Discussion:1031 Exchange Motel Property for Land
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Discussion Forum Index --> Tax Questions --> 1031 Exchange Motel Property for Land
| 19 August 2006 | |
| Client has sold motel property and wishes to do a 1031 exchange. He has already identified land(two lots) that are commercial property, yet unimproved. The cost of the two lots are greater than the proceeds of the motel property sold. Client will build either one or two new motels on this land.
At some future point an individual will invest X dollars to purchase half of the interest in the "S" corporation owned by the client. Client presently is sole owner of the "S" Corporation. Proceeds of 1031 is $900K. Land cost is $1.1M. New shareholder will invest $550K (exactly one-half the cost of land), either to purchase 50% of the land or provide funds for construction. I am concerned that if the character of the new shareholder investment is deemed to be sale of part of the land, then capital gain on the transaction must be recongnized. If the investment is to purchase a 50% position in the "S" corporation, then no gain is recognized and the funds may be used for construction of one or both new motels. Will the character of the 1031 exchange be altered with investment by new shareholder or will this investment be deemed a "Cash out" by my client? It is my opinion that funds invested should be utilized for land improvements in the form of new income producing property, not the purchase of a 50% interest in the land. Balance of funds for construction should be sought from lending institutions. Appreciate any and all assistnace. MPF | |
| 19 August 2006 | |
| I see no problem with selling an undivided interest in the land to another investor if the property has been "held" for investment, trade, or business purpose for a sufficient length of time.
However, I get the sense that "some future point in time" is either this year or next year, in which case your client has a significant boot problem. | |
| 22 August 2006 | |
| Do I understand this correctly? Client has already sold motel property and now wants to do a 1031? Can you sell and then do a 1031 after the sale? | |
| 22 August 2006 | |
| Hopefully, the client has already signed the 1031 agreement and is now in the identification stage. | |
| 30 August 2006 | |
| Thank you Riley and Morrison for the responses. First if all the client did not sell and then decide to do a 1031. Proceeds were deposited with an intermediary and the land identified within the 45 day rule. Closing has already taken place on the land thus satisfying the 180 day rule at that point. Determined that the investor will simply purchase a % of the "S" Corporation. What concerns me now is that it could take more than the balance of 180 days to complete the construction of the new (1 or 2) new motels. The total construction cost will be equal to or greater than the sale price of the relinquished property and the debt will also be greater or same as the relinquished property. Provided construction exceeds the balance of 180 days, does he have a problem with the 1031? I am assuming "NO" provided proper documentation is kept. Thanks, MPF | |
| 30 August 2006 | |
| The use of Q.I. firms are veeerrryyy cost-effective !!! Like-Kind Exchanges Using Qualified Intermediaries The info below is taken from IRS Pub. 544
If you transfer property through a qualified intermediary, the transfer of the property given up and receipt of like-kind property is treated as an exchange. This rule applies even if you receive money or other property directly from a party to the transaction other than the qualified intermediary.
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| August 30, 2006 | |
| I've just discovered a new outfit: Timcor Exchange, which is a nat'l outfit that only does these. They aren't attorneys, but you don't need an attorney for anything other than the usual RE closing stuff. No $2000 fees! Under $500 as I recall. And they claim to produce the worksheets that we need for tax filings. I'm actually looking forward to trying to find someone to run thru this outfit instead of the costly and aggravating usual ways. Anyone with experience with these guys? | |
