Like kind exchange, interesting scenerio.

lendaddy · 12-01-2006, 07:19 AM

I know next to nothing so this is all theoretical. I just want to know if this will work and if not why.

You sell a commercial income property and are left with a few hundred thousand in paper profits that you'll be taxed on.

Can you do this and avoid taxes?

Take that $300k and purchase the house of a family member from them (for what they owe).

Mortgage the house and pull 80% equity to roll into your business.

Rent the home back to that very same family member for the amount required to cover the note.

So you end up with $240k tax free to use toward your business and the family member that had gotten themselves into a bad spot with their home gets bailed out.

The position in the home would not be inflated and could sell to cover the note if required.

The fed and state tax savings would be over six figures.

turbo6bar · 12-01-2006, 07:36 AM

I think you would need to pull the equity out at least 9-12 months after purchase. Otherwise, this may be construed as boot by the IRS.

What do you plan to do with the rest of the money from sale of commerical property, though? Any elimination of debt or cash in pocket is taxable.

lendaddy · 12-01-2006, 07:39 AM

Quote:

Originally posted by turbo6bar
I think you would need to pull the equity out at least 9-12 months after purchase. Otherwise, this may be construed as boot by the IRS.

What do you plan to do with the rest of the money from sale of commerical property, though? Any elimination of debt or cash in pocket is taxable.

No elimination of personal debt, perhaps some commercial debt in the business.

What is a "boot"?

Why would you have to wait? (I'd probably get it if I knew what "boot " meant). Don't property gurus do this all the time sans the family member stuff?

Nostril Cheese · 12-01-2006, 07:42 AM

Boot

Mr_Wizard · 12-01-2006, 07:51 AM

I like these boots

rammstein · 12-01-2006, 08:02 AM

Boot is the fair-market value of non-qualified (not "like kind") property received in an exchange. Examples would be like cash, seller financing, supplies, reduction in debt obligations, etc.

turbo6bar · 12-01-2006, 08:04 AM

If you sell the commerical property for say $600k and buy a replacement property for $300k, you are on the hook for $300k, even if it is mortgage debt.

boot is any money received from the transaction or debt that is eliminated, but the above looks a bit nicer.

The ideal 1031 exchange is when you exchange UP. If you have a $600 property, you trade UP to a $800k property, for example.

turbo6bar · 12-01-2006, 08:09 AM

btw, taking cash out of the original property before the 1031 exchange or taking cash out of a property after a 1031 exchange can raise the risk of an audit. This was the theme presented in a seminar I attended a few years ago. I think the advice was conservative. Wait a year or so to pull cash out. You could probably get away with and immediate cash-out refi, but of course I'm not on the hook if the taxman comes to your door.

lendaddy · 12-01-2006, 08:44 AM

Hmm, there is nothing underhanded going on here though. The money really would go into the business, not cars or vacations.

Also, our accountant has the cost basis at $600k so only the amount above that is taxable....yes?

VaSteve · 12-01-2006, 09:57 AM

[cpa hat one]
there's special rules involved in renting residential property. i think your business needs to be be in the business of renting property or you need to be a certified RE professional. i would make sure you check with a cpa on the matter [/cpa hat off]

lendaddy · 12-01-2006, 10:50 AM

Quote:

Originally posted by VaSteve
[cpa hat one]
there's special rules involved in renting residential property. i think your business needs to be be in the business of renting property or you need to be a certified RE professional. i would make sure you check with a cpa on the matter [/cpa hat off]

The building being sold is owned by an individual not a business. Does this change things?

turbo6bar · 12-01-2006, 12:09 PM

Well, it's a not a matter of legal vs illegal. I'm just referring to the potential the IRS taxes you on the cash-out-refi.

I think you may still have a taxable gain, even if your basis is high.

Ownership by individual = AOK

lendaddy · 12-02-2006, 05:59 AM

Thanks Wayne, I'm just looking at all options right now. Closing the doors and just starting over is also an option, though not one I embrace.

Big Ed · 12-02-2006, 07:36 PM

Len,

I was considering a similar move a couple years ago. My CPA thought that the purchase of a relative's property could be challenged as not an "arms length" transaction, and there fore would not qualify.

Obviously the best advice before pursuing anything of this sort is to retain professional counsel.

lendaddy · 12-02-2006, 07:37 PM

Thanks Ed, I do need to get councel anyway to weigh other and all options. Thanks