1031 Exchange
can we buy many smaller properties up to the designated amount?
can we purchae commercial property for taxes and have it count towards the exchange?
can we buy many smaller properties up to the designated amount?
can we purchae commercial property for taxes and have it count towards the exchange?
There are three rules that are available for tax deferred exchanges and these apply to delayed exchanges.
The 200% rule allows any number of replacement properties as long as the sum of the value of the replacement properties does not exceed 200% of the value of the relinquished property(ies).
The 3 property rule allows any maximum value for the replacement properites but allows at most 3 replacement properties.
The 95% rule places no restriction on value or number of properties, however, you must close on 95% of the value of the identified replacement properties (identified in writing within 45 days of sale of relinquished properties) or you lose the exchange.
In addition, there are other restrictions. The total value of the replacement properties must exceed the total value of the replacement properties, the debt on the replacement properties must equal or exceed the debt on the relinquished properties and the equity on the replacement properties must equal or exceed the equity of the relinquished property(ies).
The like kind requirement is fairly generous in that it allows almost any properties that are held for investment. You cannot use your personal residence in a 1031 exchange unless it is converted into an investment for some period of time. It also excludes real property that is essentially inventory (i.e. flips for profit).
You should be able to find a great deal of material on the internet. As Chris pointed out, Bill Exeter has been our resident expert and is a Qualified Intermediary in Southern California.
thank you so much for that useful information. I am now interested in tax sales. A buddy of mine goes to county for records of properties that are available for back taxes. Is it true that usualy these avenues are controlled by a few elite? I heard that they will purposely overpay a bid and then split the overage in order to keep all the auctioned properties "in-house"
are tax sales properties availble to be designated in a 1031 exchange? LOL. Mr. exeter? or neone else?
realjoyestate,
If you acquire a property at a tax sale and your intent is to keep it as an investment, then it would qualify for a 1031 exchange. If you are going to flip it, then it is considered inventory and not a capital asset and it would not qualify for a 1031.
I had a house a few years ago where I was going to lease it with an option to purchase and I had evidence that this was my intent when the house was acquired. It looked like the lease option was going to fall through and I did not want to rent it out to anyone else so I considered the possibility of an exchange. I contacted a Qualified Intermediary since I was concerned about it qualifying for a 1031 because I had owned it for only a few months. I was told that the evidence would allow me to do a 1031 even though I had the property for a very short time.
Due to the difficulty in identifying the replacement properties when participating in tax auctions, you might consider a reverse exchange- where you purchase the replacement properties first, then sell your property. At least that way you would know that you will actually have some replacement properties.
I suppose another option would be to identify evey property you are considering bidding on as potential replacement properties. But you would be under a lot of pressure to buy, which might not result in you paying the lowest price.
Chris