1031 Exchange Vacant Lot
I purchased a vacant lot in April for $129,900 about ten minutes from a beach area in Florida. I can now sell that same vacant lot for approximately $229,900. I bought it to hold for future appreciation. I have two questions:
Is it possible to pull out your initial down payment from the sales proceeds without paying taxes on this portion and still do an exchange?
When you are referring to the replacement property being equal or greater in price than the relinquished property, are you referring to your cost basis or the sales price that you receive?
Would I have to exchange with property or properties equivalent to or greater than $229,900?
Thanks in advance.
8-)
It has been a while since i did my last 1031 so I forget the fine points.
Look for a facilitator as they can tell you the details. You will generally need one if you want to go this route.
You do not need to buy only one property when buying the replacement.
You generally need to be trading up if you want the complete deal to be tax deferred.
Check to see if it makes any sense to pay the tax now rather then do a 1031. Always a good check but I rarely want to pay the tax if I can continue to get a silent partner (the government when they leave their tax dollars in my deal).
John
[addsig]
I am just entering an exchange. I have a contract on the relinquished property. Here is my response to your questions as I understand the rules.
1. No. You can not take any money out of the proceeds of the sale of your relinquished property without incurring a taxable event. ALL of the net proceeds from the sale of your relinquished property must be reinvested in your replacement property to preserve a tax free exchange.
2. To keep the exchange tax free, not only must you reinvest all of your net proceeds from the sale of your relinquished property, BUT your replacement property value must be at least as much as the sale price of your relinquished property. In your case, your replacement property(ies) must cost at least $229900.
Thanks to both of you for your responses. Do either of you have a national facilitator that you would recommend for the exchange? :-D
I just use the trust department at my full service bank. An attorney had already drafted an escrow exchange agreement when I did my last exchange. I am recycling the agreement for this exchange.
It is my understanding your down payment can be pulled. the 1031 deals only with profit from sale.
There are at least two ways for pulling money out of a 1031. The first is to borrow against the relinquished property before the exchange, and the second that is more common is to borrow against the replacement property since you are rolling the entire equity from your relinquished property into the replacement property. This will likely be more beneficial to you particularly if the replacement property is improved income property since it will be easier to borrow against than the vacant lot and you will only need to get loan(s) for one property rather than two.[ Edited by edmeyer on Date 06/14/2004 ]
Quote:It is my understanding your down payment can be pulled. the 1031 deals only with profit from sale.spiderhitch,
Your understanding is imperfect. 1031 deals with equity not just profit. Since all of your equity must be reinvested to preserve a tax free exchange, this would by necessity include your original downpayment on the relinquished property..
Thanks to all for your help and replies.
There is some dangerous advice given in this post.
First, you must trade equal or up in value, which means that if you sell a rental property for $100K you must acquire a replacement property equal to or greater than $100K.
Second, you must reinvest all of your net cash proceeds into the replacement property transaction. Generally, if you are withdrawing any cash proceeds during the 1031 exchange transaction it will trigger a taxable event.
Third, you can never pull out your original investment without creating a taxable event. The purpose of the 1031 exchange transaction is to encourage taxpayers to reinvest 100% into other replacement property (not pull a portion of the cash out for any reason). You can always do a partial 1031 exchange by pulling cash out, pulling your original investment out or trading down in value, but it will trigger a taxable event.
Fourth, you never want to refinance and pull cash out BEFORE doing a 1031 exchange. The initial Congressional intent and comments contained language about "refinancing in anticipation of an exchange would disqualify the exchange." If you want to pull cash out, complete your 1031 exchange and then wait a few months (the longer the better) and then refinance AFTER the exchange and pull cash out.
_________________
Bill Exeter[ Edited by JohnLocke on Date 06/19/2004 ]
The IRS does allow encumbered property to be exchanged. The issue came up for me when I paid cash for a preforeclosure and wanted to refi my cash back out. At the time I was not anticipating a 1031 exchange. I will check with my qualified intermediary on the timing issues but am almost sure that I can exchange this propery without tax consequences.
There are situations where refinancing can take place very close to the time of the exchange without generating a taxable boot. Here are two quotes from the Allstates 1031 exchange newsletter concerning the timing of refinancing on exchanges.
"b. Refinancing before the exchange
Existing judicial authority indicates that where a pre-exchange refinancing is completed as part of an integrated transaction which includes the exchange, cash received by a taxpayer from a lender will be treated as cash received on disposition of the relinquished property. Assume that A is transferring unencumbered Property 1 (worth $200X) in an exchange with B, who will transfer encumbered Property 2 (worth $200X, encumbered by a $100X mortgage). As part of the exchange, but immediately prior to conveying title to Property 1, A obtains a new $100X loan secured by Property 1. A and B exchange and each takes subject to (or assumes) the loans encumbering the properties. In effect A has "cashed out" in the amount of $100X, but if the rules of Reg. section 1.1031(b)-1(c) are strictly construed, A has recognized no gain since A took Property 2 subject to debt which equaled the debt relief obtained."
"a. Refinancing after the exchange
...There is no judicial or legislative reason, nor has the IRS stated a position, why a taxpayer cannot encumber the replacement property after the exchange, and there is no valid reason why the taxpayer should wait before encumbering the same. The receipt of debt proceeds from a refinancing does not give rise to taxable income, and the fact that the debt proceeds are from replacement property obtained in a like-kind exchange should not alter this result."
Certainly the safe thing is to consult with and use a qualified intermediary for 1031 exchanges.
I hope this helps to clarify.
Regards,
Ed
Quote:
On 2004-06-14 19:21, anderswn wrote:
Thanks to all for your help and replies.
What community in Florida is your lot located? Sounds like a hot area.