1031 Exchange Questions - Posted by CJinPA

Posted by David Krulac on January 14, 2011 at 11:46:52:

there are work arounds for both the 45 day rules as well as the 3 max property rule. But all the rules are purposely designed to make the 1031 exchnage harder to do and more subject to scrutiny. The fewer rules the easier to do correctly, the more rules the easier to mess it up and disallow the exchange.

While, the 1031, the stepped up basis, the $500,000 tax free and capital gains are all tax benefits, if that is not an oxymoron, I still feel strongly that capital gains tax should be indexed to inflation.

To tax inflation fueled capital gains is just not right. Inflation does not increase your wealth only deludes you into thinking you are richer than you are, no matter what level of income or wealth you have obtained.

If you are old enough to remember that 1950’s TV show “The Millionaire” with its tag line, “Here, Mr. Abnthony is our next millionaire.” then you know fully that the million dollars of the 1950s isn’t the same as a million dollars today. I haven’t done the exact math, but IMHO a millionaire of the 1950 is probably a DECA millionaire today just to stay even.

To me taxing capital gains without an inflation index is unconsciousable. Inflation is a government induced, dollar printing scheme to reduce the value of the dollar and made repayments with dollars of lesser value.

Inflation is NOgain and should not be taxed at all. Or maybe some thing that capital gains taxes should just be eliminated entirely.

Now that would cause increased investment.

1031 Exchange Questions - Posted by CJinPA

Posted by CJinPA on January 05, 2011 at 15:56:51:

I have a quick questions for those who’ve done 1031’s.

I have a SFH rental that is currently listed that I intend to transfer into a 1031 and then purchase a larger rental unit (another SFH nearer the beach for rental purposes).

My question is; if I found a perfect home now but my current SFH hasn’t yet transferred into to 1031, could I purchase the new home w/ financing then when the 1st house sells, transfer the proceeds via 1031 into the new home by refinancing to a lower mortgage?

I plan on calling a 1031 expert in the next few days, but wanted to see if anyone here has done this or know’s if this is valid according to 1031 rules.

Thanks everyone -


Re: 1031 Exchange Questions - Posted by Marle

Posted by Marle on January 06, 2011 at 12:36:24:

My response was specifically to your statement: “I have a SFH rental that is currently listed that I intend to transfer into a 1031…”
If you read about them, you would know that you don’t do that.
My response was logical and appropriate.

Re: 1031 Exchange Questions - Posted by David Krulac

Posted by David Krulac on January 05, 2011 at 18:18:30:

YES, its called a reverse Section 1031 exchange. It is much more difficult to do, and as in any 1031, you must PRECISELY follow the rules, no deviation. 45 days means exactly 45 days, 180 days means exactly 180 days, NOT 6 months.

AS I understand it, the qualified intermediary must purchase the acquired property in their name and hold it until you are ready to settle on the relinquished property.

There are IMHO, easier ways to do that including , a delayed settlement, a long settlement until you’re ready, or a lease otpion or even a straight option. the latter could be the best alternative as little cash could be used as the option consideration and you could have a long option period maybe yearS.

1031s are not as easy as many people think. there are lots of rules to follow. And the time frames are not as long as they seem for aregular 1031, those 45 days will fly by faster than you can ever dream. People get so hung up on doing the exchange that they often become short sighted and buy a property that is not that great of a deal, just because it fits the IRS time frames. Its a trap, few people talk about or realize.

Good luck,

David Krulac
Central Pennsylvania

Re: 1031 Exchange Questions - YES, but… - Posted by David Butler

Posted by David Butler on January 05, 2011 at 17:27:54:

Hello CJinPA,

… you will need to handle it very carefully, by way of what is commonly referred to as a “Reverse Exchange”, and you will need to run the transaction through an
Exchange accommodator (not the same thing as a professional exchangor, i.e. trained exchange real estate agent).

