Any cash received which is not swung over to the purchase of the replacement property is taxable. The remainder, used to purchase the replacement property is tax deferred. Besides buying up in value, it is good to have higher loan amount on the replacement property than you owed on the relinquished property. That prevents further taxation upon sale of the relinquished property.
Also, there is “direct deeding” allowed. You might want to buy John T. Reed’s “Aggressive Tax Avoidance for Real Estate Investors” and his smaller book on 1031 exchanges, available at www.johntreed.com website.
1031 Tax-Deferred Exchange - Posted by L.D. Hudson
Posted by L.D. Hudson on September 22, 2003 at 22:17:36:
I am considering selling my fourplex via a 1031 tax deferred exchange. The building is in a nice inner-ring suburban area in my home metropolitan area of nearly one-million population. Its market value is approximately $145K. I understand that under the rules for the 1031 exchange, any sale contract would have to be written to transfer the property to a neutral third-party administrator (a qualified title company or other facilitating entity) and that I would have a limited amount of time to arrange the purchase of other real estate with the equity from the sale of the fourplex. Under what circumstances, if any, could I take some of the equity in cash? If I were to take any cash from the sale proceeds via the neutral third party administrator, would tax then be due only on that amount, or would the entire exchange be disallowed and taxes become immediately due on the entire sale proceeds? I’d appreciate any thoughts anyone has on this Thanks in advance.
Any cash that you pull out will be taxable. There are two ways to structure this type of cash out. You can have the Qualified Intermediary assign in to only a portion of the transaction (say 80% or 90%) so that the remaining amount is outside of the exchange and that portion of the net proceeds will be disbursed to you at the close of escrow and will be taxable, or you can assign the Qualified Intermediary into 100% of the transaction and complete your exchange leaving the balance with the QI until you have completed your 1031 exchange transaction and are ready to withdraw the remaining balance and it will also be taxable. The first structure provides immediate access to the cash, while the second structure allows you to defer the taxable gain into 2004 if the cash is actually recieved from the QI in 2004. Let me know if you have any additional questions.
The relinquished property is deeded to your buyer. The proceeds from the sale goes to your qualified exchangor*, who holds those proceeds and passes them to the seller of the replacement property at the second closing.
I second getting Reed’s book on exchanging, which provides a very concise and clear description of the whole process. And it is relatively inexpensive.
Jack
*qualfied exchangor is just about anyone who is not a relative or someone you regularly do business with (e.g., your attorney, realtor, business partner, etc.). Everyone else is “qualified.” Maybe not competent, but still qualified.