Discussion Archives:1031 Exchange

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Discussion Forum Index --> Consumer Questions --> 1031 Exchange


Lisa (talk|edits) said:

10 November 2005
A taxpayer has 100% ownership in property he recieved in a like-kind exchange. When taxpayer dies the spouse inherits the property and receives the FMV as basis. When the spouse receives the FMV basis, does this eliminate the deferred gain that resulted from the like-kind exchange?

Snooks (talk|edits) said:

19 November 2005
It is my understanding that the inherited property gets a step up in basis to FMV at the date of death or the alternative valuation date (if elected by the estate). The theory, as I undertstand it, is the assets will be taxed in the estate (if the estate is large enough). If there is no estate tax due, then you are correct. The unrealized gain will go untaxed.

Butch (talk|edits) said:

22 November 2005
Yep - no tax just a new basis!

Ensen (talk|edits) said:

14 January 2006
This is in a state that isn't community property, right? In a community property state, I believe you'd only get a 50% step up in basis.

DZCPA (talk|edits) said:

14 January 2006
One owner owns 100% gets 100% step up. Assume spouse did not own it before taxpayer received it.

Riley2 (talk|edits) said:

16 January 2006
Yes, I agree - 100% step-up which effectively eliminates the deferred gain (unless the property was held in joint tenancy or tenancy by entireties).

Hansgill (talk|edits) said:

15 September 2006
Question: I have a property which I bought in dallas for 110k cash and now I am selling that property for 165k. So I have a net gain of 55k. I am now in the process of a 1031 exchange and looking for a new property to invest the money into. Is it possible to take out some if not all of the cash which I invested into the dallas property(110k) and then take the 55k and invest it into a new property (anywhere in the US) which will I will buy for atleast 165k? I do not want to be taxed and dont understand why I cant take out my 110k which I invested as cash. Any help on this issue?

DZCPA (talk|edits) said:

15 September 2006
Do not ask the same question over 3 times on this site. HANSQILL

Hansgill (talk|edits) said:

16 September 2006
apologies...i didnt realize how the site worked...sorry for the newb mistake on the site..thanks for all the wonderfull help everyone is providing on this site. Take care

Klionerg (talk|edits) said:

20 February 2007
I'm a Realtor. I have a client who has a 6 month deadline to make the exchange. He's already transferred the property to an LLC to get this 6 month extension. He sold his property, but the closing date is 18 days past the 6 month deadline. How can this issue be resolved? Are their legal justifications that would grant someone some relief on an 18 day tardiness?

Kevinh5 (talk|edits) said:

20 February 2007
no

Vermontcpa (talk|edits) said:

23 March 2007
First time preparing a return with a 1031 exchange.. client sold property A and escrowed funds with special 1031 intermediary. No cash received on sale, all funds to 1031 intermediary and then bought new property B with intermediary funds.. here are dates

sale date of property A 1/9/06 Purchase date of "new" property 5/5/06

This is approx 118 days which I believe satisfies receipt timeframe requirement.

I am new on subject.. am I to simply fill out FORM 8824 and thats it?

thanks for the help... last item to get return completed.

Larry0434 (talk|edits) said:

23 March 2007
I use a Excel formula to ensure that I properly calculate the deferred gain and the basis in the new property. Form 8824 is easy to do incorrectly. I have amended several returns where the tax preparer (professional) did not correctly report the exchange.

PVVCPA (talk|edits) said:

March 23, 2007
Ditto, here. I had to create my own Excel worksheet for this. I used to use CFS Tax Tools worksheet, but their's has a flaw in it that they refuse to fix.

GRHI (talk|edits) said:

25 March 2007
I'm hoping this is the place I can ask questions about 1031 exchanges. I am looking into selling some a rental I have and want to use a 1031 to do this. Here are the questions I have:

I am in the process of making several upgrades to the property before I sell it at my own personal expense. Will I be able to get this back out of the escrow or do I need to take a second on the property to ensure I get this money back?

Once I sell it, can I purchase multiple properties with the proceeds or can I only buy one?

Can I use the proceeds to "exchange" with property outside the USA?

I'm sure I will have other questions, but these are the ones to start with.

