1031 exchange rules?

Question

Can you 1031 exchange a property owned by an LLC? Can you 1031 exchange 2 properties for 1 property. For example if I had 2 rentals and wanted to 1031 exchange them into a 10 unit property is that allowed? How long do you have to find a new property once you sell?

Do you have to exchange a property that is worth more than what you sold your property for or just more than the profit you make from a sales? For example I sold my home for 300K but profited only 30k , do I have to buy a property for 300k+ or can I just find a property equal or above the amount of profit I made? 30k+

Are there tax consequences if you don't find a property in the allotted time period? Can you request more time to find a new property? Sorry for all the questions if you only know the answer to one of them feel free thanks in advance for the advise. Also if you have any other advise please share.

Soh Tanaka · Answer

I'm not an expert, so consult with the right professional like @Dave Foster, but below is my understanding. - Yon can avoid paying taxes if the same tax payer ID did the sale/purchase, so it's not about the LLC, but which tax payer ID sold the house, and which tax payer ID is going to purchase the replacement property.

- You can exchange from 2 properties to one, or 1 property to two.

- When yo sell a property for $100k, regardless of your profit or loss from the property, you have to exchange it to a property (or properties) of $100k or more, or you could owe some tax.

- You only have 45 days to identify the right property/properties.

There's more rule, and you pretty much have to use a 1031 exchange intermediary. Again, please consult with the right professional.

Dave Foster · Answer

@Chris Gawlik, @Soh Tanaka is about as close to an expert as it gets on the investor side!!  Nailed every one he did!

all good questions that do have to be approached a certain way.

1. Any tax paying entity can do a 1031 exchange.  The tax payer for the old property has to be the same as the tax payer for the new property.

2.It's the value you have to replace.  The number of properties you actually purchase does not.  As long as you purchase at least as much as your net sale and use all of the net proceeds in the purchase or purchases you'll defer all tax.  And yes you can combine 1031 exchanges into a purchase of one property of larger size.

3. The tax consequences of not meeting all (every one) of the requirements are that you pay the tax.  In the IRS's eyes there is no highway option - It is only their way!  But there is no penalty for starting a 1031 exchange and not completing it.

Right now is a very interesting time in the lives of investors and in particular 1031 investors.  Because the biggest issue with completing a successful 1031 is that the best time to sell and start a 1031 is also the worst time to complete a 1031 (a sellers market).  And conversely the best time to complete a 1031 exchange is also the worst time to start a 1031 exchange (a buyers market).  But this market is so unusual and full of government and societal interventions and situations that I just wonder.....  A lot of my investors are taking advantage of the incredible lack of inventory to sell and begin 1031s.  They're banking on an easing of inventory as the pandemic eases, investors on the edge financing wise get pressured enough to sell, and in general sellers becoming more willing to consider moving.

If those elements all come about in the next 120-180 days it will be a golden opportunity for 1031 investors to actually have some fun selling high and buying low!!!!  What a thought.

@Chris Gawlik, the key to the 1031 is that you have to have your QI in place before the closing of your sale.  But that's a requirement that you want anyway.  As a good QI is going to be your guide through the maze of rules and regs.  I just sent you a pm with a checklist of the things you were asking about.

Joe Splitrock · Answer

You told me in another discussion thread yesterday that you are selling all your properties and taking them out of real estate. Did you have a change of heart already, haha?

Keep in mind that an exchange has to be identified at the time of sale. Also be aware that it transfers basis, meaning you transfer any depreciation. That means there is less depreciation expense in the new property (not a big deal but something I didn't consider from a tax perspective prior to doing my first 1031). In order for a 1031 to be tax free, you cannot receive any boot. Any boot received is taxed. As I understand, you will need to sell and acquire within the same entity.

As far as your home that you sold for profit - your personal residence is not subject to capital gains tax, so no reason to do an exchange on a primary. A 1031 would be for investment properties.

Marie Z. · Answer

Great information on this thread. I'm just starting the process of listing my two single family homes in New Braunfels, Tx to do a 1031 exchange and buy in Calif. I've done a bit of research. What Soh Tanaka says is correct, but there's a lot more to it than that. A 1031 allows you to move from one rental investment to another without having to take the tax hit on the equity you've built up. I believe it has to be done through a qualified intermediary and as they said, you have to identify 3 properties within 45 and completely close in 180 days. Why do 1031? If you sell your rental and don't do it as a 1031 exchange.....you have to recapture all the depreciation deduction that you deducted during the time you listed your rental on your taxes. That can be a hefty amount. Paying capital gain can be painful when you've worked so hard to build wealth. If anyone can give any advise regarding 1031 exchange, it would be greatly appreciated. Also any recommendations on a Qualified Intermediary in California?

Dave Foster · Answer

@Steve Morris, What @Marie Z. is considering is actually a conversion of a rental property to a primary residence down the road.  That's a brilliant plan.  Marie, your process will basically first be a consolidation exchange - you'll sell the two TX rentals and purchase one nice property in the 1031.  Then once you've used that as a rental for a while you'll then sell your current primary residence and take the profit from that tax free.  You'll move into the former rental.  This conversion doesn't trigger the tax.  So the primary residence money goes into your pocket tax free.  The rest remains tax deferred in the new primary residence.

One thought to consider though in your strategy is that any investment properties you sell with out a 1031 exchange will immediately trigger the tax on the gain.  You'll have to pay that to the IRS and your children will inherit the rest.  If you pass away while owning the properties then the basis of the properties is stepped up and they inherit as if they paid market value on the day you die.  In other words the gain disappears.  So the bad news is the kids have to sell the properties.  But the good news is that the gain would be tax free.

Mark H. Porter · Answer

Everything Soh says.

Alex Olson · Answer

@Chris Gawlik Yes everything that @Soh Tanaka said. Talk to a real estate CPA and intermediary.

Chris Gawlik · Answer

@Joe Splitrock My primary is sold and living with parents also another controversial post. haha.

People Think we're Nuts

But yea I did this before covid even happened down sizing and planning on buying more rentals. Then got caught in the middle of covid. My rental is listed as we speak. Going to take a 15% capital gains hit on that one, but I wanted to learn more about 1031 exchanges so here I am. Also wanted to learn more about solo 401k investing. Thanks for the advice Joe.

Chris Gawlik · Answer

@Dave Foster Hi Dave anything to add to this. Thanks for your help.

Steve Morris · Answer

You really need to get with a QI BEFORE you close your relinquished property.  Celia Moore is one here in OR and they work across the country.

Seller ownership should not be a problem as long as it is "like-kind" property.

Gen rules are you need to go larger on price, debt, equity on your replacement to get full 1031 tax deferral.

You have 45 (EXACTLY) days after your close to identify 3 like-kind replacement properties, then another 135 (EXACTLY) days to close one (or maybe more) of them.

You can do multiple properties, but CALL YOUR QI since the rules are intricate once you get beyond the basics.

1031 exchange rules?

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