Posted by KPC on August 19, 2005 at 12:39:51:
You can exchange for a greater number of properties or a smaller number of properties. Best thing to do is contact a professional exchange intermediary, they will gladly answer your questions. Be sure to go with a known, reputable company, perhaps one affiliated with your title company.
Sorry…another 1031 question - Posted by Chyna
Posted by Chyna on August 18, 2005 at 18:11:17:
I’m having trouble getting my mind around this 1031 exchange thing.
I’m selling a small rental property for 900K (have a buyer but no contracts yet). I bought it for $450K and put about 50K into it. The agent is charging 3%… so my profit is 373K.
Now, I want to do a 1031 exchange with this 373K. Can I split it up and buy four or five buildings (the total of which would be more than 900K) or do I have to buy only one building?
And how does this 45 day limit work? What I’m told is that I have 45 days from closing to identify three (only three?) potential properties and six months to close. What if all three sellers should pull out? Do I have any recourse or must I pay the capital gains tax? Anything else I should know?
Thanks very much,
Chyna
Re: Sorry…another 1031 question - Posted by Dave T
Posted by Dave T on August 19, 2005 at 21:43:07:
Chyna,
I think you already have a basic overview of the delayed exchange.
When you sell your relinquished property ALL of your net proceeds from the sale must be reinvested into your replacement property. Most likely that amount will be greater than $373K because you have been paying down your mortgage…right? Failure to reinvest all of your net sale proceeds will make that “shortfall” a taxable capital gain.
From the date of settlement on your relinquished property, you have a 45 day window to formally identify the replacement properties that you will acquire to complete the exchange. You can identify up to three properties without any restrictions, but you are permitted to identify more if you need to. Failure to identify your potential replacement property before the 45 day identification period expires, nullifies the exchange and the sale of your relinquished property becomes a taxable event.
If you identify more than three properties, then the total value of all properties identified can not exceed 200% of the value of your relinquished property, or $1.8MM in your case. During the 45 day identification period, you can change your mind as often as you wish, substituting new properties to replace others than were previously identified. At the end of the 45th day, you are locked in to those properties on your most recent list. To complete the exchange, you must purchase one or more properties from your list of identified properties. Failure to purchase your replacement property(ies) from the list of identified properties will nullify the exchange and the sale of your relinquished property becomes a taxable event. Failure to purchase any replacement property before the 180 day exchange window closes or before you file your tax return for the year of the relinquished property settlement, will also nullify the exchange.
There is nothing to stop you from locating potential replacement properties now, before you go to settlement on your relinquished property. You can even get the replacement properties under contract now, with a settlement date after the sale of your relinquished property. Last year, I put two preconstruction properties under contract that will be delivered in November of this year. I have just identified these properties as my replacement properties for the relinquished property I am selling next month.
When you complete settlement on your relinquished property, you then have 180 days to complete the acquisitiion of your replacement property, or until you file your income tax return for the year, whichever occurs first.
A qualified intermediary is required in a delayed exchange. I use the trust department of my bank.
Re: Sorry…another 1031 question - Posted by Dave T
Posted by Dave T on August 19, 2005 at 21:40:00:
Chyna,
I think you already have a basic overview of the delayed exchange.
When you sell your relinquished property ALL of your net proceeds from the sale must be reinvested into your replacement property. Most likely that amount will be greater than $373K because you have been paying down your mortgage…right? Failure to reinvest all of your net sale proceeds will make that “shortfall” a taxable capital gain.
From the date of settlement on your relinquished property, you have a 45 day window to formally identify the replacement properties that you will acquire to complete the exchange. You can identify up to three properties without any restrictions, but you are permitted to identify more if you need to. Failure to identify your potential replacement property before the 45 day identification period expires, nullifies the exchange and the sale of your relinquished property becomes a taxable event.
If you identify more than three properties, then the total value of all properties identified can not exceed 200% of the value of your relinquished property, or $1.8MM in your case. During the 45 day identification period, you can change your mind as often as you wish, substituting new properties to replace others than were previously identified. At the end of the 45th day, you are locked in to those properties on your most recent list. To complete the exchange, you must purchase one or more properties from your list of identified properties. Failure to purchase your replacement property(ies) from the list of identified properties will nullify the exchange and the sale of your relinquished property becomes a taxable event. Failure to purchase any replacement property before the 180 day exchange window closes or before you file your tax return for the year of the relinquished property settlement, will also nullify the exchange.
There is nothing to stop you from locating potential replacement properties now, before you go to settlement on your relinquished property. You can even get the replacement propoerties under contract now, with a settlement date after the sale of your relinquished property. Last year, I put two preconstruction properties under contract that will be delivered in November of this year. I have just identified these properties as my replacement properties for the replacement property I am selling next month.
When you complete settlement on your relinquished property, you then have 180 days to complete the acquisitiion of your replacement property, or until you file your income tax return for the year, whichever occurs first.
A qualified intermediary is required in a delayed exchange. I use the trust department of my bank.
Re: Sorry…another 1031 question - Posted by Natalie-VA
Posted by Natalie-VA on August 19, 2005 at 13:22:33:
Chyna,
Nice deal! To answer your first question, no, you don’t have to buy just one building.
As far as the 180 days to close, I’m not sure, but I think you’re screwed if a seller pulls out.
I once heard of an alternative you may want to investigate. I don’t know if this is true or not. I heard that you can do the exchange backwards. In other words, buy the replacement properties first and then sell the relinquished property within 180 days. The catch if that the intermediary would have to take title of the replacement property in the meantime and if there’s a lender involved, they may or may not allow this.
Can anyone else on the board validate this?
–Natalie
Re: a follow-up question - Posted by techin
Posted by techin on August 18, 2005 at 19:50:57:
After I exchange for 4 or 5 properties from one property, do I have to bundle these properties together to do the next exchange, or I can use just one of these properties to do the next exchange?
Any help will be much appreciated.
Techin
Re: Sorry…another 1031 question - Posted by Frank Chin
Posted by Frank Chin on August 21, 2005 at 06:38:50:
Natalie:
Yes, you’re talking about “Reverse” 1031 exchanges. But it assumes the investor has adequate resources to make another purchase to exchange the properties into before selling and closing the relinguished properties.
Unfortunately, most of the talk today is on “non simultaneous” exchanges, or which 1031 is the most common. There’s little talk of structuring “2 way” or “3 way” simultaneous" exchanges where all of the time limits of 1031’s does not apply.
Another strategy is to lease option properties you want to exchange into first, i.e tie up properties for the second leg of the exchange, then excercise the option when you have the property sold, i.e., the first leg of the exchange.
Frank Chin
Re: a follow-up question - Posted by Merez(IA)
Posted by Merez(IA) on August 19, 2005 at 12:42:49:
From my understanding, after the first exchange, each of the replacement properties stands on it’s own. Basically there is no shared basis between the 4-5 properties. However, if you only get one loan for all 4-5 properties you will need parts of it releasable (I forget what the technical term is, but basically you can get a clear title to one or more of the properties when you pay a lump sum towards the loan), if you want to do another exchange with only one of the properties.