Reducing Liability: "Be the man with the plan" - IRC Section 1031

3/8/2018

IRC Section 1031: Like Kind Exchanges

The above file will assist in calculating basis and exchange figures.

Key Factors:
Like-kind replacement properties must be clearly and specifically (unambiguously) identified to the Qualified Intermediary using the common property (street) address, and/or the legal description, and/or the Assessor's Parcel Number (APN).
A tax-deferred exchange, also known as a 1031 exchange allows you to roll over the gains on one property to another. To qualify for this, you’ll need to hold the property for a year or more (longer is better in the IRS’ eyes) and rent it to tenants. It can’t be used just on a quick-turn property. For more information, I can provide more details on 1031 like-kind exchanges. Sellers may successfully rollover gain and ultimately move into one of their investment properties and declare it to be their primary residence. Provided they are married and have held the property for five years, reside in the property for a minimum of two years, they can exempt $500,000.00 in taxes upon the ultimate sale. Capital gains taxes are eliminated upon the death of the property owner. Heirs receive a step up in basis on the date of death.

Example #1: John owns a property he paid $250,000.00 for and is now selling for $400,000.00. He has a $150,000.00 mortgage against the property and wants to buy a smaller condo for $250,000.00 with the cash. Does this qualify for tax deferral treatment?
No. John is buying down from $400,000.00 to $250,000.00. Accordingly, tax is owed on the amount of the buy down, which is $150,000.00.
Example #2: John decides to buy a replacement property for $500,000.00 and obtains a $400,000.00 loan using $100,000.00 of the $150,000.00 cash that the qualified intermediary is holding. Is his exchange fully deferred?
No. Despite buying up, John did not use all of the cash and will be taxed on $50,000.00.