All Forum Posts by: Greg Ford

Lets go down this rabbit hole for a minute and talk more generally about how Monetized Installment Sales work -- help me understand:

1)   Let's pretend at closing that sales proceeds are $1M (ignore taxes and whatnot for now).    I would not receive this $1M -- it'd have to go to a Qualified Intermediary, right?

2)   Assuming #1 is true, it seems the QI arranges a loan using the $1M proceeds as collateral, and the loan proceeds are given to me correct?     I'm sure the terms of that loan vary, but I've heard you get between 95-97% of the amount ($970K in this case).   Is that typical?   Can you get 100%?   And the term is a 30 year loan usually?

3)   So now that a loan is involved, we need to pay interest.    As I understood the way it works, the interest on the new loan is covered by a payment made by the QI to me in the same amount (for holding the proceeds of the sale).    It's not clear to me how certain the payment from the QI to me is -- is it guaranteed in any way?   Could the QI default and I have no recourse?    How can the QI guarantee me a series of payments with interest?  

This whole step #3 is where I see the hornet's nest.   Perhaps it's not as complicated as I make it seem.  But it seems I need to setup a bank account which will receive the QI payment, and then pay the loan payment.   These two payments should wash each month.   And from a tax perspective, the QI payment includes a portion of my gain from the sale, but the loan payment (the interest portion), is a business expense (assuming I use the loan proceeds for a new investment) which should wash the gain out.

So what are the risks here?  The big one I think is the QI continuing to make a monthly payment to me for the next 30 years.    I also wonder what happens in 30 years when the new note gets paid off and the QI still has the sale proceeds (or has that all been paid out to me over those same 30 years)?

The property I bought last year did not have a 1031 exchange associated with it -- it was an outright purchase, so I believe you are saying that the full amount should qualify for bonus depreciation.    Property A I am selling did have a 1031 into it when I purchased it years ago, so I definitely want to try to keep the 1031 ball rolling with the purchase of property C.    However, I think you are basically saying that a new cost segregation on Property C after purchase would have to be ratio'd down somehow (ratio of my basis to the purchase price minus land?) before it could be applied to bonus depreciation?   That makes sense, though I would have to have my tax person figure that math out.   But conceptually it makes sense.

And in the future, if I were use bonus depreciation now, and want to 1031 property B or C into something new, the same thing would happen -- I wouldn't be able to claim the full amount of the cost segregation identified 5 and 15 year property on the replacement properties because of the lower basis.   

Am I hearing what you are saying?    This is good insight.    I appreciate it. 

 Good points, but the property purchased was an operating apartment building (built 30 years ago).    It closed in October 2017 and was operating on day one.   My CPA looked at it and said it qualified. 

 I've looked into these and had a conference call with someone to explain it to me.    As I recall, I only get 97% of the proceeds, this whole deal is tied up for the next 30 years with payments flowing into and out of a bank account I'd need to setup (the payments would wash each month though), and I remember thinking it was really expensive to do this.    It did seem like it could work, and could be an alternative, but I'm not sure I'd call it better than a 1031 exchange based on my research.

Need some help with tax math here.    Wondering if this is a viable alternate strategy to a 1031 exchange?    Here are the specifics:

I'm getting ready to sell a rental property (Property A) for about $6.5M next month (June 2018).   My basis in it is around $2.8M.    Between recapture of previous depreciation, capital gains, and other taxes, I'm estimating my tax bill to be around $1M.   My primary goal would be to try to find a suitable 1031 replacement within the guidelines, however, I had another thought...

I happen to have gotten extremely lucky and purchased a $9.5M property (Property B) in Oct of 2017, and my cost segregation study was just completed and identified $2.4M of 5 and 15 year property that can qualify as bonus depreciation on last years tax return (which I have not yet filed).    This should cause just about all of that $2.4M loss to roll to 2018 as a passive activity loss carryover.

Here is my question:   Let's pretend I cannot execute the 1031 exchange for whatever reason.   Can I just buy (and close) any new rental property (Property C) in calendar year 2018, use a new cost segregation study to take advantage of bonus depreciation rules, and if this new property is of sufficient cost, use this bonus depreciation plus the carryover to completely wash out the gain of the sale of Property A?   I sure seems like this would work and I don't see any downside.     It seems like I'm just reducing my cost basis in Property A or C to offset the gain from the sale of B.

But the math is tricky in several ways.   First, I need to make sure Property C is large enough to generate enough bonus depreciation to finish washing out the gain.   If I use 20% as the amount of 5 and 15 year property in an apartment building, and I need another $1.5M of depreciation, it would suggest I need to buy something around $7.5M or so.    Correct?

Second, I'm reducing future depreciation on Properties A and C in favor of eliminating taxes today.   That's similar to 1031 concepts (defer tax to future years).    But I'll be increasing future income on properties A and C slightly due to less depreciation.   My thoughts are that even if income went slightly positive (instead of negative), overall it would keep me in lower tax brackets and probably eliminate the Obama tax that would kick in due to the outright sale of B with no 1031.   Do I have that right?

Third, I still have the options in the future to execute a 1031 exchange on property A or C, further deferring gains.

So could this be a viable alternative to a regular 1031 exchange?   Thanks everyone for your thoughts.