Discussion:1031 exchange with replacement property financing
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| Bad News: As Taxteck stated above, the $1.9+ seller carryback is boot and gain will be recognized under the Installment Sale rules. Unless your client's basis in the relinquished property is < $220K, then your client received no real benefit from structuring this as an exchange. | Bad News: As Taxteck stated above, the $1.9+ seller carryback is boot and gain will be recognized under the Installment Sale rules. Unless your client's basis in the relinquished property is < $220K, then your client received no real benefit from structuring this as an exchange. | ||
| - | Any chance that line of credit was obtained by the QI as the agent for your client? Or is that line fully belong to your client? If it was obtained by the QI and the QI will be using the a portion of the balloon payment to pay it off, then maybe there is some relief. But that would require some research, as I have never seen this type of transaction. Especially past the 180 day exchange period. | + | Any chance that line of credit was obtained by the QI as the agent for your client? Or does that line fully belong to your client? If it was obtained by the QI and the QI will be using a portion of the balloon payment to pay it off, then maybe there is some relief. But that would require some research, as I have never seen this type of transaction. Especially past the 180 day exchange period. |
| BTW, $978K to construct a house? Smells like personal use property to me. Your client may not even have a qualified exchange in the first place. | BTW, $978K to construct a house? Smells like personal use property to me. Your client may not even have a qualified exchange in the first place. | ||
| Riley2 & I do not always see eye to eye on exchanges. You should try to get his point of view on this transaction, too.}} | Riley2 & I do not always see eye to eye on exchanges. You should try to get his point of view on this transaction, too.}} | ||
Revision as of 05:01, 30 July 2009
Discussion Forum Index --> Advanced Tax Questions --> 1031 exchange with replacement property financing
Discussion Forum Index --> Tax Questions --> 1031 exchange with replacement property financing
| 29 July 2009 | |
| I have a 1031 exchange with the following facts:
FMV relinquished property = 2,192,400 Exchange expenses = 95,156 Cash received at closing = 50,174 Mortgage payoff at closing = 74,159
Exchange expenses = 3,001 New loan to purchase the replacement property = 505,000
Any thoughts? | |
| 29 July 2009 | |
| TaxTools has a great worksheet to help you pencil this out. You have boot. | |
| 29 July 2009 | |
| do you use the TaxTools software? you can download a trial/demo version for free at taxtools.com
(if you choose to purchase, drop me an email and I can refer you so you can get a discount) | |
| 29 July 2009 | |
| I'll give it a try. I believe the only online subscription we have is RIA, which has been less than helpful. | |
| July 29, 2009 | |
| Can you please provide some more info:
Was this a deferred (3-party) exchange? How much money was transferred through the QI? You said there was seller financing. How much of the sales price did your client finance? Was the new loan on the replacement property taken out at closing or did this happen after the fact? How much cash did your client get out of the replacement escrow? I have a hunch your client has a big pile of boot. | |
| 30 July 2009 | |
| The seller financing is boot. The recognized gain on that boot will be reported and taxed over the term of the note. | |
| 30 July 2009 | |
| PVVCPA:
I have seen you post on many of the 1031 discussions and you seem to be quite knowledgable in this area. I would really appreciate some insight as this is a big client and we have a big realized gain at stake. This was a deferred exchange. There were 2 properties given up in the exchange, both were seller-carry for a combined total of 1,979,500. The QI is the note-holder and has been receiving the payments. My client obtained a line of credit to provide the funding for the replacement property (substitute for equity in notes). She transferred 500,000 to the QI to purchase land. She then used 978,463 from the line of credit to construct a house on the land. She bought a commercial property for 175,000 (seller-financed) and a condo for 330,000 (bank financed). The new loans (not the line of credit) were included in the closings of the replacement property. My client did not get any cash out of the repaclement escrow. Thoughts??? | |
| 30 July 2009 | |
| Taxteck:
The QI is the note-holder and has been receiving the payments. See details above. I think we are ok on the seller-carry??? | |
| 30 July 2009 | |
| The note & security docs are in the name of the QI. The QI will be receiving the payments (interest only) until the balance is due in the form of a balloon pmt in approx 18 months. QI is using the interest payments to make payments on my client's line of credit. The QI will use the balloon payment to payoff my client's line of credit.
I think this is where I run into a snag. It appears to me that the QI will be left with funds that were not reinvested. That is why I am concerned about the 505,000 of new loans. I am afraid the QI may not have executed this exchange properly. | |
| 30 July 2009 | |
| Money borrowed from third-party lenders cannot be treated as boot. Boot, by definition, is that portion of the amount realized that is nonqualifying proeprty. The note held by the QI is an example of boot. | |
| July 30, 2009 | |
| Good news: I believe you are OK with the new loans on the replacement property as these loans did not create any additional boot coming out.
Bad News: As Taxteck stated above, the $1.9+ seller carryback is boot and gain will be recognized under the Installment Sale rules. Unless your client's basis in the relinquished property is < $220K, then your client received no real benefit from structuring this as an exchange. Any chance that line of credit was obtained by the QI as the agent for your client? Or does that line fully belong to your client? If it was obtained by the QI and the QI will be using a portion of the balloon payment to pay it off, then maybe there is some relief. But that would require some research, as I have never seen this type of transaction. Especially past the 180 day exchange period. BTW, $978K to construct a house? Smells like personal use property to me. Your client may not even have a qualified exchange in the first place. Riley2 & I do not always see eye to eye on exchanges. You should try to get his point of view on this transaction, too. | |
