Discussion:1031 exchanges and replacement property financing
From TaxAlmanac
Discussion Forum Index --> Advanced Tax Questions --> 1031 exchanges and replacement property financing
Discussion Forum Index --> Tax Questions --> 1031 exchanges and replacement property financing
| 23 March 2009 | |
| Looking for some help on a complex 1031 exchange situation.
Client sells a property and 1031's the property into 4 other properties. He follows all the rules and regulations for deferring the gain (ie timeline, independant party, etc.) In purchasing the 4 replacement properties my client requires no financing because the 1031 funds are adequate to close on all 4 deals. Two months after the exchange is complete, the buyer takes out a new loan on one property and distributes the proceeds to the partners. Two months after that, the buyer takes out a new loan on a second property, and distributes the proceeds to the partners again. First question: I know there is no set timeline that says you cannot finance or refinance the property after the exchange is complete an blow the gain deferral. Does anyone know whether or not this is accurate from practical experience? Does the fact that this was a finance change the answer than if it had been a refinance? Second question: If they took the proceeds of the new loan home, do they have an interest tracing problem in order to deduct the expense against the property? Has anyone seen practical experience in this area? Help would be greatly appreciated. | |
| 23 March 2009 | |
| 2nd question is easy - have to do the tracing anyways, so none of it is deductible against any of the properties | |
| 23 March 2009 | |
| first question is a facts and circumstances, but they might have blown it | |
RoyDaleOne (talk|edits) said: | 23 March 2009 |
| Where is Harry when you need him? | |
Harry Boscoe (talk|edits) said: | 23 March 2009 |
| Harry is fixing hot and sexy GF's toilet. The GF is older than the toilet, but not by much.
I think the like-kind exchange with "later extraction of equity" is OK [is this where the lawyers would always say "old and cold"? I assure you they weren't referring to the GF...] but the client/taxpayer/exchangor/buyer/distributor/property owner - it's a partnership, I deduce - has got the old "debt-financed distribution" reporting duty, I think. The *partners* are supposed to trace the proceeds of the borrowing after they get them... I am basing this on things that were current like when I used to have hair - back in a prior century. Is "debt-financed distribution" reporting still .. uh .. available? Last time I saw a *real* K-1 we were using carbon paper... Toilet won't be fixed for a while. It needs replacement parts from *Italy*... | |
Laketahoecpa (talk|edits) said: | 23 March 2009 |
| Regarding debt-financed distributions, you'll report the interest expense associated with the debt that was borrowed and then distributed on Schedule K, Line 13d - Other Deductions. The description we use is Interest expense attributable to debt-financed distributions.
Each partner will deal with the deductibility of this interest expense individually on their personal returns, depending on what they did with the original distribution of funds. | |
| 24 March 2009 | |
| If the partners are real estate professionals and subsequently use the distributions to fund other real estate partnerships, are you saying that you would report it on the K-1's of the partnership that had the financing and then deduct the interest on the partnership that the distibuted funds were contributed to? Since they have the ability to deduct all their real estate losses, couldn't you leave it on the orginally financed partnership as deductible instead of tracing thru to a different real estate partnership?
Lastly, does anyone understand how the option to apply debt financed distributions against current income/expense operations works? Sounds like I could apply the debt financed distributions up to the extent of partnership operations. The thinking is that the distributions came from operations instead of the debt, while the debt paid for the partnerships needs. This make any sense? | |