Thanks!

Kevinh5 (talk|edits) said:

25 March 2007
GRHI, you will want to get a professional (paid) advisor. Start your research by using the search fields in the yellow to the upper left. There are many discussions on your topic already answered.

Kevinh5 (talk|edits) said:

25 March 2007
This really is a place for professionals to discuss taxes. Once in awhile we answer DIY questions, but they are usually YES NO or LOOK HERE answers, especially close to the tax filing deadline. If you wait until May, you will probably get more help here.

Larry0434 (talk|edits) said:

25 March 2007
If your deferred gain is significant, run do not walk to obtain qualified advise. Make sure they are working a significant number of 1031 issues a year, over 10. I see failed 1031 attempts each year. Then, it is simply too late to fix. The small amount out of your pocket is cheap insurance.

Corptaxhelp (talk|edits) said:

March 26, 2007
GRHI: The first question you should ask is 'why am I doing a 1031 exchange?'. If you don't have a clear and specific answer, you should probably cash out now.

Taxgirl12 (talk|edits) said:

29 March 2007
Hi all, I am reviewing a 1031 exchanged. Property A bought in exchange basis is 9339 sold for 61000 with closing costs of 4800.....client cashed out...closing cost did not reduce the gain of 51661...should it? or only in another exchange that it affect basis. It is late...thank you

PVVCPA (talk|edits) said:

March 29, 2007
yes gain s/b reduced by closing costs

Taxgirl12 (talk|edits) said:

29 March 2007
darn it amendments..think I will wait. It looks like I need to review the basis of the properties too....<ugh>

Dlowen7861 (talk|edits) said:

2 April 2007
Client sold property A and funds ($150k) were escrowed to 1031 facilitator. Debt service on property A was $200. Gain was $125k. Facilitator exchanged $140k into property B, and then $10k into property C. Basis for property A was divided between property B and C. Client sold property C, and now wants to avoid repaying A's basis in this property. Can A's basis be reallocated entirely now to property B? A's basis ($125) is less than what was exchanged into B, and B's debt service is greater than A's. Thank you in advance.

Strowe (talk|edits) said:

25 April 2007
Partner and I disagree on treatment of 1031, seeking third opinion. Given FMV 310, basis 165. Received FMV 270. Upon sale of given property, debt of 130 paid off. Required cash contribution to close 90. I say received property basis is 125 (165 + 90 - 130). Partner says received property basis is 255 (165 + 90). Which is right and why?

Wwtaxes (talk|edits) said:

25 April 2007
I agree with your partner. If you buy an item for 50K, put 5K down, and take out a loan for 45K, the basis is still 50K. As I understand it, the adjusted basis for a like kind exchange is the basis of the old item plus any additional monies paid. Of course, I knew next to nothing about 1031 exchanges before this tax season, so you might want to wait for more expert advice.

FTF65 (talk|edits) said:

April 25, 2007
Neither one of you are right. Since you did not trade equal or up in both value and equity, this is a taxable exchange. Although the $90 cash paid equalizes the equity, it does not fully offset the $130 of mortgage relief; accordingly, you have a gain of $40 ($130 - 90).

The basis in the replacement property is $165, which is (165+90+40-130). As a check, you could also back into the basis by taking the FMV of property received of $270 less deferred gain of $105 (total realized gain of $145 less $40 gain recognized) which equals $165 (i.e., if the replacement property is sold for $270 in a taxable transaction, you will recognize $105 of gain).

To avoid any gain recognition you would need to reinvest in a like-kind replacement property with a value of at least $310.

Strowe (talk|edits) said:

25 April 2007
To FTF65 I like your analysis better than how the code reads. IRC 1031, CCH Essentials and Master Tax Guide all seem to have a hole in their discussion of 1031 for a step down in value. Where do you have difinitive reference for your explanation?

Riley2 (talk|edits) said:

25 April 2007
Agree with FTF65, except that you need to add exchange expenses to basis.

FTF65 (talk|edits) said:

April 26, 2007
Strowe - see Reg 1.1031(d)-2, Example 2.

Agree with Riley2 regarding exchange expenses; however, since the fact pattern didn't include any, I didn't address.

