Purchase using 1031 and personal funds

KNOXVILLE, TN · Member since 2017 · 7 posts · 5 votes

I am considering selling a property that will have about a 60k gain and using a 1031 exchange to purchase another property for 110k. I will use personal funds from a Helock for the remaining 50k of the purchase plus any renovations. I was told by a CPA that once the newly acquired property sells in the future the gain from both sales would then be taxable because I am mixing 1031 funds and personal funds for this purchase. I have never done a 1031 exchange but was under the impression that one could roll the gains from one property to another and so on. I'm exploring all the resources I can read and am still unclear. Can someone clarify if I am understanding incorrectly or if I was misinformed? Best regards,

Nick

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Soh Tanaka

Property Manager · Lindenhurst, IL · Member since 2016 · 854 posts · 506 votes

Your CPA might be right, but I would also talk to a 1031 intermediary like @Dave Foster to make sure that you are doing 1031 correctly. I don't think using the personal fund is the issue here.

I don't know what you are selling your current house for, but $60k gain (and I don't know how you define "gain." What goes into the bank account may not be necessary the IRS's definition) the replacement property is $110k sounds like you may sell the current house below $110k, in which case you may have some tax consequences. Again, talk to professionals.

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Soh Tanaka
Property Manager · Lindenhurst, IL · Member since 2016 · 854 posts · 506 votes
6y
Your CPA might be right, but I would also talk to a 1031 intermediary like @Dave Foster to make sure that you are doing 1031 correctly. I don't think using the personal fund is the issue here.
I don't know what you are selling your current house for, but $60k gain (and I don't know how you define "gain." What goes into the bank account may not be necessary the IRS's definition) the replacement property is $110k sounds like you may sell the current house below $110k, in which case you may have some tax consequences. Again, talk to professionals.
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Alex Olson
Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
6y
Originally posted by @Nick McMahan:
I am considering selling a property that will have about a 60k gain and using a 1031 exchange to purchase another property for 110k. I will use personal funds from a Helock for the remaining 50k of the purchase plus any renovations. I was told by a CPA that once the newly acquired property sells in the future the gain from both sales would then be taxable because I am mixing 1031 funds and personal funds for this purchase. I have never done a 1031 exchange but was under the impression that one could roll the gains from one property to another and so on. I'm exploring all the resources I can read and am still unclear. Can someone clarify if I am understanding incorrectly or if I was misinformed? Best regards,
Nick

As long as you continue to 1031 exchange in to another property you will continue to defer capital gains. Once you sell outright and no long exchange into something is when you have to pay capital gains taxes. You can always cash out refi your loan to pull money out to get cash you need. It is cheaper than having to pay capital gains tax.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Soh Tanaka thanks for the shout out. @Nick McMahan, Your accountant is correct. Gain is gain and it is taxable if you sell and do not do a 1031 exchange. If you do a 1031 to defer the gain on this sale then it goes forward. And if you ever sell that property without a 1031 then you would pay tax on the gain that. you deferred and the new gain. So like @Alex Olson, the key is to defer defer defer and then die. That way the tax is never paid. And it goes away for your heirs.

But just to make sure of something - If you want to defer all tax in a 1031 you must use all of your proceeds in the purchase (you indicated you're doing that) and you must purchase at least as much as your net sale. If the property you want to purchase is $110K then your sale cannot be more than $110K or else you will have to pay tax on the difference.

But it is perfectly fine to use personal funds to complete a purchase. And as we stated above, it doesn't change the tax situation at all.

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Nick McMahan
OP
KNOXVILLE, TN · Member since 2017 · 7 posts · 5 votes
6y
Thank you gentlemen for your insights. I understand and hope to employ the defer, defer, defer, die method. However, it seemed to me the accountant was stating that I would not be able to do a 1031 a second time because I was mixing 1031 funds and personal funds but there seems to be an alternative answer so I'll see if I can get clarification from him and repost if needed. Thank you all again. Best regards,
Nick
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Nick McMahan Yep, as long as the property you are selling qualifies as investment property you have held long enough to demonstrate that intent you can 1031 as much as you want. There is a calculation that is reported on the form 8824 at tax time. The basic premise of the 1031 exchange is that your basis in the old property carries over to the new property. So if you sold a $100K property that had a $50K basis ($50K profit) and purchased a new property for $100K your starting basis in that new property will be $50K - same as the ending basis of your old property.

If you buy a property for $150K using $50K of your own money then your basis is now $100K in a $150K property (still $50K in profit deferred but your personal cash bought additional depreciable basis).
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Michael King
Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
6y
Ah the 4D method. We would even die to get out of paying taxes!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Michael King. Well I'm sure not gonna volunteer to pay :). But the 4ds are not the best reason to defer. really just the icing on the cake for your heirs. As a matter of fact i caution clients about not telling their children about the stepped up basis since they'll likely be the ones making the decision to pull the plug! And you wouldn't want that prematurely.
For me it's really the ability to use that deferred tax dollars during my lifetime to benefit me. It's a form of compound interest and is so powerful as you get into a less leveraged mode later in life and are simply making money off of your cash. And a lot of that cash is deferred tax.
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Michael King
Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
6y
So @Dave Foster, when one croaks and the properties are inherited by the surviving (or murderous?) spouse and children, is there a tax they pay for the inheritance?
I'm too young to be thinking all this.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Michael King, Nope they get the real estate tax free. Now stop for a moment and contemplate just what your death is worth to said murderous spouse and children.
Scary no? :)
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Michael King
Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
6y
@Dave Foster The trick then is to not only build value in your portfolio, but also build value to those that are most likely to benefit from receiving that portfolio. Hmmm seems like a knife edge to walk along!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Michael King, Indeed! How to ensure you're worth more alive than you are dead. It's always seemed to me that life insurance was really the opposite of that for the ensured!!!! I wanna buy death insurance that pays my kids for every year they can keep me going :)
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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
6y
Anyone seen the movie Knives Out? Seems appropriate to this discussion. :-)
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