All Forum Posts by: Bill Exeter

Qualified Intermediaries come in all shapes and sizes.  The first thing to know is that the 1031 Exchange Qualified Intermediary industry has no licensing or regulatory body.  There are very few Qualified Intermediaries with any kind of regulatory oversight.  Regulatory oversight is critical.  I've seen numerous QI's fail during my 40 years in the business, and most of the failures would have been prevented had their been government oversight.  It is not the size necessary that matters, but whether they have regulatory oversight and how they are managed. 

You should also check to ensure they have Errors & Omissions insurance, Fidelity Bond coverage, and a Financial Institution Blanket Bond.

Some are more consultative and advisory and provide guidance, while others are just processors.  Be ware of the ones that get compensated on the back end by trying to refer you to replacement property solutions that compensate them.  

I would not say the IRS doesn't like the process.  The IRS has issued three (3) Private Letter Rulings that specifically allowed these types of transactions, but you are certainly right about the time, money, risk and cost prohibitive in many cases. 

Hi Dan, 

Thank you so much for the shout out. 

Hi JF, 

You can certainly sell one (1) relinquished property and acquire two (2) separate replacement properties as long as the total purchase amount is equal to or greater than the net sale price of your relinquished property.  It also diversifies your holdings, cash flow, risks, etc.  

Generally, you must acquire property that you do not already own.  Most people will tell you that your second choice can't be done, but the IRS has issued two (2) Private Letter Rulings on point where they did allow the taxpayer to build on property they already owned through a 1031 Exchange.  However, there is no way to do this without risk.  PLRs can't be cited as precedent, so you could do exactly the same thing as the other taxpayers in those PLRs and the IRS can still disqualify the 1031 Exchange and the more your transaction deviates from the PLRs the more risk you take on.  ADUs can be extremely difficult to structure since they are usually on the same parcel/parcel number.  

Good morning GP, 

If your property sells for $300,000, your "net sale price" after deducting your routine selling expenses (brokers commission, title, escrow, closing attorney, documentary transfer tax, etc.) will likely be around $275,000 (ish).  This is the magic number in a 1031 Exchange.  You need to acquire one or more replacement properties that are equal to or greater than $275,000 (ish).

The selling expenses, costs and fees are what they are.  The successful sale is all about having the right team around you.  A good realtor that knows the market where the property is located, a good tax advisor that understands real estate and 1031 Exchanges, a good closing agent, and a good Qualified Intermediary that can walk you through the 1031 Exchange process.  

I would be very careful in working with a 1031 Exchange Qualified Intermediary that provides ("sells"0 replacement property solutions as part of their services.  You should work with a Qualified Intermediary that is going to focus on administering the 1031 Exchange and not trying to get paid on the back end.  This avoids any conflicts of interest.  Certainly partnering with companies that have consistent replacement properties available makes sense if the properties meet your investment guidelines.  

Good morning Carl, 

@David Krulac is right on the money.  There are a couple of ways that you can address the 1031 Exchange deadlines.  It is still a seller's market in many geographic locations, so you can ask potential buyers for an extended closing period and/or with options to extend the closing period.  If they need access to the property immediately, you can offer to leave to them until you are ready to close.  As David indicated, look for properties before you close on the sale of your relinquished property.  If you find a replacement property before you close on the sale of your relinquished property, see if the seller will cooperate.  Try to get an extended closing and/or options to extend the closing until you are ready to close on the sale of your relinquished property.  You can also offer to lease with an option to buy to tie up the property until you are ready to purchase.  If the seller insists that you close immediately, you can consider the Reverse 1031 Exchange.  Reverse 1031 Exchanges are more complicated and have higher costs, but can solve these problems. 

Hi @Brian Moore, 

The IRS has issued proposed regulations that classify the Monetized Installment Sale as a "listed transaction."  This means that the taxpayer that completes a Monetized Installment Sale has to disclose they completed one on their tax return and any advisor that materially participates in the Monetized Installment Sale has to disclose that they did so.  I would be happy to send you a copy of the proposed regulations if you like.  Just send me a PM with your email address.

Mr. Rutkowski mentions the Private Annuity Trust and how the IRS grandfathered in those that had already completed the transaction, but the IRS does not have to grandfather in a transaction.  You only need to look back at the partnership issues of the 1970s and 1980s that were later disallowed and were not grandfathered in.  

I would be very careful with Monetized Installment Sale transaction and have your tax advisor review before you enter into any MIS transaction.  Have them compare to those transactions that survived in court.  They are usually used in relation to Agricultural property. 

Assuming that you meet all of the other requirements (trading equal or up in value and reinvesting all of your equity (cash)), the easiest way to look at it is your new debt will be the difference between the purchase price of your replacement properties less the equity that you are reinvesting.  

You can also replace some or all of the old debt with new out-of-pocket cash if you like.  

Good morning, 

@Dan H. thank you for the shout out.  

My initial thought was you bought the house, you put the cash payment down, and your dad only helped you get it it with the financing, so it is your house.  However, he has been treatment it, reporting it and filing it as his own property (as a rental), so now hard to say it is really your house.  Actions speak louder than words.  

I agree with the above comment.  Just deeding the house to you is dangerous.  There are way too many moving parts here.  

There could be income tax consequences, gift tax consequences, property tax consequences, and more.  I would have your tax advisor review the entire situation, and probably your legal advisor, to make sure you both do what is best for both parties.  It will be money well spent.  

Your father selling the property to you at cost might eliminate the income tax and gift tax consequences, but not the reassessment for property tax purposes.  I would have your tax advisor review this possibility.  

If it is determine that he needs to sell it to you at current fair market value, he could do a 1031 Exchange.  Renting to a related party is perfectly OK as long as they are paying/charging fair market rent.  Selling to a related party also works, but the related party must hold the property they acquired for at least two (2) years.  

This is more complicated than some might thing (to do it right).  Get the right tax and legal advice before proceeding so that you avoid unintended consequences. 

You can do a 1031 Exchange at the time of sale with the seller carry back note, but can't do it when the note pays off.  The note payoff is just a pay down or pay off of debt and is not considered a sale of real estate at that point.  The actual sale of the real property occurs upfront and the "net proceeds" from the sale of the real property includes not only the cash but the seller carry back note.  The entire amount of "net proceeds" must be used toward the purchase of replacement properties to defer the payment of all your taxes. I would search for "1031 Exchange and Seller Carry Back Notes" to get much more information on the topic.