IRS 1031 Run Out-Ouch! - Posted by Shaun

Posted by ken in sc on January 22, 2001 at 16:50:03:

Have you tried the smaller “community” banks near you? A 65% LTV loan short term is a no-brainer for them. I would go and say you need the money quick to buy and fix up the property. My bank will loan 80% of tax value with no appraisal, no survey, and only a $50 doc-prep fee. Borrow the money for 180 days. Then, once you close with the exchange, you can do any needed repairs and refinance based on a new appraisal at your leisure. You would have two closings, but the first one is cheap with little fees. It would be worth it if you have a big tax bite looming and little time.

Just an idea.


IRS 1031 Run Out-Ouch! - Posted by Shaun

Posted by Shaun on January 22, 2001 at 06:54:16:

I have a IRS 1031 Tax Exchange deal half done. With the amount I must put down on the replacement property I will need only about a 65% LTV mortgage. Even with “A” credit, there may not be time to qualify for a commercial institution loan. Any ideas on how to fund, if time is too short? To let it go would be a big “ouch” tax bite. Hard money Loan would work, but would rather not. I do thoses myself. However, don’t believe IRS looks favorably on loan from your own corp? Any suggestions??

Re: IRS 1031 Run Out-Ouch! - Posted by John J

Posted by John J on January 22, 2001 at 09:18:09:

Remember Shaun, that the 1031 does not give you a tax credit or a tax deduction. You are only postponing the tax payments and the only savings are the return on the amount that you would otherwise pay in taxes. A simplified example: Suppose your replacement property is worth $100,000 and you could get a commercial mortgage - but not within the 1031 timeframe - for the $65,000 at 10%, then you would be paying about $6,500 in interest the first year. If a hard money loan - within the allowable time frame - costs you 15%, you’d be paying about $9,750. So it will cost you an extra $3,250 in the first year to do the 1031. Suppose that $30K out of the $35K (or $40K incl. closing costs) that comes out of the 1031 escrow account is subject to capital gains taxes if your time runs out. You’ll be paying 20% of this, which is $6,000, in federal taxes (you’ll pay it now vs. later). If you can get a 20% return on your money, it will be worth $1,200 to you in the first year to be able to postpone these tax payments. Don’t end up paying $3,250 to save $1,200. Of course, there are many other factors to consider, such as new vs. carry-over depreciation schedule, state income taxes, depreciation recapture, compounding, and your actual figures being different.

I have let the 1031 eligibility run out in the past without feeling bad if I could not find a great deal on a replacement property within the 45 days. I find this a rather short time for folks like myself who primarily buy at trustee sales or from other distressed situations. On the other hand, I have seen numerous people rush into a transaction at unfavorable terms because they absolutely had to do a 1031 exchange. I always love it when I get a buyer who is set on doing a 1031 and I learn during the negotiations that the 45 days has run out and mine was the only property they had identified as a replacement. My objective now is to get the best deal on a property and I only include the tax consequences in the detailed analysis of the transaction and therefore it can still be a deciding factor. Hope this helps.

Re: IRS 1031 Run Out-Ouch! - Posted by Shaun

Posted by Shaun on January 22, 2001 at 15:30:42:

John J. Thanks for your imput and it makes a lot of sense. But I will be not simply deferring the tax, I will be avoiding it all together. Correct me if I am not right, but by 1031 into another investment property under the rules I do not have to pay tax now on the gain, which is considerable, due to the property having been depreciated, and must be recaptured (about $10,000.00 in my case)I will never pay any taxes as long as I keep it in investment property and keep on 1031 exchanging it when ever it is sold. Ultimately it goes to the heirs and they start over. In the meantime, I get the positive cash flow and cover it with depreciation and take out tax free money in the form of loans when ever I need them. Obviously we wouldn’t want to let the new property seller know the details of our 1031, just that we are doing one, which I believe is required by the rules. To me this means the 1031 can’t be beat and should be done every time! Have I missed something?

You’re correct - Posted by John J

Posted by John J on January 22, 2001 at 20:31:35:

You’re correct as far as your situation is concerned. Most people eventually cash in. You might also watch your basis vs, loan amount. If you eventually do sell without being eligible for a 1031 you might have some tax consequences if you owe more on the property than your basis.