Wwtaxes (talk|edits) said:

26 April 2007
FTF, Riley,

I found your contributions here of great interest. Although I've never encountered a situation like this, I'd like to learn more about it. Would you consider writing a short article on this site about it? I'd really like to see your explanation out there as an article that we can use for reference. It's easier than finding it buried in a discussion.

Strowe (talk|edits) said:

26 April 2007
FTF65

Your assessment of the case I presented was dead on accurate. I have confirmed with other professionals and in the regs. By the way the specific reg reference is 1.1031(a)-2(b)(D)(iv) where is discusses exchange surplus and deficiency. Your inclusion of the proof (backing into the substitute basis) was particularly useful. Thanks for your help.

Arunarya (talk|edits) said:

7 May 2007
I have a 1031 Exchange question. The property was sold in October, 2006. The sellers were looking for an exchange property, but were not able to do so. The time (180 days) has run out. Now, do they pay the Capital Gains Tax for 2006 tax year or 2007 year, since the period expired in 2007.

Larry0434 (talk|edits) said:

7 May 2007
2006

Htfs (talk|edits) said:

4 June 2007
1031's started in previous year but failed in current ate reported on current

Sas (talk|edits) said:

30 June 2007
I have a client who would like to do a 1031 exchange; I am trying to determine if his property will qualify. It is a vacation home that he and his family used some and he rented some. I believe that only the percentage corresponding to the percentage of time the property was rented - versus personal use can qualify for 1031 treatment. Can anyone point me to a resource that better defines the business or investment use requirement? The only thing I have found so far is IRC section 280A, which may or may not relate to 1031 exchanges.

TheTinCook (talk|edits) said:

30 June 2007
Check out Rev. Proc. 2005-14 in Revenue Bulletin 2005-7 It's about combining sec 121 and sec 1031, so it may not entirely be on point.

Kevinh5 (talk|edits) said:

30 June 2007
SAS, also use the yellow box to conduct a search. This question has been asked and answered before.

Geekyu (talk|edits) said:

15 January 2008
Question: I have a rental property which is completedly paid off. I am thinking of doing a 1031 exchange for another property but I don't want to put all my equity into this new property. Could I acquire an equity loan on the first property, and thereby keep some cash without having to pay the capital gain tax?

Corptaxhelp (talk|edits) said:

January 18, 2008
Geekyu: What is your purpose for deferring the capital gain tax? The current rate is 15%. When you finally do pay the tax, do you expect it to be more or less than it is now?

My advice: Skip the 1031 exchange and pay the tax now.

Blrgcpa (talk|edits) said:

18 January 2008
If you do a 1031 exchange, and purchase something less expensive than what you currently own, you will only pay tax on the difference, not the entire amt.

PVVCPA (talk|edits) said:

January 18, 2008
Geekyu, The IRS would love to collapse the refinance and the exchange into one transaction and label that equity draw as boot. As with any step transaction, you should be OK if you can provide a business reason for each step. Good luck with that.

Bocyaj (talk|edits) said:

6 April 2008
I have a client that purchase a building for 1,200,000 and recently sold it for 2,000,000. he did a 1031 exchange and purchased two other investments for 1,400,000.00. are his capital gains 200 or 800 thousand

Khwaja100 (talk|edits) said:

11 April 2008
I have a question. Are there any restrictions for a Real Estate Professional owner who made election to aggregate 15 of his residential properties into a Single Activity. What is the downside if he decides to do 1031 exchange on one or more properties, how the current year losses or NOL, if any, be treated?

Thank you for taking the time to reply

Wexeter (talk|edits) said:

June 1, 2008
Bocyaj,

Your client's realized (but not recognized)capital gain is $800,000 ($2.0 less cost of $1.2). This ignores closing costs. His gain is of course deferred because he completed a 1031 exchange.

Wexeter (talk|edits) said:

June 1, 2008
CorpTaxHelp,

You are missing the real point of the 1031 exchange. It allows the investor to keep 100% of his or her equity working for him or her so that it continues to build. It is really a wealth building strategy. The analysis should include how many years they have to continue investing before they will start drawing on their investments to determine if the 15% should be paid now or deferred. It is not just a tax decision.

