Posted by Frank Chin on February 24, 2001 at 06:30:25:
Many real estate investors keep their investments till their death, and it then goes to their heirs. Due to the so called “stepped up” basis, the heirs can sell the property with no capital gains tax due, if sold immediatley. If sold later, the basis for calculating gains is the value of the property at the time of death. They pay estate taxes though.
The heirs can also keep it, pay no capital gains, collect the rents through their lifetime, and will it to their heirs.
Another strategy is to keep doing the exchanges till you have a good cash cow - then instead of selling the property, keep it and refinance out to buy other properties.
In our case, we have two and three family houses here in New York City which is difficult to hire professional management. The wife wants to move to a warm climate in a few years. We’re looking for larger commercial properties to move the equity into through 1031 exchange where we can hire property managers. If we succeed, we can then refinance out to buy other properties later on without doing a 1031 exchange.
Of course - it’ll be simpler if we do a 1031 exchange for a property down south. Unfortunately, the wife and I was never able to agree on a locale to move to. Ideally, it should be one where we can profitably do Real Estate.
Posted by S. Perry on February 23, 2001 at 13:13:01:
Please help!
I’m purchasing a home and the seller intends to perform an IRC Section 1031 tax deferred exchange. What is this and how will it affect me?
Letter reads:
Seller requests buyers cooperation in such an exchange and agrees to hold buyer harmless from any and all claims, costs, liabilities, or delays in time resulting from such an exchange. Buyer agrees to an assignment of this contract by the seller.
Re: 1031 tax deferred exchange? - Posted by Frank Chin
Posted by Frank Chin on February 23, 2001 at 13:53:48:
I’m currently selling a property that hopefully will be through a 1031 exchange. Had a discussion with my attorney on this very letter.
What this means is that when go to the closing, the buyer does not give me the money. The money goes to an exchange agent. I don’t pay any taxes on that money. Then I buy the next property tax free using that money.
It does not affect you. It affects the seller. That’s because he cannot lay his hands on the money. If he does, he’ll be paying taxes. There’a an assignment involved with the exchange agent, which goes into the purchase contract. Hence, the letter.
I advised this to my attorney of this. He laughed and pretty much told me that some purchaser may get all excited and think I’m trying to pull something, word for word what you said in your post. He said he’s going to make the contract amendment a week before closing, when he’s sure I’m really going to do this exchange. “Why give the buyer a heart attack?” he says.
Mind if I forward your post to my attorney? He’ll get a kick out of it.
Re: 1031 tax deferred exchange? - Posted by S. Perry
Posted by S. Perry on February 23, 2001 at 14:18:31:
Happy to be able to amuse you and your attorney.
Why do I need to sign an agreement to a contract amendment if it will not affect me? Once the seller gets paid why should I care what happens to the money?It sounds as if the seller is making a substantial profit on the sale and I’m getting screwed.
Re: 1031 tax deferred exchange? - Posted by Frank Chin
Posted by Frank Chin on February 23, 2001 at 14:44:11:
Let me explain the transactions
Regular Transaction
Mr X sells you the house for 100,000.
You sign a contract buying the house for $100,000.
Let say Mr. X has no mortgage - He gets a $100,000 check at the closing. ( less some adjustments)
Tax time - Mr X pays taxes on the $100,000 he recieved.
1031 Transaction
1- Mr. X sells you the house for $100,000.
2- Mr. X wants to do a 1031 transaction.
3- Mr X says to you - when you come to the closing, don’t pay me - Give your $100,000 to Mr. “Y” - He’s my exchange agent.
4- You sign a contract buying the home for $100,000, including the contract language you mentioned, and including an assignment to Mr. Y.
5- Closing - the $100,000 goes to Mr. Y. Mr. X gets nothing at the closing.
5- Mr. X buys another property. He tells Mr. “Y” who’s holding the $100,000 to pay the other guy.
6- Tax time - Mr. X pays no taxes.
Whats the Difference?:
In the first case you pay Mr. X, the seller, the $100,000. In the second case you pay Mr. Y the exchange agent the $100,000, because that’s what Mr. X asks you to do.
Mr Perry pays $100,000 in both cases.
Its almost like when you come to my house to pay me $100,000, I say to you, I don’t want the money, please give the money to my brother instead.
Re: 1031 tax deferred exchange? - Posted by S. Perry
Posted by S. Perry on February 23, 2001 at 15:32:30:
I fully understood the concept of the exchange after your first post but I appreciate the detailed explanation. My concern was that I probably paid more than I should have for the property.
Re: 1031 tax deferred exchange? - Posted by Frank Chin
Posted by Frank Chin on February 23, 2001 at 15:57:44:
I understand.
Its the same feeling some people get when buying a house directly from the owner, should have gotten it cheaper because there’s no real estate agent.
Keep two things in mind about the 1031:
1- The owner can try to do the exchange by identifying another property within 45 days of closing. If he finds nothing, then he’ll have to pay the taxes anyway.
2- The tax is actually deferred, When he sells the next property, he’s liable for taxes on this one as well, unless he does another 1031 transaction.
Your argument sounds a little like saying if a company you buy goods from pays little or no taxes, you should share part of it by having them sell you stuff a little cheaper.
I try not to worry too much about his tax savings. I would like to think that if the price is comparable to others in the area, and you like the neighborhood and house, then go for it. If you don’t like the house or neighborhood, then its another story.
Re: 1031 tax deferred exchange? - Posted by JimG (OH)
Posted by JimG (OH) on February 23, 2001 at 21:15:54:
Frank-
are you saying that as long as the seller keeps rolling along with 1031 exchanges, he keeps accumulating all those taxes? How and when will it catch up to him? If he’s going to get hammered with them anyway, why even go thru all the trouble? I’m new to all of this, so please be gentle in your response! Thanks