All Forum Posts by: Dave Foster

@Sascha Weinberg  hi and welcome. The U.S. is a wide open market right now as you can see.  One thing you'll want to be aware of as you start is that every time you sell property in your name you will be subject to the FIRPTA withholding of 10% of the sales price.  It is not a tax but is used to offset any tax due when you file a return. There are a couple of exemptions to this so study it and use some advance planning and you'll avoid it fine.  Perhaps the easiest way to avoid FIRPTA withholding is by making sure you do 1031 exchanges whenever you sell,  the  non-recognition of gain offered by the 1031 releases you from the requirements of FIRPTA.  Good luck

Dave

@Naphat S.  congratulations on your hard work and delayed gratification.  As you explore options come to mind. 

 First you don't say how long ago this was your primary residence. If you have lived in it for two out of the last 5 years you may sell it and still take the primary residence exclusion. Which makes your profit tax free.  

Second, any of your sell scenarios can be made to work with a 1031 exchange.  The identification rules are a little more restrictive but it is still fairly easy to craft a 1031 for you that accommodates 1 or 7 properties.  I realize that instead of narrowing your focus I just gave you more options- sorry:). But good luck you're on the right path and we're here to help.

Dave

Hi @Terrence Smith 

  You've started a most interesting philosophical string discussion.   I think maybe your original priorities are getting lost in the shuffle.  Here's what I'm hearing you say are your two biggest priorities and neither one is really about wanting to sell.  Selling is simply one of your options to get what you really want which is -  

1. You'd like more properties

2. You need cash

Can you do both?  That all depends on the numbers doesn't it.  And of course there's the very thoroughly discussed question of the cost of doing that.  Does the money you get now cost you more in the long run?  Does the cost of saving taxes now in real dollars, time and opportunity cost out weigh the benefits of using a tax deferred strategy?  

We see clients all the time having the same dilemma of wanting to continue to use 1031 tax-deferred dollars to grow their portfolio but need cash for immediate use.  Well you may be able to do it all if you can make your numbers work and find the right properties.  The structure would look something like -

1. Sell Building number 2 and do a 1031 exchange.  The mortgage is paid off and you use your cash proceeds as down payments on 2 properties.  Either pay cash for one and take a larger loan on one (preferred to lower cost of borrowing) or take loans on both.  You just kept all of your money tax deferred and increased your number of units.  Goal number one complete.

2. Immediately after the purchase (not before! There is precedent for the IRS to disallow an exchange that was refinanced immediately before a sale in order to pull cash out) do a refinance, or take out a new first or a heloc.  Again you kept all of your profit tax deferred and now goal number2 is complete.

Again, only you will know whether your credit and the equity in the properties and the state of the market will handle it but it may be possible to have your cake and eat it too!

Dave

@Kyle J. That's right.  In general like kind in real estate refers to use not nature.  So apartments are like kind to commercial which is like kind to raw land etc.  Interesting side fact is that the lease itself is probably receiving real estate treatment as like kind also.  The IRS deems land leases and improvements by those leaseholders of  more than 30 year duration to be like kind to other real estate held for investment.  

What @Account Closed is describing is actually a fairly common scenario. In reality there are potentially two pieces of real estate being dealt with. The land itself which could be 1031ed subject to the lease in place providing income and the leasehold that owns the construction and the lease on the land (as long as that land is under lease for more than 30 years). This too can be 1031ed. Most often these are syndicated TIC or DST projects. And with these liquidity and hidden expenses are always the lurking gorillas. So make sure of your due diligence.

This process provides the framework for a product called a 1031 leasehold exchange similar to a reverse exchange except where you already own the land and want to do a 1031 and sell another piece of real estate to build on the land you already own.

Dave

Hey Shaun,  What a neat scenario you've orchestrated. Nothing like a little hard negotiation to make your deal work.  

