapture ( ie all the money you depreciated the property by while you have held it to the taxable amount).

The 1031 exchange allows you to buy another larger property and “exchange” it for your smaller one in your portfolio.  The taxes don’t go away at all… they are simply deferred until you sell the larger property.  So you would owe the taxes on the smaller and larger property down the line when you sell it (presuming you don’t do another 1031 exchange.)  If you did multiple 1031 exchanges is feasible that a property could owe huge taxes to the point when you eventually sell it all the proceeds would be owed to taxes… but you would have benefited along the way from the profits you made on what you otherwise would have paid to taxes long ago, 

The exception is if you die owning the property, in which case your heirs would not owe the taxes due to the step up basis they would receive when inheriting the property.

Randy