The Reverse Exchange is acknowledged as a marvelous strategic technique for gaining more flexibility in managing capital gains tax liability. Since the Treasury
Dept. issued Revenue Procedure 2000-37 eleven years ago, Reverse Exchange volume has significantly increased. In fact, many investors (institutional investors
especially) now use the Reverse strategy exclusively, often structuring every acquisition as a Reverse Exchange ? and making the ?match or sell? decision later.

Reverse Exchanges are especially advantageous in markets where an imbalance between the supply and demand for investment properties exists, or where the
relinquished property sale transaction fails, and ? for whatever reason ? you must acquire your like-kind replacement property first. Unfortunately, though the
guidance provided by the Treasury Dept. has clarified the issues surrounding Reverse Exchanges ? providing a much higher comfort level than before ? it also
leaves a lot of unanswered questions.

This dilemma inherently create a more complex AND costlier 1031 exchange vehicle. Consequently, the Reverse technique often presents exceptionally
complicated deal formulation/reward issues that often denude the intended outcome ? or inhibit its usage altogether. Consequently, it isn’t used as much as
it could be, and investors wind up leaving a wealth of highly rewarding IRC 1031 benefits on the ?cutting room floor?, and in the process often forfeit otherwise
viable transactions! (We do have a ‘high-octane’ solution for that BTW, for deals such as you describe here in particular.)

In any event, a major hurdle when engineering a Reverse Exchange is selecting the structure; then forming the required Exchange Accommodation Titleholder
(?EAT?) entity; and finally, deciding which investment properties will be acquired and held or “parked” by the ?EAT?.

The two ?reverse structures? available are commonly referred to as 1) ‘Exchange First’, and 2) Exchange Last? because the simultaneous 1031 exchange portion
of the transaction occurs either at the beginning (Exchange First) or at the end (Exchange Last) of the Reverse 1031 exchange. Each of these structures has its
advantages, and each has some critical disadvantages. Both are very complex processes.

Feel free to contact me by private email through the link in my name in the header of this post if you would like a referral to a tremendously well-respected
Exchange Accommodator, who has done joint consulting work for us over the past 15 years, and more recently has been invaluable in consulting with us on
our subsidiary Trust Exchange Services projects, where one or more of the parties has “parked funds” and their existing Exchange Accommodator, who for
whatever reasonisn’t too good at their work. In such cases we use our guy to help make sure everybody gets out “clean” in terms of future IRS issues.

Hope that helps, and best wishes for your continued success.

David P. Butler
Nascent Equity &
Hotspur Investment Group

Re: 1031 Exchange Questions - Posted by Marle

Posted by Marle on January 05, 2011 at 17:01:25:

google 1031 exchanges. There’s a variety now, and the rules are specific to each. Reading about them beforehand allows you to form your questions so you make better use of the time with the person on the other end of the phone. You will ask better questions and understand her responses better.

Re: 1031 Exchange Questions - Posted by CJinPA

Posted by CJinPA on January 07, 2011 at 08:22:40:

“My response was specifically to your statement: “I have a SFH rental that is currently listed that I intend to transfer into a 1031…”
If you read about them, you would know that you don’t do that.”

Huh? You mean that I cannot sell my SFH rental, put the proceeds with a 1031 intermediary while I identify another SFH rental home?..

Was it that I didn’t specifically say ‘proceeds’ and it read like I intended to transfer the ‘home’ into a 1031? If so, me thinks you’re reading too literally into what is typed. Either way, both Dave’s were able to understand the original post.

Simply ignore my posts moving forward Marle, I won’t be offeneded in the least.


Re: 1031 Exchange Questions - Posted by CJinPA

Posted by CJinPA on January 05, 2011 at 18:38:39:

David - Thanks for the response, I greatly appreciate it. When I talk to the firm who’s scheduled to handle my transaction tomorrow, I’ll be sure to cover this option in detail.

The house I’m currently marketing will sell… it’s price slightly below market and in a Blue Ribbon school district just outside of AC in New Jersey. The reason for me asking the 1031 question is that I’ve already located the property I want to transfer the assets into… With your response, at least I know I potentially have some options.

Thanks again.


