Discussion:1031 Exchange Question

Secondly, if a client were to tell me they "came away with $100,000", they usually are realizing that amount after the mortgage has been paid off, which is not a reflection of gain/loss.

If the §1031 rules are met, the unrecognized gain is what the old property would be if sold for the price it was sold at in the escrow on the first leg. If the taxpayer actually took cash out and/or decreased his debt on the old property by taking a lower loan on the new. He has boot to the extent of those amounts.

If the boot is more than the unrealized gain - he or she must recognize the total unrealized gain. (Exchnage blown for bad planning) If the boot is less that the unrealized gain, he or she must recognize the amount of the boot as taxable gain. Reduced by exchnage expenses.

I don’t think that you can automatically assume that someone walking away from an exchange with cash is automatically receiving boot. The regulations clearly provide that a taxpayer receiving cash from the other party to the exchange would have to recognize cash boot to the extent that the amount received exceeds the cash boot given. However, cash received for any other reason (e.g. financing activities) would not be boot.

Example, John Smith exchanges Blackacre with a fair market value of $1 million and no encumbrances for Whiteacre with a fair market value of $2 million and no encumbrances. At the time of the exchange, Smith borrows $2 million from the bank to close the deal. Obviously, Smith will receive a $1 million check from the escrow company when the escrow closes; however, he has actually given cash boot of $1 million dollars and qualifying like-kind property of $1 million to the owner of Whiteacre. In this example, Smith is actually giving $1 million in cash boot to the owner of Whiteacre; however, Smith is also walking away from the escrow with $1 million in cash. Smith would not recognize gain in this case since the sole reason for the $1 million check is the brand new financing (not the exchange). Some practitioners recommend waiting until a few days after the exchange to borrow the $2 million, thereby eliminating any question about the source of the cash; however, I personally see no reason to wait until 3 days after the exchange to borrow the $2 million.

Furthermore, there is nothing in the regs that provides that the debt on the new property must be equal to the debt on the old property. Instead, the regs provide that in a situation involving mutual assumptions of debt, a net decrease in liabilities will create mortgage boot. Loan assumptions are so rare these days (because of due-on-sale clauses) that the mutual assumption regulations are almost never used. The mutual debt assumption rules do not apply when the old debt is paid off in escrow and the debt on the property acquired is not assumed from another party to the exchange (e.g. brand new financing).

the one trading (and getting a new rental) determine the basis to start depreciating?? KayKay

The buyer could provide the seller with exchange property at the time of closing.

Note in my way of thinking the most common like-kind exchange is trading one vehicle for another.

Any cash the seller touches is taxed to up to the gain, no exceptions, and no extensions.

Starker anyone?

Are there any holding periods in a deferrred exchange to exchange again?????? Client will complete exchange on vacant land 10-06-08. Already had an inquiry to resell at higher price?? Can client do another 1031??

Also be sure to see Rev. Proc. 2008-16, even though it's about dwellings, not vacant land - it's interesting input to the parameters that would help show intent to hold.