Combining 2 sales into a single escrow?

Question

So the buyer of my 2 duplexes (side by side properties) has asked for a single escrow to save a few bucks. I am looking to do a partial 1031 exchange; around 50% of the total proceeds but not clear as to whether the single escrow affects this. Each duplex has a different sale price, amount of debt and profit. Any information on how best to do this would be greatly appreciated.

Rob

Wayne Brooks · Answer

@Dave Foster will have a better idea.

But to be clear you said you’re going to use “50% of the proceeds”....the cash you don’t reinvest of course becomes taxable boot. But, I assume you realize it’s not just the cash you need to reinvest but also purchase the same price or greater property that you are selling (less your actual sales cost) to avoid boot.

You mentioned you were buying all cash which is why I mentioned that. So if you had $200k in mortgages on the properties you are selling and don’t replace that amount, with another mtg or additional cash, that would be taxable boot.

You have to have a QI who actually receives the cash proceeds from each of the 2 sales, and technically buys the replacement properties, so I assume they would distribute/allocate the funds accordingly.

Wayne Brooks · Answer

It makes no difference to you whatsoever. Each property will have it’s own individual sale.

Make sure you have your QI lined up and advising you.

Since you’re doing a partial, it may be better to Fully 1031 one, and not the other.....it depends on the details, each property sale stands on it’s own.

Rob Saunders · Answer

Indeed...they're pretty cheap and now I'm seeing why! Thanks for the info.

Rob

Dave Foster · Answer

@Rob Saunders Unfortunately It won't.  The reason is the very specific way the IRS interprets boot in a partial 1031 exchange. If you're not careful you're going to spend exchange fees and still pay full tax.  You'r QI needs to be helping you sort through the requirements.

Rob Saunders · Answer

Dave, been checking out a few posts on partial 1031 exchanges and have returned to my confused state! Is there a difference between choosing up front to only put a percentage of the proceeds into a 1031 versus doing a full 1031 but failing to meet the conditions? Might help with some real numbers; combined value of the 2 duplexes is $1.5m, $865k in cash after selling expenses and mortgages paid off, with taxable gain of $730k. We are actually looking at a $500k replacement property that we would pay cash for. My plan was to do an (approximately) 30% partial 1031 exchange. I am assuming we'd pay capital gains on the $230k ($730-$500k) but I'm now confused on whether the partial exchange protects me from the significant trade down? Thanks in advance.

Rob

Dave Foster · Answer

@Rob Saunders, I get what your buyer is trying to do.  It's possible for us to separate out those two properties for 1031 purposes even if it's one escrow and do your exchange on one property or the other or both.  So that's not a problem.

The other issue of what saves you the most in tax dollars is not so easily answered.  The biggest issue is that if you want to defer all tax you must purchase at least as much as you sell.  Any amount you purchase less than you sell is going to be treated as profit.  So if you're trying to eliminate a mortgage by paying cash and doing a partial exchange your options would be to

Do an exchange on both properties as one unit and only replace 50% of the value of what you sold. Say each duplex was $200K. If you put the two sales together as one exchange your reinvestment requirement is $400K.  If you only purchase a property for $200K you will pay tax on the $200K difference.

If you do an exchange on only one property you'll pay whatever tax is due on the sale of the one.  But you will purchase enough to do a full exchange on the other.  So the key is going to be what is the actual gain on each one and how far you will be buying down.  Time to get your pencil sharpener out !!

Rob Saunders · Answer

Understood; we have enough cash coming out of the combined transactions to replace the mortgage component of the current properties if we do a partial. Thanks again for the thoughts.

Wayne Brooks · Answer

@Rob Saunders

Rob Saunders · Answer

Thanks Wayne, I was originally going to fully 1031 one of the properties but it's not lining up well with what's available in my target market; I am looking buy a single replacement property with cash and don't need the full amount that either property will generate. Do you know if I can choose how much from each property to set aside for the 1031? According to my accountant I can minimize the taxable capital gain by splitting this between the 2 properties. I realize you don't have all of the numbers; I'm just looking for a sanity check on the process he is proposing.

Thanks,

Rob

Combining 2 sales into a single escrow?

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