All Forum Posts by: Dave Foster

Thanks for that shout out @Bill B.. @Nathan Driscoll, what most folks don't realize is that the IRS does not know anything about how a property is deeded.  Deeding is a state convention.  The IRS only knows what tax return reports the activity of the property.  The actual wording of the law says that the taxpayer for the new property must be the same as the taxpayer for the old property.

In most cases there will be a match between taxpayer and who is on the deed.  But... in certain instances it is possible that the deed does not match who the taxpayer really is.  And this is the opportunity you've been looking for.

You can sell the property as you and your wife (the taxpayer is your joint tax return). And you can buy as a single member LLC that has elected to be taxed as a sole proprietor. This means that the LLC will not file a tax return. All activity of the property will be reported on your personal return - where it is now. So the tax payer will stay the same.

But... since you are in SC which is not a community property state you and your wife cannot both be members of the LLC. Only one of you. Even though the property will still be reported on your joint tax return. These are the kinds of little nuance that can drive you nuts. But the IRS has nuclear weapons and is giving hand guns to their auditors. So they win every argument :)

@Jamaal Smith, since you live in one of the units, you might be able to take advantage of the 121 exclusion, which allows you to take the first 250k (500k if married) of the gain tax-free. In your case, it would be on the portion of the property that was your primary residence if you've lived there for two out of the previous five years of owning it. 

Since the rest of the property was used for investment, you could also take advantage of the 1031 exchange and defer all of the tax and depreciation recapture and reinvest it into another investment property/properties. If you qualify for both tax advantages, you could take a portion free and clear, and if there is any additional tax, you could defer the rest in a 1031 exchange. 

@Michael Lynch, If you decide to cut ties with the property, you'll face not only tax implications but also depreciation recapture for the duration you've owned it if you don't do a 1031 exchange. For you, that could be anything between $30K and $60K of profit plus the depreciation recapture. For some, that's not a lot. But depending on your location, it could still be a chunk of tax!

I like what @Rick Albert mentioned about the passive opportunities that qualify for 1031 exchange treatment. Syndications like DSTs (Delaware statutory trusts) allow you to defer all of the tax but also provide some cash flow, while eliminating the hands-on aspect of real estate investing.

Investors who aren't super excited to invest in their local market will park their proceeds (tax-deferred) in these syndications until they sell, and the market is a bit more attractive.

Thanks for that kind shout out @Bradley Buxton.  @Alex Frey, you're in great shape to do the 1031 exchange on that property.  In fact we need to parse through some dates because you  could be entitled to take some of that profit tax free.  And then defer the rest with the 1031 exchange.

If you lived in the property for 2 years before you moved you would get the first $500K of profit tax free (if married, $250K if single).  If you moved before 2 years you could take a prorated amount tax free since you relocated for a job related reason.

This is if you sell the property within 3 years of moving out. If you don't meet either of those hurdles then the 1031 exchange will still avoid all tax.  And there's nothing inherently difficult in going from one sale to multiple purchases.  We would call that a diversification exchange.  You want to be focused on your desired markets and types (since you can purchase any type of investment real estate).  So that the 45 day period doesn't sneak up on you.

Your qualified intermediary for the 1031 has to be in place before you close the sale of your old property.  So they will be the key resource guiding you through the process.

@Christine D.., You can certainly do a 1031 exchange into vacant land, but you wouldn't be able to use the proceeds for the construction after you take title.

One of the requirements of the 1031 exchange is that in order to defer all of the tax, you must purchase at least as much as your selling or more. You would need to use all of the proceeds in the purchase of the land, and unfortunately, you can't make improvements on property that you already own using the proceeds from your exchange account.

There is something that's known as a reverse exchange or (construction exchange), where your qualified intermediary takes title to the property while you complete the construction. You still have the 180-day timeframe to complete the construction and be hopeful that there's no major setbacks. The cost of reverse exchanges tends to be more pricey because your QI has to create what is called an EAT (Exchange Accommodating Trust) to take title of the replacement property.