Wexeter (talk|edits) said:

June 1, 2008
New Revenue Procedure 2008-16 provides safe harbor guidelines on when a taxpayer can structure a 1031 exchange on the sale of vacation property or second home. Read the entire text at Rev. Proc. 2008-16.

Wexeter (talk|edits) said:

June 1, 2008
HTFS,

Failed 1031 exchanges are reported in the year in which the first property is conveyed, but might qualify for installment sale treatment under Section 453 depending on when the taxpayer has the right to access the funds. See article on my website.

Wexeter (talk|edits) said:

June 1, 2008
Arunarya (talk

Marcilio (talk|edits) said:

2 June 2008
Safe harbor

The safe harbor criteria address both relinquished property and replacement property. Relinquished and replacement property qualify as property held for productive use in a trade or business or for investment if each of the dwelling units is owned by the taxpayer (one for at least 24 months immediately before the exchange, and the other at least 24 month immediately following the exchange) and within that time, in each of the two 12-month periods immediately:

l The taxpayer rents the dwelling unit to another person or persons at a fair rental price for 14 days or more; and

l The period of the taxpayer's personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental price.

So..a bit of caution. Plain old vacation or 2nd home without rentals does not meet safe harbor criteria.

Corptaxhelp (talk|edits) said:

June 2, 2008
Wexeter: There are very few reasons why someone should enter into a 1031 exchange today. I don't think you have fully modeled the consequences of a 1031 exchange given what we know about capital gains rates, the lost depreciation after a 1031 exchange and the general state of the real estate world. Right now, a 1031 exchange is a bad idea.

The capital gain's rate is at the top of my reasons not to enter into a 1031 exchange. Look back over the last 27 years of rates:

1981 - 20%
1986 - 28%
1997 - 20%
2003 - 15%

The current rate of 15% will expire in 2010 and we'll be back at 20%. That's not speculation. That is the law of the land as it now stands. Going from 15% to 28% would be a huge kick in the shorts. An investor's equity in a property would have to increase by a hefty 13% to net the same amount after taxes.

I don't know if you have been watching the residential and commercial real estate markets but I'm not seeing a 13% appreciation rate on anything. There are some markets -- both commercial and residential -- that have easily lost 25%. If I saw any positive equity movement, I'd be thrilled. That 5% from 15% to 20% is bigger than you might think and I think most 1031 proponents aren't factoring it into their model.

Some people are feeling pretty good about the capital gain's rate staying low because Republican McCain is looking strong. I'm not especially concerned who gets into office. There isn't a good political metric to show which way the rates are going. Republican Ronald Reagan (1986) raised the rate only to have George W Bush (2003) lower it. Democrats Jimmy Carter (1981) and Bill Clinton (1997) both lowered the rates. McCain wants to keep the current rate but won't have to votes in Congress. Both Hillary and Obama want the rate higher. So, it really is a crap shoot.

In no case does anyone believe that the capital gains rate is going any lower. It simply won't happen.

So, here is what I'm telling myself and my clients: If you're an investor, skip the 1031 exchange and pay your taxes now. Worst case, you paid your taxes early at a historically low level and you get the benefits of depreciation going forward. Best, most likely case, you saved yourself anywhere between 5% and 13%.

If you're an owner and heading into a property you love and will be in forever, consider a 1031 exchange but not blindly.

Belle (talk|edits) said:

June 2, 2008
Bocyaj & Wexeter Shouldn't there be a recognized gain as the client went DOWN in FMV?

Kevinh5 (talk|edits) said:

2 June 2008
Corptaxhelp, there still COULD be very valid reasons to do a 1031:

1) extremely low basis and extremely high appreciation (even with market downturn). i.e. fully depreciated property that has gone up. If taxpayer continues to want to own real estate forever, but has a hot buyer, may not make sense to pay taxes now.

2) older taxpayers in ill health. Step-up will occur upon their death (barring dying in wrong year, in which limited stepup occurs). No sense in paying any tax now.

Corptaxhelp (talk|edits) said:

June 2, 2008
Kevin, I'm not so sure about your first point. Even if I paid $10 for a piece of property which now has a zero basis and a bazillion dollars worth of appreciation, I'd rather pay 15% than 20% to The Man<tm>.

