All Forum Posts by: Lauren Speidel

@Spencer Howe If you buy down in value then yes, you would be responsible for the tax liability on the amount you did not reinvest, whether that be in cash or debt. It would be good to run the numbers with your CPA to see what that ultimately means for you tax wise but usually are clients are paying somewhere between 30-40% in taxes off of the gain. In some circumstances, if you don't reinvest enough, it would not make sense to do the 1031 because you'll be taxed on your full gain.

@Spencer Howe Okay, so now if you want to do a 1031 and have a fully tax deferred exchange you need to reinvest your full net sales price. Net sales price is the gross sales price minus routine closing costs like broker's commission, title insurance, closing agents fee, etc. From there you would have to reinvest all of your cash proceeds and the debt amount that is paid off at closing and you would end up buying for your net sales price or higher which should equate to a fully tax deferred exchange.

@Spencer Howe Usually it's best to do a cash out refinance and season it for 6 months prior to the sale and subsequent 1031 Exchange. Although if you did the cash out refinance for business purposes, you may not need to season it at all. At closing, the closing agent will pay off any loan that is secured to the property and as the Exchangor your goal would be to reinvest all of the cash proceeds and the debt amount paid off at closing into the replacement property. 

@Richard Quijano A 1031 Exchange can be a great way to not only defer your tax liability but also to build your wealth through real estate investing. Let's connect some time and discuss how an Exchange may (or may not) benefit you.

@Brie Schmidt and @John Warren, thanks for the mention.

Hi @Allen B.,

You can use your 1031 Exchange funds to cover X+Y. The Seller credits to you (A+B) effectively reduce the amount that you need to fund into the closing. This is not a problem if you are trading up in value and need to deposit additional funds into closing. However, it can result in some amount of 1031 Exchange funds not being used if you are trading equal or down in value, which would create a taxable event. If this last comment is the case, you can ask the closing agent to disbursement the prorated amounts to you at closing so that all or more of your 1031 Exchange funds can be used toward the replacement property.

@John Warren Thanks for the mention!

@Robert High No, if you sign a contract and have a contingency, it is not a Reverse 1031. A Reverse 1031 is when you purchase (close on) the Replacement property first and then you have 180 calendar days to sell your Relinquished property. Signing a contract will not start your Exchange period. If you do get into a situation where you need to purchase your Replacement property first, then you may consider a Reverse 1031 Exchange. The most common structure involves, the QI creating an LLC and then they purchase the Replacement on your behalf while you attempt to sell your current property. So be aware that you can't just purchase it now and decide later you want to include it in a 1031. You can't own both properties at the same time which is why the QI parks title to the Replacement property. Reverse 1031 Exchange have a number of complexities and hurdles which is why it would be important to be aware of the structure before going down that road.

@John Warren Thanks for the mention!

@Julie Smith There is a requirement called the same tax paying entity requirement when you are engaging in a 1031 Exchange. The same tax paying entity that has held the relinquished property must be the same tax paying entity that must purchase the replacement. It would be up to your tax advisor or CPA to determine if you can each purchase a replacement in your individual names and it satisfy your same tax paying entity requirement. It may depend on if you live in a community property state, if you filed your taxes together, etc. 

If you do decide to do a cash out refinance, it's probably best to do that now and season the refinance for 6+ months. If you do a cash out refinance now and sell shortly after, under audit it could look like you were not planning on reinvesting all of your proceeds which is a requirement for a fully tax deferred exchange.

@Tiffani T. The 1031 Exchange is probably your best option. Of course, having a discussion with your tax advisor/accountant would be your first step. While you purchased the property for $190k, capital improvements could increase that number and depreciation you've taken would decrease that number and what you are left with is your adjusted cost basis. Your gain will be your net sales price versus your adjusted cost basis. Typically we see investors pay anywhere between 25-40% (could be more or less) roughly in taxes off the gain. If you are planning to reinvest into another rental property or investment property, an Exchange will allow you to defer your tax liability and have your full net sales price working for you in another asset. A 1031 Exchange can be a wonderful tool for someone looking to grow their wealth through real estate investing. 

@Tina Thornton When you are doing a 1031 exchange, you need to make sure you are purchasing real property. There are a few types of passive investments that qualify for 1031 exchange treatment but the options are limited. To name some passive options you could invest in a Delaware Statutory Trust (which you'd purchase from a financial advisor), or a syndicated tenant in common structure (similar to a Delaware Statutory Trust). These are registered as securities and with any security and investment there are risks involved. If you do decide to reinvest into a syndication, you need to make sure they will accept 1031 Exchange funds and you are buying alongside the syndication as a tenant in common. If you purchase partnership interests, you aren't buying real property, you are buying personal property.

@Dan Moe For 1031 Exchange purposes, it would not jeopardize the 1031 Exchange. With that being said, it could be a red flag for the IRS. One red flag combined with other red flags could cause an issue. It all boils down to whether it is OR isn't an investment property.