Question About 1031???
I'm selling my rental house that I have owned for 14 years, it has been a rental for 8 years. I will take the money and 1031 and buy more rentals or one apartment building. I wanted to know if I have to use the full amount to exchange or can I take out some of the money for personal stuff and invest the rest using 1031?? I don't have a good tax man to ask yet, but I'm looking. Thanks 
you will be taxed on any amount that isn't reinvested into your replacement property purchase.
Thanks! Do you know how long I have once I sell the rental to obtain a new investment property?
To keep the exchange tax free, your qualified intermediary must apply all of the proceeds from the sale of your relinquished property to the acquisition of your replacement property. Any amount you keep out of the exchange will be taxed as a capital gain.
Beginning with the settlement date on your relinquished property, you have 45 days to identify up to three replacement properties and then another 135 days to complete the purchase of one or more of your identified replacement properties.
An exchange takes planning and certain documents and an exchange structure must be in place before you go to settlement on your relinquished property.
It is never too early to beginning putting your exchange structure and documentation in place.
FYI, there is also another option to naming 3 replacement properties of unlimited value.
You can name an unlimited number of replacement properties as long as the aggregate value of that list of properties does not exceed 200% of the property you are exchanging.
Don't forget the other half of the 200% rule. You also have to acquire (from your list of identified properties) properties which in the aggregate have a FMV of at least 95% of the total replacement properties identified.
Quote:
On 2004-03-02 08:09, DaveT wrote:
Don't forget the other half of the 200% rule. You also have to acquire (from your list of identified properties) properties which in the aggregate have a FMV of at least 95% of the total replacement properties identified.
I believe this is not entirely correct: ther rule is that the maximum number of properties that the taxpayer can identify is either 1) three, without regard to the FMV of those three, or 2) Any number so long as their aggregate FMV does not exceed 200% of all relinquished properties.
The 95% that you are talking about is separate from the 3-property rule.
The 95% comes in only when initially a taxpayer identified too many properties, but recieved a certain replacement property before the end of the 45 days and recieved that property before the end of the additional 135 days.
This property qualifies for 1031 treatment only if the replacement property has a FMV of at least 95% of all of the identified replacement properties.
Am I wrong?[ Edited by GoldenBear on Date 03/03/2004 ]
the 95% rule only applies if you name over 200% of your relinquished property.
Quote:sanjosee wrote:
the 95% rule only applies if you name over 200% of your relinquished property.
Quote:GoldenBear wrote:
I believe this is not entirely correct: ther rule is that the maximum number of properties that the taxpayer can identify is either 1) three, without regard to the FMV of those three, or 2) Any number so long as their aggregate FMV does not exceed 200% of all relinquished properties.
The 95% comes in only when initially a taxpayer identified too many properties, but recieved a certain replacement property before the end of the 45 days and recieved that property before the end of the additional 135 days.
This property qualifies for 1031 treatment only if the replacement property has a FMV of at least 95% of all of the identified replacement properties.
I knew I should have looked this up rather than relying on an imperfect memory. Thanks guys for keeping the record straight.
OK, just to recap: There is the three property rule, the 200% limitation rule, and the purchase 95% of all identified property rule. If the taxpayer purchases 95% of the aggregate fair market value of all properties originally identified, the three property and the 200% limitation rules DO NOT apply.
Back to the original question. Why don't you refinance the house before you sell it a take some cash out of the equity before the exchange. You will still have to conform to all the other 1031 rules (replacement property has to have higher price and higher mortgage). This may solve your cash need and still be able to defer all the taxes.
richard, please give an example on how that process would work. I am in similar situation but it sems to me if you sell the propert or relenquish it, you have to pay off the bank loans. I must be missing something here. [ Edited by Ricker on Date 03/08/2004 ]
Replacement property need not have "a higher price and a higher mortgage".
It is the amount realized on the sale that is the key, which is usually means the replacement must cost the same OR more as the relinquished property (not necessarily more). You don't need to have a mortgage at all on the replacement property - you could pay all cash.
Quote:richardw wrote:
replacement property has to have higher price and higher mortgage
Quote:GoldenBear wrote:
Replacement property need not have "a higher price and a higher mortgage".
It is the amount realized on the sale that is the key, which is usually means the replacement must cost the same OR more as the relinquished property (not necessarily more). You don't need to have a mortgage at all on the replacement property - you could pay all cash.
Both of you are correct, but for different exchange circumstances.
If the taxpayer is doing a simultaneous exchange, then he could receive mortgage boot by exchanging into a property with a smaller mortgage balance. For example, Adam has a $800K property with a $600K mortgage balance that he wants to trade for Barbara's $800K property with a $400K mortgage. As a result of this exchange, Adam will receive $200K in net mortgage relief which will be taxable as mortgage boot.
On the other hand, if Adam were to enter a deferred exchange, by selling his property to Charles, then using the proceeds of the sale (through a qualified intermediary) to acquire Barbara's property for $800K, then the new mortgage balance needs to be only as high as required to complete the purchase. Adam may even add some of his own money to the purchase transaction to lower his new mortgage balance. His exchange is a fully tax deferred event as long as Adam reinvests all of the proceeds from the sale of his relinquished property into the acquisition of his replacement property.
Depending upon the area and your market, you can avoid the intermediary by closing the transaction simultaneously. You may have to educate your closing people as I have.
Sell your rental subject to developing into a 1031 exchange. There will be reasonalbe limitations on both your and the buyer.
Then find a property to buy (exchange) and offer to exchange your house into the new property subject to your buyer closing. At closing, you assign the PA on your house to the seller of the property you are exchanging into, close on the exchange and close on the house sale essentially simultaneously.
Viola, no intermediary nor related fees, No delayed exchange.
[addsig]
Quote:Viola, no intermediary nor related fees, No delayed exchange.jfslenes,
You have just described a deferred exchange. The qualified intermediary in your example is the settlement agent. Even though the settlement on the relinquished property and the settlement on the replacement property occurred simultaneously, this is still the structure for a deferred exchange.