All Forum Posts by: Daniel Osman

@Kevin Meyer If you're planning on renting out the other units and living in one of the units, you can apply split treatment to the transaction. This means that the portion of the property used for rental purposes can qualify for the 1031 exchange, while the portion used as your primary residence does not. Revenue Procedure 2005-14 provides guidance on how to handle such transactions, allowing you to exclude gain under Section 121 for the primary residence portion and defer gain under Section 1031 for the investment portion.

In terms of the VA loan you'll have to talk to your lender about what's possible.

@Ann Reagan It sounds like you're in a situation where a combination of forward and reverse 1031 exchanges could be beneficial.

You could start with a forward exchange by selling one or more of your rental homes and use the proceeds to acquire the commercial property you're interested in. This allows you to begin the transition while deferring capital gains taxes on the properties you sell. If you can't sell all four properties during the forward exchange, you can transition into a reverse exchange to acquire the commercial property. In this scenario, you would "park" the commercial property with an Exchange Accommodation Titleholder (EAT) while you continue to sell the remaining rental homes. This gives you the flexibility to secure the commercial property even if all your rentals haven't sold yet.

Be aware that with reverse exchanges, financing can be a challenge, as some lenders may be hesitant to lend to an EAT. Additionally, given the number of properties you have to sell, starting with a reverse exchange means you run the risk of not selling your other properties in time to apply the proceeds to the exchange, which could result in recognizing capital gains.

@Craig A. The entire partnership could all agree and do a 1031 exchange but the LLC would have to purchase the replacement property to maintain the same taxpayer.

After someone passes the heirs receive a step up in basis. The basis is typically determined by an appraisal. 

You could see if your partners would be interested in a drop and swap. 

The LLC distributes the real property to its members as tenants-in-common (TIC) interests. This means that each member receives a direct ownership interest in the property, rather than holding an interest in the LLC that owns the property.

Once the property is distributed, the members hold their interests directly. This allows them to individually manage their interests, including selling their share or engaging in a 1031 exchange.

By holding the property directly, a member can sell their TIC interest and use the proceeds to acquire a like-kind replacement property in a 1031 exchange. This allows the member to defer capital gains taxes on the sale of their interest.

@Michael Dahl 

In a 1031 exchange, to fully defer capital gains taxes, you must reinvest all net proceeds from the sale of your relinquished property into a like-kind replacement property. Any cash you take out from the transaction is considered "boot" and will be subject to capital gains tax.

It's a common misconception that you only need to reinvest the profit from the sale. In reality, you must reinvest all net sale proceeds to fully defer taxes. The IRS views this as a continuation of your investment, not a tax break. The concept is "continuity of investment," meaning you can roll your gains forward, but you can't take any money off the table while still fully deferring taxes.

In your case, if you withdraw the original 50k down payment, it will be treated as boot, and you will have to pay taxes on that amount. To avoid any tax implications, you would need to reinvest the entire 125k (50k original down payment + 75k gain) into the replacement property.

If you're in Minnesota, be aware that in addition to federal taxes, you may face a high state tax on any boot. You're usually better off completing the 1031 exchange to defer taxes and then refinancing the replacement property afterward. Refinancing does not create a taxable event since it's debt. The best part? Your tenants should be paying off that debt each month.

@Cole Bossert is spot on. Sselling your 22% ownership interest in a warehouse to one of the other owners would not qualify for a 1031 exchange. The exchange must involve real property not partnership interest. 

@Craig A. How is title held on the property?

That's pretty ridiculous your attorney is saying that. We have a software that allows us to open your exchange online in minutes. We get people calling the day of closing all the time. Sorry to hear your attorney is giving you an issue.  

@Dave Foster really great points as always. Do your clients proceeds go into an interest bearing account with a bank?  If not, where do they go? 

@Steve Schaeffer Since you've previously engaged in 1031 exchanges, it's important to understand the implications of transitioning from a DST to an UPREIT. When you exchange your DST interest for Operating Partnership Units in an UPREIT, you are converting your real estate interest into a partnership interest. This transition is facilitated under Section 721, not Section 1031, and it changes the nature of your investment from direct real property ownership to a partnership interest. As a result, you will no longer directly own real estate, and the ability to continue doing a 1031 exchange out of the UPREIT ceases.

The UPREIT will manage depreciation at the partnership level. You will receive your share of the partnership's income, deductions, and credits, including depreciation, through your OP Units.

For something like this you should consult with a tax advisor to fully understand the implications of this transition. 

@Yael Fuerst Based on the information you've provided, you have a potential gain of $25,000 from the sale. However, you mentioned owning the property for 10 years. If you have claimed depreciation on your single-family home over the years, the IRS requires you to "recapture" that depreciation when you sell the property. This means that the portion of the gain attributable to depreciation is taxed at a higher rate, up to 25%, rather than the lower capital gains rate.

If you proceed with a 1031 exchange, you can defer both the capital gains tax and the depreciation recapture tax by reinvesting in a like-kind property. This allows you to leverage the full proceeds into a new investment property without immediate tax consequences.

As @Emran Chowdhury mentioned there is typically a cost to exchange, the average tends to be around $1,200. However, there are innovative companies offering a No Fee exchange. That makes it risk free for you to try and do an exchange, so even if you don't find anything within the 45 days there is still no cost to you. 

If you have the option to defer taxes and reinvest your full proceeds it's usually going to help you.