1031 For Repairs?
I see a lot of talk about 1031 exchange to defer taxes. Here are some questions I have:
Does the profit that is being deferred have to be used to PURCHASE a house or can it be used to REHAB a house?
If you can use it for REHAB, can it be for a house you already own?
What is the time frame you have to purchase a house to roll the profits into?
Thanks for the help.
One more thing:
If I sold a house and made say $40K, do I have to 1031 the whole amount into another house? Or can I roll $30K and keep $10K and pay taxes on that 10K?
Quote:If I sold a house and made say $40K, do I have to 1031 the whole amount into another house? Or can I roll $30K and keep $10K and pay taxes on that 10K?Yes, you can roll a portion of the proceeds from the relinquished property sale into your replacement property, and also withdraw a portion for your own use.
The portion that is applied to the exchange is tax deferred, while the portion that you withdrew is taxed.
Quote:I see a lot of talk about 1031 exchange to defer taxes. Here are some questions I have:
Does the profit that is being deferred have to be used to PURCHASE a house or can it be used to REHAB a house?
If you can use it for REHAB, can it be for a house you already own?Understand, that in a 1031 tax-deferred exchange, ALL of the proceeds from the sale of your relinquished property are applied to the purchase of the replacement property. This means that all of your equity in the property -- not just your profit -- must be rolled into the replacement property acquisition.
Yes, you can use a 1031 exchange to acquire a property that needs rehab. Your exchange intermediary can even do the rehab for you with exchange funds before he conveys title to you to close the exchange. This is an expensive arrangement because your exchange intermediary will have to take title to the replacement property then use whatever exchange funds were not used to acquire the property to accomplish the rehab. At the end of the project, the intermediary reconveys title to you.
If you take title to the property from the exchange, then any rehab you perform is done with money out of your pocket.
A property that you already own can NOT be the replacement property in an exchange.
Ok, then can you put all the proceeds towards the closing, ie. down payment, commissions, title, etc., and have the owner of the new property you are exchanging into escrow money for you at closing.
For instance, a property where the owner wants $100K, offer him $120K and use your proceeds for closing and he gives back $20K to escrow for repairs?
One thing to keep in mind is that the amount of funds pulled out of the exchange (not reinvested) will be applied 100% first to depreciation recapture and then to capital gain taxes. If you pull enough out, you will recognize all of your taxable gains and an exchange would not make sense.
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Quote:On 2006-02-02 18:58, estateXchange wrote:
Ok, then can you put all the proceeds towards the closing, ie. down payment, commissions, title, etc., and have the owner of the new property you are exchanging into escrow money for you at closing?You can do anything you want, but with this strategy, money you propose to escrow at settlement for repairs is money withdrawn from the exchange and will be taxable.
Your exchange intermediary must accomplish the rehab with money in your exchange escrow account BEFORE title passes to you and the exchange is closed. [ Edited by NewKidInTown3 on Date 02/03/2006 ]
If you wish to include the rahab as part of your tax-deferred exchange, you would need to set-up an improvement (build-to-suit or construction) 1031 exchange before you close on your acquisition. The replacement property must be acquired and held or "parked" by the Qualified Intermediary in order to properly structure the improvement exchange. The costs must be capital expenditures and not repaire costs in order to qualify for tax-deferred exchange treatment.
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