All Forum Posts by: Ben Lin

@Galen Ikonomov, Sorry to say but you are wrong as well. Don't be so harsh on that CPA :). 1031 is a narrow deep niche that only nerds like me delve in.   And the reinvestment targets are very counterintuitive. 

@Ben Lin, The two part reinvestment requirement is that in order to defer all tax you must purchase at least as much as your net sale (contract price minus closing costs and commissions).  And you must use all of the net proceeds from the sale (the net sale minus mortgage paid off).  The reason for this two part requirement is that the IRS is willing to leave their tax with you.  But you are not allowed to benefit from the transaction without them getting some of their tax.

The IRS doesn't care how much gain you are deferring.  They simply say that the first dollar you benefit from (either by taking cash or by purchasing less than you sold - lowering your liabilities) is a dollar of profit.  

What Galen is saying is that you are taking your original basis out first which is not taxable.  That's understandable.  But the IRS says, NO - the first dollar you take out or any amount you reduce your debt by is gonna be profit first.  And since they make the rules, the IRS wins every time!

Sorry to say but yes, you will pay tax on all $355K (if there was that much profit in total). If your profit was only $300K. then you'll pay tax on the $300K and the other $55k would be considered a return of your basis.

Ben,

 So what I am hearing you saying is you had a property in LA that was worth $755,000 and after the sale of that property, you cleared $366,000 which you turned and bought a property in Houston for $400,000 by using the $366,000 and adding $34,000 more in personal funds.

 am I correct in my understanding? If I am, you don't have capital gains, because you used all the proceeds from the GAINS to purchase a property.

 Also, look for a new CPA whatever your answer is.

@Galen Ikonomov, Sorry to say but you are wrong as well. Don't be so harsh on that CPA :). 1031 is a narrow deep niche that only nerds like me delve in.   And the reinvestment targets are very counterintuitive. 

@Ben Lin, The two part reinvestment requirement is that in order to defer all tax you must purchase at least as much as your net sale (contract price minus closing costs and commissions).  And you must use all of the net proceeds from the sale (the net sale minus mortgage paid off).  The reason for this two part requirement is that the IRS is willing to leave their tax with you.  But you are not allowed to benefit from the transaction without them getting some of their tax.

The IRS doesn't care how much gain you are deferring.  They simply say that the first dollar you benefit from (either by taking cash or by purchasing less than you sold - lowering your liabilities) is a dollar of profit.  

What Galen is saying is that you are taking your original basis out first which is not taxable.  That's understandable.  But the IRS says, NO - the first dollar you take out or any amount you reduce your debt by is gonna be profit first.  And since they make the rules, the IRS wins every time!

Sorry to say but yes, you will pay tax on all $355K (if there was that much profit in total). If your profit was only $300K. then you'll pay tax on the $300K and the other $55k would be considered a return of your basis.

@Ali Boone I'm not terribly worried about the balloon.  It's a 3-year mortgage and the bank plans to issue another loan rather than call in the payment in full.  I can pay the balloon when the time comes but I hope it doesn't come to that.  

Cash flow is my priority.  So I'm going to take that $150 and put it where that gets me more cash flow.  Whether it's in paying off the mortgage or buying a new property depends on the properties available.  However, since inflation is so high I'd rather have a nice fixed-rate mortgage.  This new situation makes the math a lot harder.  

@Ben Lin I'm selling because that was always the plan.  C-class was a low-entry cost experience builder for me but my plan was always to sell those for a more stable asset class.  I don't want more doors, I want more cash flow and more stability.