1031 exchange a capital gains question.

[lendaddy]

I was told that if I sell an income property in this calender year I will only have until April 31 2007(3 months) to do a 1031 exchange. But if we close on the first of the year we get until April 31 2008 (15 months).

Now lets assume that you don't want to do a 1031 at all, does this mean you can "use" the money for 15 months before you have to send it to Hillary or do you have to make quarterly payments or some other such craziness?

[pwd72s]

Good question. I have no idea. I would suggest contacting both a CPA and a Tax attorney. The larger the amount, the stronger my suggestion.

[lendaddy]

Originally posted by pwd72s
Good question. I have no idea. I would suggest contacting both a CPA and a Tax attorney. The larger the amount, the stronger my suggestion.

Sure I will double check any advice I get here but I don't have a lawyer or a CPA in the room right now......or do I?

I will add that I did already meet with one of each and was very unimpressed, but maybe I was asking the wrong questions.

[turbo6bar]

For individuals, if you sell in 2006, you'd have to close by April 15th 2007. If you sell in 2007, you have 45 days to identify your replacement property or properties and 180 days to complete the acquisition of your replacement.

If you do a 1031, you don't get to touch the money. It goes to an intermediary. If you touch the proceeds, kiss your a$$ goodbye. Just kidding.

You need to find a title company or closing attorney worth a dime. Tell them you'd like to do a 1031 and need more info. They will refer you to a 1031 specialist who can answer your questions.

[lendaddy]

Wow, I can't believe how different the information I get is. Thanks.

[jhc]

turbo6bar is right. you can't touch the money. you also can't any any mortgage relief, ie you have to owe at least as much on the new property.

[lendaddy]

Originally posted by jhc
turbo6bar is right. you can't touch the money. you also can't any any mortgage relief, ie you have to owe at least as much on the new property.

Really? That's insane. What is the purpose of that rule?

[motion]

turbo6bar is correct on all accounts, except.... if you touch (use) part of the money, its called a "boot". SOME accountants believe that will negate a portion (not all) of the 1031 tax advantage. If you are accessing some of the money (boot) you are in effect, directing the exchange, which some see as a no-no. Its really a grey area. If you boot $10k, you MAY have to pay gains on that $10k. Or you might not, depending on your accountant and the mood of the person at the IRS reviewing your return

[motion]

Originally posted by lendaddy
Really? That's insane. What is the purpose of that rule?

To encourage re-investment, which is the whole point of a 1031 exchange to begin with.

[motion]

Originally posted by turbo6bar
For individuals, if you sell in 2006, you'd have to close by April 15th 2007

I've never heard of this one... I was under the impression that you have 45 days to identify your new property(s), no matter when you sell.

[lendaddy]

Originally posted by motion
To encourage re-investment, which is the whole point of a 1031 exchange to begin with.

So if I can't just reinvest the profit, I have to go whole boat for the amount of the sale?

[motion]

That's correct. It encourages a "moving up" form of re-investment. Its actually a good thing. At least I have found it to be good for me. An imposed type of investment discipline.

[lendaddy]

Originally posted by motion
That's correct. It encourages a "moving up" form of re-investment. Its actually a good thing. At least I have found it to be good for me. An imposed type of investment discipline.

OK, so I could reinvest for the same or more than pull equity without penalty?

[motion]

Here's how it works:

You bought a house in year 2000 for $100,000

You sell it in 2006 for $150,000

Your profit is $50,000 minus improvements, fees, points, etc.

You must identify a new property(s) within 45 days of selling the home

You must close on the new home(s) within 180 days of selling the home

The new property(s) must have a cumulative purchase price of at least $150,000

[motion]

Originally posted by lendaddy
OK, so I could reinvest for the same or more than pull equity without penalty?

No, that will catch up to you when you sell the property and convert it to the next exchange property. They look at the original purchase value, not the amount owed.

[motion]

If you want to effectively end the 1031 cycle of madness, there is a way. All you have to do is live in the house for 2 years. Then you can sell it and keep up to $500,000 of the gains (if married, $250k if single) tax-free. This is how many people live tax free. They buy properties using 1031 exchanges, then live in them tax-free for 2 years. Sell the house and keep all the profit tax free.

[pwd72s]

Have you thought of carrying the mortgage on the property you plan on selling? That would reduce any capital gains. I'd ask a minimum of 20% down though...plus an interest rate higher than a home mortgage rate. To CYA, the agreed upon rate could be the minimum paid, subject to review every year (?) in case interest rates go up.

[lendaddy]

That all makes sense except that I am dealing with commercial property(though if my luck continues I may have to live there)

[pwd72s]

I was talking commercial property...I'm getting nice monthly payments @9% interest. They quit paying, I get to sell the property again...I've reached a point in life where the only real estate I'm interested in owning is the real estate I live in.

[930addict]

Here's a website with some info on 1031 exchanges.

http://www.realtyexchangers.com/WhatIsa1031Exchange.shtml