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Can I convert a replacement property to a primary residence?

  • Yes, provided that the holding requirements of S1031 are met.

How do I calculate the gain?

  • Step 1 – Calculate the net adjusted basis.
  • We maintain constant contact with your settlement agent to ensure the process is done correctly.
  • Determine the original purchase price, plus closing costs.
  • Add capital improvements during the period of ownership that were not expensed.
  • Subtract any depreciation taken.
  • That is the net adjusted basis.
  • Step 2 – Calculate the net sales price.
  • Determine your sales price.
  • Reduce it by the costs of the sale (e.g. brokerage commission, legal expenses).
  • That is your net sales price.
  • Step 3 – Determine the gain.
  • The gain is the net sales price less the net adjusted basis.

What are the benefits of an exchange?

  • Defer gain until you realize them.

What is boot?

  • “Boot” is “other” property received by an taxpayer in an exchange. Here is a simple example: Bob owns 50 acres of vacant land valued at $100,000. He enters into a proper 1031 Exchange, selling the vacant land, and acquiring another parcel of 100 acres valued at $200,000 as replacement property. But under the deal, he also receives a (a) farm combine, and (b) some stock in a pet food corporation from the seller of the 100 acres. The combine and the stock are “boot” because these are not “like kind” property.
  • Cash boot occurs when the exchanger receives cash at the end of the exchange. But that can be offset by cash paid by the taxpayer in the acquisition of the replacement property, in some circumstances. For example, if the taxpayer at the end of the exchange receives $30,000, that is cash boot. It must be recognized, but can be offset by boot paid by the taxpayer. For example, if the taxpayer put down $30,000 as a contract downpayment for the replacement property, this would be considered cash boot paid, and would be offset against the cash boot received.
  • Mortgage boot occurs when the mortgage on the replacement property is less than the mortgage on the relinquished property. For example, if the taxpayer has a $50,000 mortgage on the property he sells, but acquires a replacement property with a mortgage of only $30,000, this would result in $20,000 of mortgage boot.
  • What are the rules of boot?
  • Cash boot paid offsets cash boot or mortgage boot received.
  • Mortgage boot paid offsets mortgage boot received.
  • Mortgage boot paid does not offset cash boot received.

What is relinquished property?

  • This is property held for productive use in business, trade or investment which is sold, and the proceeds of the sale are assigned to a QI to hold until the replacement property is acquired.

What is like kind property?

  • The IRS requires the replacement property to be “like kind” of the relinquished property. If you sell a tractor, you must buy a tractor, or other farm equipment. All real estate is like kind, so the sale of real property in an exchange simply requires that the replacement property also be real estate.
  • Not limited to real property, other types of property can be exchanged. But the following types are prohibited:
  • Inventories.
  • Stocks.
  • Bonds.
  • Notes.
  • Interests in partnership.
  • Certificates of trust.
  • Property acquired for immediate resale (less than a year).
  • Principal residence.

Must the deed be in the name of e1031xchange?

  • No, direct deeding is permitted under IRS rules.

Are there extensions to the deadlines?

  • No, the regulations are strict, no extensions can be granted.

What if I don’t want to invest all the gain?

  • Partial exchanges are allowed, but tax must be paid on the net boot realized.

How long must I hold the replacement property?

  • The taxpayer’s intent must be to hold the property for business, trade or investment, and it’s generally recommended to hold it for at least a year.

Will state capital gains be deferred also?

  • Check with your local tax adviser.

What is a qualified intermediary?

  • Under the IRC a QI is an independent party who facilitates the exchange. The QI cannot be the taxpayer or a disqualified person.
  • Disqualified persons are those who have a relationship: Attorney, CPA, banker within 2 years prior to closing of relinquished property, other than with respect to representing them on the closing of the relinquished property.
  • The QI holds the proceeds to prevent the taxpayer from having actual or constructive receipt of the funds.

Can’t I just put the funds in a separate account?

  • No, that will taint the exchange and disqualify you. The regulations are generous, but strict. Taxpayer may not receive the proceeds or take constructive receipt in any way.

I already signed a sales contract, is it too late?

  • No, as long as title has not transferred, the exchange can be done successfully.

If I already closed on my relinquished property, is it too late to transfer the funds to a QI?

  • Yes, one the taxpayer gets real or constructive control over the funds, the exchange is tainted and will not work.

Does the QI take title?

  • No, direct deeding is permitted.

What time lines must I be aware of?

  • There are two major deadlines:
  • Within 45 days of closing, identify replacement property in a writing to the QI signed by the taxpayer. There are 3 rules for identifying the replacement properties.
  • Taxpayer can identify 3 like kind without regard to value.
  • Any number can be identified, but total value cannot exceed twice the value of relinquished.
  • Identify any number, but before the end of the exchange acquire replacement properties with an aggregate fair market value of at least 95% of the fair market value of all the identified.
  • 180 days or next tax filing (not properly extended) the replacement property must be purchased.
  • No extensions can be granted.

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Thank you for your work on this 1031 exchange, I was pleased with the level of service.
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