All Forum Posts by: Dave Foster

There's been some great questions posted that you need to ask yourself when determining whether the current deal is sweet enough and rather to pull money out or sell. 

On the other side of things...While it may not seem like much, the power of a 1031 exchange lies not just in the 4 or 5K you save now.  It is in what that 4-5K can do for you over the next 20 years as you develop your investing career. Compound interest is a powerful force.  1031 compounds your returns using deferred tax dollars.

Hey Chris,  

When you've got a lot of moving parts and some very specific replacement requirements you may want to look at doing a reverse 1031 exchange.  With a reverse you can locate and lock up your perfect replacement property before selling your old properties.  Lots of benefits to these not the least of which is you can lock up the replacement at today's prices and get some equity build time while waiting to sell your old properties till the time and price are absolutely what you want.  

You've really got several good options.   And you don't have to decide today.  The rules of Primary residence (sec 121) say that you can sell a house you have lived in for 2 out of the previous five years and you and your wife could take the first 500K in profit tax free.  So if you wanted to try renting it for a year or two you would still qualify to sell the house and take the profits tax free as long as you could still quantify that you had lived in it for 2 out of the previous 5 year period.  And the even better news is that you can do this once every two years.  So take your time looking at your options.  Time is on your side. 

If you end up holding it as a long term rental then Jim Viens is absolutely correct.  Consider a 1031 exchange at that time and continue to defer the taxes.   

The 1031 exchange can be a powerful friend in a consolidation situation like this because you can both use the leverage of deferred tax and continue to shelter it plus you lessen the inherent risk of over leveraging debt.  A reverse exchange could be even more powerful allowing you to capture double equity while picking your perfect next purchase.

Hi Craig,  You absolutely can do a 1031 exchange even if you carry back a note.  You may or may not have to pay some tax. In order to do a total exchange The IRS requires that you reinvest all of the proceeds from the sale in the next purchase or purchases.  However you can take some of the proceeds (think of the owner carry note as part of the proceeds) as what is called boot and only pay tax on that amount.

Here's an example.  Say you were selling a $2mm retail center that you had paid $1mm for and are carrying back a note for $400K. Your exchange account has two proceeds in it - $600K in cash and a note for $400K.  You have a couple of options.  You can pay the tax on the 1mm gain (not fun).  You can do a partial exchange ( you would pay tax on the $400K note but shelter the remaining $600K in gain from tax which is better than a sharp stick in the eye but still meh!).  Or you could find an alternative source of cash and buy the note from your exchange account so your 1031 account has $1mm in it which you use to purchase replacement property - no tax.   Now outside and unrelated to your 1031 account you have a note for $400K secured by the property you sold and here's the great part about it - You paid $400K for it (remember you "bought" it from your exchange acct) so the only tax you will pay on it will be on the interest it produces.  

Yes, do the  exchange and carry some paper.  There are several ways to do it.

Hey Robert,

There is another possibility you may be able to explore. You're house would not qualify for purposes of sec. 1031 but there are a few exceptions to the 2 year use period. Since it sounds like your gain falls well below the maximum exclusion you may want to look at the reduced exclusions offered by the service to see if any of those apply. Publication 523 lists those exceptions

Dave

I think your client might really benefit from a chat about basis on this property with his accountant before attempting a partial exchange. It is highly likely that the actual gain after closing costs, and un tapped capital improvements or un taken expenses could be much less than 1 million and may leave him in a position where spending 500K in a partial exchange doesn't result in any tax benefit. In that case he's going to pay the tax but will at least have the cash to do that and a bank roll to start his next project.

One other possible option that would be helpful albeit it a "second best" scenario is to use all the information to shift the recognition of gain and there fore incur the tax payment one year later.

Absolutely, start an exchange. If the client identifies two properties one 500K and one for 700K during his 45 days and closes on one of them for cash he will still have a valid exchange in process as he has properly identified potential replacements. At day 180 or roughly May or June of 2014 his exchange period will end and he will end up recognizing the gain but the gain will only be recognized in 2014 and tax due April of 2015. This strategy would work with or without a completed partial exchange

Dave Foster

Dave Foster || Phone 850.889.1031 || fax 303.496.1031

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