As for point two, if I could make people die in 2010, I'd certainly adjust my financial activities accordingly.

To your larger point -- sometimes a 1031 is a good idea -- I absolutely agree.

Still, 1031 exchanges are a lot like breast implants: a lot more people have them than need them and both just delaying the inevitable. (Pretty weak, I know: Come up with a better analogy.)

Kevinh5 (talk|edits) said:

2 June 2008
I don't know if you can find a better analogy. That one is both visual AND tactile. Now if we could get the senses of taste and smell involved.....

Bushmaster (talk|edits) said:

2 June 2008
I agree with Kevin's last post.

Death&Taxes (talk|edits) said:

2 June 2008
I think we can all agree that the 1031 is not a 'no brainer.' Sometimes location could make you sit up and take notice: Pennsylvania does not recognize the 1031, which means you pay 3.07% on the gain. If your property is in the City of Philadelphia it also does not recognize the deferral, which means another 4% in round numbers. Anyone know any other states where this might occur?

One other point: two partners in life exchanged a Philadelphia rental property for one on Fire Island NY this year. They are both nearing 50 and plan eventually to retire to that new property. This makes sense.

Webfoot97219 (talk|edits) said:

19 June 2008
I'm selling a building and the lot it's built on for $1,050,000. It has a $677,000 mortgage. My tax basis in the property is $528,000. I want to defer some of the gain and plan on purchasing a new property for $400,000. I'll use $100,000 of the proceeds from the sale for a down payment and take a mortgage for the remaining $300,000. I anticipate that my selling costs will be $140,000 which includes a prepayment penalty on the mortgage. I need the remaining cash for operating expenses. My realtor is telling me most of the gain will be taxed because I'm trading down and getting what she calls "boot" and that it may not be worth trying to §1031 the property. I don't get it. Help please.

Corptaxhelp (talk|edits) said:

June 19, 2008
Webfoot: Your realtor is right in that a 1031 may not be a good idea for you. In fact, unless I misread something, you're not even eligible for a 1031 exchange since you are trading down.

Is the building you are selling a building in which you have your company? Are you just looking for more cash now but would like to continue to operate your business from that location? Have you looked at a sale-leaseback? That would allow you to cash out while still keeping use of the building in a leased arrangement.

More information could lead to better advice.

Marcilio (talk|edits) said:

20 June 2008
Webfoot, the idea of a 1031 (like-kind) exchange is that you trade a piece of property for the same class of property with no money exchanged. If you receive a new property and money to boot, it's gonna cost you cash. So you can see, that if it is a straight (or 3 way) trade, the property you receive is probably going to cost at least as much as the one you trade in.

You didn't state purpose of the proposed transaction, but if there are business issues involved, I recommend that you talk to a tax and business consultant to consider alternatives.

If the purpose is to downsize, and you only want to own one building, §1031 exchange won't work for you. However, if you want to trade your building for 2 or more smaller buildings, §1031 may be perfect.

Wexeter (talk|edits) said:

August 17, 2008
The Housing and Economic Recovery Act of 2008 is going to change the ability of real estate investors to combined the 1031 exchange and the 121 exclusion. The Housing Act modifies Section 121 by restricting the ability of the real estate investor to exclude gain from their taxable gross income from the sale of their personal residence if the personal residence was a rental property (or other non-qualified use) prior to the subject property being used as a personal residence. Real estate investors could convert existing rental property into their personal residence by moving into the property and then living their for two years and qualify for the 121 exclusion ($250,000 tax free exclusion) when they sold their personal residence. The changes to the 121 exclusion [1] will now limit the amount that the real estate investor can exclude from their taxable income upon the sale of their home.

Trillium (talk|edits) said:

17 August 2008
No need to link to your offsite article for info on the changes to the section 121 exclusion, Bill, as this change has already been thoroughly discussed here – see this fairly lengthy discussion on HR 3221, for starters.

But I'm glad you chose this particular 1031 exchange thread for your attempt at self-marketing. The June 2008 posts, in the aggregate, serve as a nice overview of some of the pros and cons of the concept, and if anybody missed Corptaxhelp's untoppable analogy the first time, here's a second chance at it...