Boiling it down to just the 1031 situation keep your eye on the tax liability from the sale of the land.  That's the magic number.  If your land sold at the top end of what you expect you're looking at a total gain of around 20K.  In Utah that would make your tax liability in the neighborhood of around $2800.   With that number you now have your comparison point for shopping QI's for cost and structure of a reverse exchange.  

Reverse exchanges require a specific type of financing that is non-recourse to the EAT which means that you guarantee the loan but you are not a member of the LLC and the liability of the LLC who actually owns the property only extends to the property itself. These are not a typical mortgage product as you can imagine but there are plenty of lenders around the country who do them - normally private commercial banks and local community banks and a few national brokers.

But as you can imagine the added complexity of putting that kind of financing together coupled with the slightly higher cost of the loan itself and the structure of the reverse etc etc.  Honestly, I think you'd be hard pressed to find a quality reverse exchange for much less than that which means that you're spending all of your tax liability and maybe more to save your tax liability.  

With the repair issue still outstanding you may have a shot at selling the land before closing the purchase of the new house.  That would make your 1031 a simple forward exchange and much more economical.  The other option that you just mentioned is also very valid - Sell the land when appropriate and 1031 into another property.  Keeping it simple, especially when you're relatively inexperienced isn't a bad thing.  

At the end of the day it's always a question of how much am I having to pay to shelter the taxes.  And is that worth the effort of being locked into the 1031 structure.

Dave

@Shaun Hunt Congratulations on your upcoming purchase.  @Elizabeth Colegrove is also correct. Because you have not yet taken title to the new property you could conceivably do a 1031 reverse. In a reverse exchange, the QI sets up a holding company, usually an LLC, to act as the EAT (exchange accommodating title holder). This EAT holds title to the property until you sell your land at which time you use the proceeds from the sale of your land in a regular 1031 exchange to purchase the new property. You're just purchasing it from a different entity. There's a lot of nuance on type, structure, cost etc on reverses so it may or may not be worthwhile for you to pursue.

The first thing I would recommend you try is to extend the closing for your purchase and make the sale of your land first.  The second approach would be to sell the land to a friendly  but unrelated entity for your retail price.  You do a 1031 and that person sells the land at no profit so there is no harm to them.  Barring manipulating it so you can close the sale of the land before you close the purchase of the house you could do a revere exchange.  

Good luck and certainly feel free to reach out if you'd like more clarification.

Dave

@Daniel K AdderlyGood luck Daniel,  I agree with @Doug Merriott .  Kw has some great resources and some very independant and aggressive agents and trainers in the TB area.  I'm happy to help in whatever way I can.  I've got a pretty strong network in the area and can make some introductions to you for study resources.  Love to hook up with both you guys locally.

Dave

To add on to what @Hattie Dizmond said, it would be worth your while to check PA law regarding transfer tax on LLCs. In many states, including here in FL there are exemptions from transfer tax when moving from a single entity LLC into an individual name because the single entity single asset LLC is disregarded. We use this with reverse 1031 exchanges quite often. Check your state law for that exemption.

Dave

@Daniel Foster Hey Great last name!  Obviously the answer to this question is whatever your accountant says.  But there is a precedence for you and he to talk about.  This is fundamentally the same allocation of expenses  issue  you have in a mixed  use property where you live in part and rent part.  The difference is use timing and intent.  

My thought would be that it is possible but you would need to have very clean chain of documentation so that the progression from primary to rental and the associated expenses flow the same way.  And the other issue is going to be whether those are expensable items under any circumstances or whether they would need to be capitalized whether primary or rental.

Dave

I agree with @Alex Agafonov your ratios and risk stress seem a little high.  You've made some great projections but take some time and turn the "wills" into "ares".  If you're looking at staying in this property for two years like you say then don't do a 1031.  Simply sell it and take the profit tax free under sec 121 exemption.  Now you've go tax free cash to get your next two properties.  

Meanwhile work with those roommates and network.  Maybe there's something to be done with the couch sitters on your next properties.  Or maybe you find a creative deal.  Either way it's a great start but don't believe press clippings until they're from yesterday's newspaper.

Dave