Posted by Ben(NE) on June 23, 2005 at 13:19:31:
Makes sense, thank you for your input.
1031 Exchange - Legal Challenge - Posted by Ben(NE)
Posted by Ben(NE) on June 16, 2005 at 10:47:25:
I purchased a duplex two years ago on land contract. I am now refinancing to take advantage of the appreciation and loan pay down. The seller (we have become friends) will realize a significant capital gain and wants to do a 1031 Tax Deferred Exchange to shield his tax liability.
The problem is that his 1031 agent says that since he sold the property to me on land contract, that he can’t qualify for an exchange. This makes sense to me but we are trying to look for loopholes to get around this. Perhaps he “kicks me out” and cancels our original agreement and then sells it to me a week later? Any ideas from the legal minds here? Thanks for your help.
Re: 1031 Exchange - Legal Challenge - Posted by William L Exeter
Posted by William L Exeter on June 23, 2005 at 11:49:47:
Sorry, but there is no way to do this. The sale occurred two years ago and there is no way to undo that. The Land Contract is merely a financing vehicle that is taxable pursuant to Section 453 of the IRC as an installment sale. The payoff will trigger his capital gain tax. He could have structured a 1031 exchange two years ago before the close of the sale (although Land Contracts present special challenges), but it is too late now.
you’re playing with fire… - Posted by David Krulac
Posted by David Krulac on June 17, 2005 at 15:59:15:
when you play with the IRS. Its like having a can of gas in one hand and a lit fire in the other. There’s the possibility that you could survive, or all heck could explode right in your face. For the last 2 years you’re saying that the seller hasn’t been paying any taxes on your contract? WOW, can you spell Leavenworth, boys and girls?
voiding the existing contract and then reinstating essentially a week later is a sham and would be considered fraud by the IRS.
this could have all been avoided, if the seller and you had done things differently 2 years ago. For example an OPTION, would have been a great thing to do. No taxes due on the option payment until the option is exercised or expired.
Re: you’re playing with fire… - Posted by Ben(NE)
Posted by Ben(NE) on June 17, 2005 at 17:51:47:
David -
I really appreciate your comments. The seller HAS BEEN paying taxes per IRS code on the portion of my payments to him considered income.
The problem is he now realizes there will be a significant gain on the property when I refi and pay off the land contract.
The last thing I am willing to do is light a match when I’m holding the gas can. However, if there is a way to pour the gas into a car and drive the tax gain directly into another property that’s what we want to do.
It sounds like you are not aware of any way to 1031 the gain from a property sold on land contract into another property without having legally needing to show the gain to the IRS. Is that right? Thanks again for your advice.
Re: you’re playing with fire… - Posted by Bill H
Posted by Bill H on June 21, 2005 at 01:58:00:
I agree with David Krulac.
Simply put…how can you say it is a 1031 when the title changed and the property was sold to you 2 years ago?
Also: some of their agents are really sharp at title searching…if your contract is recorded…what now?
The IRS will go over the 1031 with a fine toothed comb, call your investor friend in, ask a simply question like when did you iniitate the contract? Then what?
There goes the neighborhood!
It aint worth it!
Good Luck,
Bill H
Re: you’re playing with fire… - Posted by Ben (NE)
Posted by Ben (NE) on June 21, 2005 at 08:45:26:
Thanks for the input, Bill. Just to clarify, title has NOT changed. The seller still has title in his name on the duplex. Also, he just called me and said he spoke with a national 1031 exchange corporation who told him this would be no problem. They told him that we could cancel our land contract and write up a purchase agreement so he could 1031 the gain.
Remember that the seller has been properly reporting and paying tax on the income under the installment sales IRS provisions.
This information may or may not change your expert opinion. Thanks!
Re: you’re playing with fire… - Posted by William L Exeter
Posted by William L Exeter on June 23, 2005 at 12:00:00:
Actually, title has changed. Title is broken up into three component parts: legal title, equitable title and beneficial title. Legal title has not been transferred because it is retained by the seller to protect him/her under the land contract, but the equitable and beneficial title has transferred, which is why the 1031 exchange can not be completed at this point.
Re: you’re playing with fire… - Posted by David Krulac
Posted by David Krulac on June 22, 2005 at 19:08:54:
the 1031 exchange company isn’t exactly an impartial source. lets say the whole deal does blow up and both you and the seller get audited, will the 1031 exchange company provide a legal defense for you? I think not. I would run the idea past a qualified CPA who is very familar with both real estate and 1031s.
The seller made a mistake 2 years ago by not doing an exchange then, I don’t think the IRS is too forgiving of 2 year old mistakes. And what do you get for your trouble besides a red flag for an IRS audit?
Re: you’re playing with fire… - Posted by William L Exeter
Posted by William L Exeter on June 23, 2005 at 11:57:33:
We are also a national exchange company, and I can tell you that they are wrong. I have been in the 1031 exchange business for over 20 years. This exchange would absolutely be disqualified by the IRS under an audit. It is up to you and your other party, but this proposed transaction is not just a disqualified exchange, but because you are trying to specifically circumvent the tax liability is would be classified as tax fraud. You do not want to go down that path. Sorry to be the bearer of bad news, but the seller should have done an exchange two years ago when the property actually sold.