Taxes Due On 1031?
How are taxes due on a 1031 exchange? A relavtive of mine wants to exchange their rental property for a multifamily unit closer to home. Theyre idea is to sell the multi family property to me with 6% owner financing imediately after the exchange is complete. How will the taxes be due on a transaction like this. Is it even valid for the exchange or is there any problem with this?
With the strategy you propose, the 1031 will be disqualified and the sale of the relinquished property will become a taxable event.
My understanding is that you must hold the replacement property for a time period of 1yr and 1day at which point they would sell the property to me with a no money down 30yr mortgage w/ 6% interest. Would the taxes due then be spaced out with the seller carryback mortgage payments?
Since your relative is not saving anything on taxes with the deal structure you outlined, why not just buy the rental property they own now under the terms of sale you describe?
An installment sale does allow the seller to pay the capital gains taxes over several years as the profit from the sale is received.
The investor has to have the INTENT to HOLD the property for investment purposes, so if they were to sell you the multi-family property immediately the 1031 exchange would be disallowed under an audit. If they sell it to you after 12 months, then they have deferred their capital gain taxes for another 12 months. The installment sale would defer the capital gain taxes over the term of the note, but would not defer any accumulated depreciation recapture taxes.
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Does the current property cash flow?
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