All Forum Posts by: Steve Wolterman

Hi Stacy, looking at your numbers, I come up with the following:

Dep Recap is 25% on 56,631.30 = 14,157.83

Fed Cap Gain is 20% on the remainder of the gain, 20% on 126,739.90 = 25,347.97

State Gain is 7.25% on 183,371.20 = 13,294.41

NIIT is 3.8% on 183,371.20 = 6,968.111

Hi Michael, Daniel Osman said it well.  If you pull out the $50k before or during the exchange, you will have to pay tax on it.  However, if you roll all of your proceeds and equity into a replacement property(ies) that equals or exceeds the adjusted sales price of your relinquished property, you can refinance the replacement property and pull out the $50k after it's purchased without tax consequence.  Just a thought.  We recommend that transaction to many of our clients who wish to pull out equity in an exchange.  Thanks, Steve

Hi Owen, it’s not all that uncommon for us to get a call in the morning and prepare all of the exchange docs for a closing the same day.  It should not be a problem to get everything ready for a closing in one to two days.  I’m happy to discuss with you.  I think that’s unacceptable of the attorney to tell you can’t do an exchange because closing is in two days.  Thanks, Steve

@Jon Taylor explained it l well.  Yes, a 1031 will probably still make sense.  

Hi Kamal. You will want to be careful here. If you and your husband own the relinquished property in your individual names, and you intend to own the replacement property in an LLC, if both you and your husband are members of the LLC it will be deemed a partnership unless you live in a community property state. I see in your profile that you may reside in NC, which is not a community property state. Because the LLC would be deemed a partnership, you would be changing taxpayers. I would tell you to do one of the following: (i) each spouse form his/her own single member LLC and the two LLCs can own the replacement property as 50/50 co-owners, and you and your spouse would then continue to report ownership of the replacement property on your joint 1040; or (ii) acquire the replacement property in a single member LLC owned 100% by you or your spouse. If you wonder why the latter doesn't violate the same taxpayer rule, it's because a separate IRC section 1041 enacted over 40 years ago essentially says that spouses can transfer property between themselves without tax consequences, and to my knowledge the IRS has not come down on any 1031 exchange since then in which husband/wife sell relinquished property and acquire replacement property in only one of their names or vice versa. I've been facilitating exchanges as a QI for a long time and the two options above are how we handle the situation. I'm happy to discuss further with you if you have more questions. Thanks, Steve

 Thanks for the recommendation Jeffrey! 

If you refinanced over a year ago, I would not be concerned about doing a 1031 and would say it’s a “normal 1031.”  You do not want to refinance relinquished property shortly before you sell it in an exchange.

As a general rule, the IRS will take issue when a taxpayer refinances and strips equity out of a relinquished property shortly before selling it in an exchange.  The IRS will not take issue when a taxpayer refinances a replacement property in an exchange, even if the taxpayer refinances the replacement property immediately after purchasing it in an exchange.  

Sri, you can sell the SFH and replace it in a 1031 with either: (i) 2 or more SFH from different states; or (ii) a multi unit from any state. If total value of the replacement property(ies) equals or exceeds the adjusted sales price of the SFH, you will be able to fully defer your gain. SFH, multi units, duplexes, office space, industrial space, vacant land, and other real property held for productive use in a trade or business is all like-kind to each other in the 1031 world and can be exchanged for other real property in any of the 50 states and most territories.

I know it's a tough market to find property but there are other options. If the tax deferral is important, you can always roll the funds into a DST investment for a period of time (usually around 6yrs) and exchange back into bricks and mortar and the end of the investment. I can further explain DST investments if you are unfamiliar. There is also a favorable rule that allows a taxpayer who sells relinquished property in the later half of the year elect Sect. 453 Installment Sales treatment if the taxpayer is unable to acquire enough replacement property or fails in the exchange in all-together. This means that when you sell a property and do a 1031, and the 180 day period of the exchange straddles the tax year, i.e., the 180th day is in 2024, and you end up owing tax on the sale, you can elect to report and pay the gain in 2025 when you file your 2024 return. You would still likely pay a year of interest on the amount, but the extra year is often preferrable to taxpayers. You should make an earnest attempt to complete the exchange, and I see many clients are still finding replacement properties during their identification periods. The 453 installment sale treatment can be a compelling reason to attempt the exchange.