All Forum Posts by: Toni Baca

@Cameron Robert Mozzochi Dave gave a great breakdown on the difference between Section 121 vs Section 1031. 

Under Section 121 you are not limited on what you can do with the proceeds. You do not need to invest into another property unless you chose to. 

When doing a 1031 exchange you must purchase for equal or greater in value from what you sold, and put all of your exchange proceeds into another investment property in order to defer all taxes. 

When selling a property, your mortgage will be paid off in full at the time of sale. The remaining proceeds are taxable. If the property has been your primary residence for 2 out of the last 5 years you qualify for Section 121. If it is an investment property you can qualify for a 1031 exchange and you would put your remaining proceeds into your replacement property. 

Does that make sense?

Just bought my first house hack in Colorado! I am writing leases for 3 tenants and am wondering what I should change/add to the lease if anything? 

My plan is $800 month to month for the first two months then $775 if signing a 6 month or year lease. Utilities (Electric/Water are split 4 ways and Internet/Trash/Recycling are included.)

How do I structure the split of utilities?

Do I add a rental insurance clause? 

Anything else I should change since I'll be living on the property with the tenants?

Thanks for all the tips :) 

Hi there, 

I am house hacking my first property and I close next week! I am curious about the pros and cons of holding title to your real estate under a single member LLC?

My initial thoughts are: 

• Will this affect my mortgage? (I have a primary residence loan)
• Will this affect my insurance?
• How long after closing should I wait to quit claim the title to an LLC?
• Is there more protection owning Real Estate in an LLC versus your individual name?

What are your thoughts?! Thanks :) 

I love this thread! 

I am also a circus artist! I do aerial arts, juggling and lots of circus things. 

I teach circus to children. 

I love the outdoors, and spending as much time in nature as possible :) 

Hi @Al Skerrett,

Oh good I'm glad it brought some clarity, and that definitely makes sense why you would be confused. I always advise people when shopping for a QI get someone who will get on the phone with you. If they are holding your proceeds, they should be able to pick up the phone, answer your questions, and find the best scenario for your situation. Find out there experience, and if they are able to answer all your questions. Overall I would say the industry prices are similar across the board, although one company may charge a little less or more. Also some companies you can even make a deal if you are selling more than one, but there will always be a fee for each relinquished. 

Hope that helps!

Hi @Al Skerrett, 

The reason you need to do 3 separate exchanges for each individual property you are selling is because each relinquished property is its own 1031 exchange. You need to enter a 1031 exchange agreement, and have your QI set up a 1031 exchange account to hold the proceeds of each property sold. This is regardless of how many you are purchasing. Typically exchange company's charge an extra fee for additional replacement properties for example if selling one and purchasing 2+ properties. (The additional replacement cost may vary) However there is always a fee for each relinquished property sold. 

I also agree with Alex, a good QI is worth the fees. I have heard horror stories, and you want to ensure your taxes are deferred correctly.

Did that answer your question?

Hi Mario, 

I'm hopeful your restaurant will re-cooperate in the coming years. These are definitely unprecedented times.. 

With that being said, selling a property sounds to be of beneficial interest to you! One thing to keep in mind if you do sell, since you held the property for 15 years you probably have a pretty high recaptured depreciation and capital gains tax. You could do a 1031 exchange and buy a new property (with hopefully better cash flow) and defer your taxes.

Since you have such high equity in the property, you can take out a new lien on the property before selling or after closing on your purchase to get tax free cash from your exchange! (Basically refinancing) My company calls this an Equity Equalization Loan, but essentially its a second unrecorded mortgage on your property that would be paid off at closing, and the pay off amount would be transferred to you tax free. 

Just a thought :) let me know if you have any questions about this process! And best of luck to you! 

 

Hi Jeff, 

This is perfectly okay! This does not affect your 1031 exchange or your primary residence. Since you are doing improvements on the residence as the landlord, this is still considered your investment property and does not invalidate your exchange. 

You can spend time in your 1031 property as long as you are documenting that each visit is to do improvements on the property. In the rare case of an audit, make sure to document (in a journal or spreadsheet) all of your receipts and daily work you are doing while you are there.

Also do not change any of your primary residence documents to your investment property (i.e. Driver's licence address etc.) which I doubt you would, but still putting that out there. :)

Let me know if you have any other questions, I can find the exact ruling and court case stating this is okay. 

Hi Holly, 

Thanks for sharing your experience, I personally plan to use Section 121 to avoid capital gains tax on my first home. (I will live in for 2 and rent for 3 years before selling)

I also am a Qualified Intermediary and can say that one plus side of doing the 1031 exchange is that you also were able to defer your Recaptured Depreciation. This is taxed at the highest rate of 25% Federal + State Tax, and tends to sneak up on most people. Based on the price of your property and the depreciation allowance, the 1031 could have still been in your favor. With that being said, a good QI should be able to tell you your tax consequences and what the most advantageous situation for you is, even if it means losing the business. :) 

One thing I ask our clients, is for ALL the information of their investment property. How long it has been a rental and if it was ever your primary? Plus what is your long term goals? When working with a QI in the future giving as much information as possible can help your QI decide what is the best situation for you. 

Hope this helps and good luck on your next rental!

Hello, 

I am under contract for my first house hack! My ideal plan for the first home is to live in it for 2 years (with 3 roommates), rent for 3 and sell before the end of 5th year. Under IRS Section 121 - if you live in your primary residence for 2 out of the last 5 years you can exclude up to $250K of capital gains as a single taxpayer. 

My question is can I still take annual depreciation, and deduct expenses during the time I'm living in the property and still qualify for Section 121? I understand I would need to ratio 3/4 of the property as an investment and 1/4 would not be deductible for the first two years because that portion is my primary residence. 

Or if I take investment deductions (annual depreciation, write-offs etc.) during all five years, will I no longer qualify for Section 121? Even with Section 121, will I have to pay Recaptured Depreciation tax?

Thoughts?