1031 Exchange into portfolio of properties... - Posted by Bryan

Posted by Patrick S. Lawson on June 13, 2006 at 08:50:12:

  1. Yes.
  2. Capital gains tax on the sale unless you 1031 again.

1031 Exchange into portfolio of properties… - Posted by Bryan

Posted by Bryan on June 12, 2006 at 17:51:53:

I am selling land that I have $0 in debt on and will make $45K on. Next month I’m scheduled to buy a portfolio of 5 rental properties and I’m supposed to put $50,000 down on them. 2 questions:

  1. Can I 1031 exchange the sale of my land into the purchase of the rental properties?
  2. Assuming “yes”, will their be any negative tax implications if I decide to sell the rental properties separately in a year or 2?

Re: 1031 Exchange into portfolio of properties… - Posted by ray@lcorn

Posted by ray@lcorn on June 13, 2006 at 10:07:11:


This is an excellent example of using equity to pyramid wealth. By doing the 1031 the way you’ve described (i.e. trading up) you’ll actually have positive tax implications.

You mentioned that you are putting “$50T down”, so you’re putting in extra cash and using some amount of debt. Both will increase your tax basis above the original land cost. You’ll have to allocate the basis to each property, then between land and building for each.

Depreciation deductions will then be calculated from the building values, which you didn’t have from the land, so next year’s return is going to offer you some tax sheltering deductions, depending on how you own the properties and your tax status. Most of us use pass-through entities (e.g. LLCs) in order to use the tax benefits to shelter personal income, and if you’re a full-time real estate professional you can use all of the passive losses.

However, as you form the depreciation schedules keep in mind that it has long-term implications. On sale the tax rate for depreciation recapture is 25%. The trick is to find the optimum combination of deductions without going overboard, and again can only be determined by your individual tax status. A tip: If your return generates a loss carry-forward it’s an indication that the long-term tax efficiency can be improved.

When you sell the gain will be calculated on the adjusted basis of each property, and assuming you keep them at least one year, at the cap gains rate of 15%, plus the depreciation recapture. Or of course you may choose to repeat the process with another trading-up 1031.


p.s. For an article explaining the basics of 1031 tax-deferred exchanges, see http://www.real-estate-online.com/articles/art-159.html