All Forum Posts by: Buddy Holmes

An Hard Money organization in Charleston has been offering funding for 1st mortgage security to Flippers with good plans for several years now.   Another group of RE investors thought that if they teamed with the former group they could provide additional funds to the Hard Money lender.  They set up a semi-liquid investment fund that could provide a fare return for fund investors with a short term (90 day) ability to have investment funds returned upon request.  The investment could provide additional funds to aid the Lender to grow. 

Hard money lender has had a sterling record on no foreclosures for their 10 yr history. They have accomplished this through careful vetting of the rehab/flipper's plan, 1st mortgage security position, short term loans of 6 mo or less, and careful validation of ARV.

I think this is an excellent example of a finding a solution to short term cash investment at an attractive rate and benefiting the renewal of our neighborhoods via seasoned flippers. A True win-win-win solution.

Investment Info:

Large multi-family (5+ units) other investment in Charleston.

Cash invested: $50,000

LLC Investment in Apartment Complex

@David Starr 

I don't think anyone answered your question on the house, Trailer and RV or RV ready lot.  If they were rentals, then I think they are also part of the 1033.

If they were just private property sitting in a mobile home park, then I am not so sure. If the trailer and home were rentals, i think that gives you the best case for a wider "like kind" replacement like the DST's mentioned.

The nice part of the 1033 is you don't mess with mortgage matching. So if your property was paid off or low mortgage then you can match the reinvestment with mortgaged property at perhaps 75% L/V or the DST with L/V of about 60% or less.

So you can keep some cash that way without the  tax bite.

The DST do require you to be an accredited investor, and I think your would have to stick with Apartment complexes (like kind residential property), or Mobile home park (I don't know if there are DSTs for these). I think that the DST for office complex, industrial and other triple net commercial property would not be considered "like kind for the 1033 where it would be for a 1031 exchange. I am not an expert but have read as much as I can find on the 1033 subject and have done a couple 1031 exchanges.

Hope that helps.

Thanks @Steve Vaughan I had never heard of it either before the fire destroyed my rental and @Dave Foster was kind enough to point out the law and that it would most likely help me.  There was so little on the 1033 on BP I just wanted to add what I have learned.  Turbo Tax even has a form for the 1033!!

The 1033 does not use a QI.  For condemnation of property you have three years rather than two.  You need to calculate the basis of the property at the time of sale to the property to the utility for the calculation of how much gain is deferred so you can fill out the 1033 form for your initial tax return declaring the start of the 1033 exchange.

BTW you did say easement. the payment was for the lack of use of the easement and you still own the property?

If there was no sale of easement land, I don't think the 1033 even applies.  If it is just a payment for the future lack of use of a portion of your farm, and a court has determined what that loss is for utility's payment, I don't think you would owe any tax on that payment.  Just my uninformed view of what would be right.  The IRS may think differently.  If the utility sends you a 1099 or 1098 then they know how the IRS views the payment.  If they don't send you one then go by what your taxman says.

I am not an expert by any means, but let me comment from what I have learned about the 1033 from my fire loss of a rental single family home.

The closest use of a 1033 in your described case would be if the land taken was used for some income producing use. For example growing crops or raising cattle or other farm use. In this case, because of condemnation you have an extra year, from my description of what I learned for the fire loss. You would have to invest in a new "like kind" property at least the total payment from the utility plus some proportion of gain of that property from current basis to current FMV.

The "like kind" is more restrictive than for a 1031, so my guess is it would have to be another parcel of farm land.

A CPA or good tax office should be able to  help with the additional gain (if any) from the utility payment.

Just thinking, you can't depreciate land, so for farm land there may be no basis adjustment at all, just a proportion of what you paid originally for the vacant land.

hope that helps a little.

Well I have leaned a little more about 1033 Exchanges and would like to pass along to the BP group.

I have found the IRS 1033 (a)(2)(A) form to send with your tax return.  At least I have found the Turbo Tax form to do this.

It does not have an official IRS form number so ...  Anyway the first tax report filing after your fire loss you fill out this form and tell the IRS the details what and when it all happened and how much you received in insurance and sale of the remains.

You also list how much the property cost and when you bought it.  If it was a 1031 property to start, you provide the basis which includes the original 1031 reduction as well as the normal allowed year to year reduction claimed on your tax returns since renting it.   If you have not yet replaced the property, you state on this form that you are reporting a delayed 1033 Exchange and describe your intent to replace it with a "like kind" property within 2 years.

"Like kind" is a bit more restrictive than the 1031 rules as I understand for rental property it is residential for residential and commercial for commercial and the two can not be mixed. I assume SFR to Multi family residential is OK.

As I understand the 2 year period, it starts with the first tax return notification. So a fire in 2020 starts in 2021 and the replacement must be reported by the 2023 tax return.  I don't plan to test that definition too much and plan to replace by two year from the Fire loss just to be sure.

There is no call for a QI which is good because insurance payments and mortgage payments alone is sufficient nightmare.

There doesn't seem to be any requirement for mortgage matching like the 1031.

The only issue is the Replacement property must be same or greater than the loss property gross cash obtained.

As a side, in such cases insurance checks are written to the insured AND the mortgage holder.  Unless the insurance is sufficient to pay off the mortgage or even if it is, don't expect to be able to sell the remains very quickly.

Mortgage companies are set up for conventional closing where they get all their money from the escrow or lawyer'c closing.

If people pay off their mortgage with out selling, the system eventually produces a letter to be recorded at your county deed office that the deed to secure debt has been satisfied.  The mortgage company can't you or your lawyer a simple note that the mortgage has been paid.  Totally unthinkable that anyone should nee this to sell the remains of the home!

For checks coming in from insurance companies they expect to hold the check and payoff small amounts to a contractor as the home is refurbished.      These three processes are totally different departments and there is no hope in changing the systems!

So I hope y'all never need to do a 1033 but should you have the misfortune to need to, it seems like a nice silver lining tax law.  Again Thanks to @Dave Foster for pointing this out to me.

@Dave Foster

I have/had a SFR in SC, which was an exchange property in a CA 1031. We had a severe fire with an estimated 6 to 9 months to rebuild.

We opted to use the insurance payoff to payoff the mortgage (BTW this is much more complex than you might imagine) and sell the home AS IS to a Flipper.  I can do a 1031 on the Flip sale (then the tax reporting seems difficult) but the 1033 exchange rules seem like the more flexible way to go.  However I have not found any written rules like in the case of the 1031 exchange.

That is:

1) Does the new property have to be >= t the net sale of the Flip Sale plus Insurance like a 1031?

2) Does the new mortgage have to be >= the old mortgage like a 1031?

3) I understand there is no requirement for a QI to handle funds.

4) I understand the time lines are more relaxed and 2 years in mentioned but no real rule.

5) I see talk about identifying the exchange property on a tax return but again no rule or how to do this.

I would appreciate any help on this issue and thanks for @Dave Foster for heads up to the 1033 in the first place.

Cheers,

Buddy

@Shefali Rai, Looks like you didn't find much help on BP for your question.  I have a firs damaged SFR and just learning about 1033 as well.  Can you help fill in what you found out?

Did you accomplish the 1033?

Cheers,

Buddy

Thanks @Ned Carey 

"Opportunity Fee" seems fitting.

Cheers,

Buddy