Posted by William L. Exeter on September 08, 2004 at 21:55:52:
You can acquire a replacement property of equal or greater value, reinvest all of your net proceeds from the close of your sale transaction and then refinance the replacement property once you have closed and completed your entire 1031 exchange transaction. This refinance will not trigger a taxable event and would allow you to use the funds to payoff your HELOC.
1031 Exchange Question - Posted by Art (MD)
Posted by Art (MD) on September 07, 2004 at 21:58:20:
I funded my LLC with a 170K loan from my HELOC. My LLC bought a property for 170K. Resold at 235K for 52K profit a few months later. All proceeds (229K) went to an intermediary.
My LLC just bought another property for 125K and used 31K of the money in the intermediary’s account. I want to pull the 170K back out to repay my HELOC and get ready for next deal. What if any tax consequences are there if I do this?
I have not found an accountant who knows the answer off the top of their head, hence my posting.
Thanks
Art
Re: 1031 Exchange Question - Posted by Stew
Posted by Stew on September 08, 2004 at 09:28:04:
I am in the middle of a 1031 exchange and the QI only kept the profit. I had a loan on the property and it got paid off at closing. Here is my question, Why didn’t the HELOC get paid off at closing? Should he have told the title company to pay off his HELOC and only give the QI the 52K (profit). The 170K was borrowed money. It now appears as if it were profit from the whole deal.
He stated “All proceeds (229K) went to an intermediary”
Just trying to learn. Thanks
Re: 1031 Exchange Question - Posted by William L Exeter
Posted by William L Exeter on September 08, 2004 at 01:56:24:
Hi Art,
First, you must be careful with your short-term holding period. The tax code, regulations and numerous court decisions are very clear that a taxpayer must have HELD the property they are selling (relinquished property) and must have the INTENT to HOLD the property they are purchasing (replacement property) for investment or use in their business. There are numerous cases where the taxpayer’s 1031 exchange was disallowed due to a short holding period because they could not clearly demonstrate their INTENT to HOLD the property.
In order to defer 100% of your capital gain taxes you must follow three (3) basic rules:
(1) Trade equal or up in value based on the sales price. If you sell property for $500K you must buy for $500K or more. I have an article on this subject that I would be happy to email to you - just email and request it.
(2) You must reinvest all of your net cash proceeds. You can pull cash out but it will triger a taxable event. And, what’s more, any cash that you pull out is allocated first to any depreciation recapture and then to capital gain taxes. You can not pull out your original investment with out creating a taxable event. In your example, if you pull the rest of the cash out ($170K) you will trigger all of your $52K in capital gain taxes and would not benefit from doing a 1031 exchange transaction.
Bill Exeter
Re: 1031 Exchange Question - Posted by Dave T
Posted by Dave T on September 07, 2004 at 23:22:17:
When did you go to settlement on the relinquished property? What date?
Re: 1031 Exchange Question - Posted by William L. Exeter
Posted by William L. Exeter on September 08, 2004 at 21:53:00:
The HELOC is on his primary residence and not the investment property. You could have had the HELOC paid off through the close of escrow, but you run the risk that the Internal Revenue Service would classify this as the pay off of personal debt and therefore constructive receipt of the funds.
Re: 1031 Exchange Question - Posted by Deb Childs
Posted by Deb Childs on September 24, 2004 at 12:25:07:
Are there recent changes to the 1031 Exchange rules that would require someone to have owned the first property they wish to exchange for a period of 1 year?
And, if a deposit was made on that property, would the the refund of that deposit trigger a capital gains tax?
Thank you for a speedy response if possible.
Deb
Re: 1031 Exchange Question - Posted by Art (MD)
Posted by Art (MD) on September 08, 2004 at 13:42:20:
My question is then a simple one, how do I get the money back to pay my HELOC off and still keep the the 1031 status? If I create a mortgage from myself to my HELOC, can I then have the title atty realize that there was a mortgage payoff that was missed?
Question - Posted by Stew(NE)
Posted by Stew(NE) on September 08, 2004 at 09:30:32:
I am in the middle of a 1031 exchange and the QI only kept the profit. I had a loan on the property and it got paid off at closing. Here is my question, Why didn’t the HELOC get paid off at closing? Should he have told the title company to pay off his HELOC and only give the QI the 52K (profit). The 170K was borrowed money. It now appears as if it were profit from the whole deal.
He stated “All proceeds (229K) went to an intermediary”
Just trying to learn. Thanks
Re: 1031 Exchange Question - Posted by tbone
Posted by tbone on September 08, 2004 at 08:28:47:
good information! Thanks for the post.
Re: 1031 Exchange Question - Posted by Art (MD)
Posted by Art (MD) on September 08, 2004 at 07:27:53:
We settled August 3rd. We bought it in May this year.
Re: 1031 Exchange Question - Posted by Art (MD)
Posted by Art (MD) on September 08, 2004 at 22:01:21:
How about if I had created a mortgage from myself to the LLC? The LLC would need to payoff the mortgage debt when selling the property. Wouldn’t that work?
Re: 1031 Exchange Question - Posted by William L. Exeter
Posted by William L. Exeter on September 24, 2004 at 12:45:19:
There have been no recent changes regarding this area of the code or regulations. The requirement has always been that the property held by the taxpayer must have been held as rental, investment or used in a business, and the taxpayer must have the INTENT to hold the replacement property for the same qualified use (rental, investment, etc.) The difficulty is how to prove INTENT and demonstrate that you held the property for rental or investment. The best way to prove or demonstrate that is by HOLDING the property and most tax advisors recommend a holding period of 12 months. I would be happy to email an article on HOLDING REQUIREMENTS if you are interested. Just email and let me know.