The answer to your specific question is that modular construction is a lot easier to accommodate the 180-day timeline. Many times, our clients will enter into a contract for the construction well ahead of when they have to purchase the land. So the finished structure is delivered on site very shortly after the purchase is complete. Permitting and planning are the big jokers in the deck. And those can vary widely depending on location.

@Kevin Forsell, Silent partners can be good... or bad. House hacking can be good... or bad. Borrowing from "Dan" can be good... or bad. It just all depends on your relationship and how the deal is structured.

If you structure your partnership as (TIC), whenever you decide to sell, each of you could do a 1031 exchange on your percentage of interest in the property and invest it into another investment property. That would be perfectly fine. You do not necessarily have to take title to your % as an LLC. Dan would take title to 60% of the property. You would take title to 40%. That's not necessarily a problem. But in a dispute, the percentages will speak if you haven't addressed responsibilities already

The title holder or (tax payer) for the old property has to be the same to satisfy your 1031 exchange, If you put the property in a multi member LLC with you and "Dan" as members you would be making the entity the tax payer and the entity would also have to do the 1031 exchange to remain the tax payer for the new property. That would require you to stay together into the new property.

@Denis Brown, what you're referring to is what we like to call a consolidation exchange, where you sell multiple properties and reinvest the proceeds into a larger investment property using all of those tax dollars.

Like what @Jason Zundel mentioned, your qualified intermediary has to be in place before the sale of your first property. If you can sell them in a portfolio like you mentioned, that will make the process much smoother as it could be treated as one exchange with one set of timelines etc.

But, being very familiar with the Lee County markets (we started our STR portfolio in Cape Coral way back when Dinosaurs roamed). I think you will get a premium selling those as individuals. That's not necessarily a problem. You'll just want to cluster those sales as closely as you can. Using long closing periods for your first sale. And short escrow periods for your latter sales. There's a lot of inventory coming on the market there now. But that can actually give you an advantage. If you manage to only sell two of them close together then you can still do a consolidation exchange of those two into something else. And still be able to do a 1031 exchange on the 3rd property when it sells. You're not held hostage to selling all or none.

@Chris C., The answer to avoiding paying tax on profit and the depreciation recapture is to do a 1031 exchange. It's fine to combine those three properties into one sale as a portfolio. It would mean that you only have to do one exchange. But it might be more efficient to sell them as individuals.

Generally, you get a higher price for them when sold individually. You will want to try to close the sales as closely together as possible. And then do what we call a consolidation exchange - and purchase a new property that is at least as expensive as the aggregate of the sales. Or simply buy a replacement property for each exchange. You've got a lot of flexibility here.

You can certainly do a 1031 exchange into vacant property. It can be any type of investment real estate as long as it's held for productive use. So if you wanted to sell SFH and 1031 into commercial real estate or vice versa, that would be perfectly fine. If you purchase bare land with the intent to hold onto it for the sake of appreciation down the road, that's also fine.

@Christopher Cava, kudos for taking advantage of the 1031 exchange to expand your RE portfolio. You've got a good head start on your replacements. One other avenue to look at would be raw land in the path of progress, or land with a rentable building, or available to rent out for agriculture while waiting for progress to catch up. With the 1031, you can not only exchange into any type of real estate anywhere in the country. But you can move into raw land as well. Your comment about cows triggered my thinking that there might be a rentable piece of agricultural land that could work for you. Especially if it's in the path of future progress. 

@Zachary Bellinghausen, Every market is going to be a little different, just like every sector. If you're fixed on FL, then the first thing I would do is buy time if possible. Extend the sale of your old property if possible. And remember that if you're doing a 1031 exchange, you have an additional 45 days after the close of your sale to identify your potential replacements. I know that doesn't seem like a lot of time. But it's amazing how quickly a drop by the fed can impact your proformas. And it's equally surprising how seller sentiment can change on a dime if the dom is starting to creep up on them. Time may not seem like it's on your side. But it really is if you think of it that way.

If you don't find a replacement property you like, you could also look into passive investment opportunities like @Peter Fisher said. There are a few syndications out there, such as DSTs, that qualify for 1031 treatment and allow you to defer all of the tax and still provide passive income. The most important thing with these is that Investors can 1031 into these when the market isn't attractive and 1031 back into real estate once the DST expires and is sold.