Wexeter (talk|edits) said:

August 17, 2008
I have to disagree with Corptaxhelp's "untoppable analogy". He essentially ignores depreciation recapture, which is taxed at a much higher rate. And, if you compare two taxpayers side-by-side with one paying tax as they go and one always deferring over time, even if the tax rate is only 15%, the one that defers will have a substantially greater networth. And, with the step up in cost basis, there can be a huge benefit for the 1031 exchange strategy. Corptaxhelp can pay his taxes all he wants, but I never intend to pay tax - ever.

RoyDaleOne (talk|edits) said:

17 August 2008
A Section 1031 exchange has no utility in the world of losses.

Wexeter (talk|edits) said:

August 17, 2008
Actually, RoyDaleOne, there is a place for 1031 exchanges in the world of losses. Taxpayers that need the loss in the future or expect to receive a more favorable tax benefit in the future based on their specific circumstances or a taxpayer that has too many losses and will not be able to utilize them may wish to defer losses into a future period. We have clients that fall into this category off and on that structure 1031 exchanges specifically to defer their losses. It is not a normal occurance and not usually advisable, but there are circumstances where it is beneficial.

Corptaxhelp (talk|edits) said:

August 18, 2008
Wexeter, you are the CEO of a 1031 exchange firm. It is hard to see your position as unbiased.

Taxacctmary (talk|edits) said:

18 June 2009
Taxacctmary (talk

Taxacctmary (talk|edits) said:

18 June 2009
Help! I've been told 2 different ways to determine basis in a 1031 exchange. First way is just that the Adjusted basis of property given up is the basis of the new property (ies) purchased. I was ok with that. Then I was told that we must also take into account the Mortgage on the new property when determining the new property's basis. Which is it? I have a client who sold property (Adjusted basis of $178,276) for $620,000. Bought 3 (because one's not enough)new properties. First property for $365,676 (taking a loan of $255,970). Second property for $121,000 (taking a loan of $90,750) Third property for $125,000 (taking a mortgage of $93,750. I know the percentage to give to each property but what value do I split. Please help!

Riley2 (talk|edits) said:

18 June 2009
Assuming that there were no loan assumptions, the basis of the new properties in this case is the basis of the old property plus exchange expenses minus $23,324.

KathiJud (talk|edits) said:

8 October 2009
New user here and not a 1031 question. Do we allow advertising such as this here?

Kevinh5 (talk|edits) said:

8 October 2009
Kathi, no we don't. But I don't see any advertising. (Because I had already deleted it before you got your post in.) Thanks for pointing out any spam - you can always leave a message about spam on Trillium's or my user talk page. Or you are welcome to delete spam yourself. We have a zero tolerance rule for spam.

KathiJud (talk|edits) said:

8 October 2009
Thanks Kevin. You are welcome to also delete my question and everything below it as housekeeping.

Kevinh5 (talk|edits) said:

8 October 2009
No, I believe that it will serve as a good reminder to others to point out SPAM, and to feel free to delete said SPAM at will (if you feel you know how). Also, if you will point out SPAMMERS to either Trillium or myself (by leaving a message on our talk page) , we will do our best to make them feel not welcome back.

Sheldon (talk|edits) said:

11 January 2010
1031 exchange only partially completed at death

Is there any possibility of completing the exchange within the allowable periods or the potential to extend the periods?

This is just a prospective client of mine. The taxpayer started an exchange in 2009 with the idea of getting a higher income stream and more diverse assets. The exchange was not completed at the taxpayers death in 2010. So we will have a final 1040 return in 2009 with capital gains shown on the portion not exchanged or is there anything else that can be done to finish the exchange. The QI and the investment advisor that started the deal seem to think there is nothing else that can be done to complete the exhange. It seems it should be up to the beneficiaries of the estate to me, but it may be difficult to get the children to step up and make the decisions needed in time. Anyone ever had this situation and is there a good source of information on this topic? I've searched for death in a number of 1031 discussions here as well as the 8824 instructions and there doesn't seem to be much information.

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