Re: 1031 Exchange Questions - YES, but… - Posted by CJinPA

Posted by CJinPA on January 05, 2011 at 18:44:06:

WOW! Thank you David, I’ll be in contact.


Re: 1031 Exchange Questions - Posted by CJinPA

Posted by CJinPA on January 05, 2011 at 17:18:39:

Wow, thanks for the super condescending response Marle.

To clarify, I’ve already done a decent amount of research (lol, via Google at one point). I have an exchange firm I’m currently working with but since I’m traveling at the moment and it’s past 5pm EST they’re no longer open today.

While waiting for my flight I figured I’d ask the ole trusty creonline forum to see if anyone had a quick answer to a fairly straight forward question.

Apologies to anyone who found my original post too elementary, including Marle.


Re: 1031 Exchange Questions - Posted by Marle

Posted by Marle on January 07, 2011 at 14:05:35:


Re: 1031 Exchange Questions - Posted by Frank Chin

Posted by Frank Chin on January 07, 2011 at 06:24:44:

IF you have already LOCATED the property, and just waiting for a buyer for your property, then there is NO NEED to do a DEFERRED NON-SIMULTANEOUS exchange which a “1031 exchange”, in IRS parlance, technically is.

Do as Dave suggests, option to buy, and if you are selling below market already, wait for a buyer.

What you do is a SIMULTANEOUS 3 way exchange where you get the buyer of your relinguished property, you (both as buyer and seller), and the seller of your upleg property all into one room for the closing. It’s called three way as there are 3 parties, though you can have 2-way (an echange between two parties), 4 way ( exchange 1 into 2, or 2 into 1) etc.

No accomodator is needed because no funds would be held to do the next leg of the exchange, as required by the IRS, as it is all done at once.

I have found local real estate attornies often foggy on real estate exchanges, so I might have an “accomodator” just to help prepare the paperwork, which they can do by mail, and on the phone on closing day.

A reverse exchange can be costly if they have to set up a separate entity, which they should, to hold the property, something you don’t need if you located the upleg property already. One other benefit of simultaneous exchanges is you don’t have all the time lines to observe required in the 1031 exchanges.

Instead of spending the money on the reverse exchanges, sell it cheaper and get it done.

Finding the Wild Card… - Posted by David Butler

Posted by David Butler on January 07, 2011 at 13:54:35:

Hello Again CJ,

You are very welcome.

I note that both David Krulac and Frank Chin have subsequently offered some very good input, which touches a bit more on the problems I alluded to with
regard to exchanging, and more particularly, “Reverse Exchanges”.

As both have stated, there several possible alternative solutions, each of which offers their own set of advantages/disadvantages. In fact, their feedback
points to the necessary structural integrity required for all transactions, and the range of possible solutions that may or may not be worthwhile in further
exploration. And Frank has touched on one of the other important factors in any transaction that goes outside of a straight “I sell, you buy” traditional
“cash-to-loan” or “cash-to-new-loan” scenario.

It is critical to understand that there is no “Golden Hammer” deal-structuring technique that fits perfectly for all transactions, all the time. The starting point
has to be based on carefully analyzing your own objectives as specifically as possible, then - and perhaps more critically - trying to match those up with the
objectives OF THE OTHER PRINCIPAL to the transaction - to the degree necessary to reach a meeting of the minds.

This type of counseling approach is what initially drove the formation of the Society of Exchange Counselors some 50-odd years ago; and for the most part,
the best of their members have maintained the training and requisite “solution knowledge” to meet those objectives. But, as it is, many of them too become
enamored either with a particular methodology, or the trap of being overly creative, when simplicity is the better path in the given transaction.

And as Frank and I have suggested, the parties will generally be operating in an environment that involves 3rd party providers, whom aren’t well-schooled in
several - or more often, numerous - aspects of their own specialty. Many CREI also frequently deal with this constraint in transactions involving real estate
agents, even in fairly simple installment sale transactions - and sad to say, even in the field of exchanging. The same caveat applies for the various advisors
that often are in the mix (a necessary by-product if the deal involves tax-planning, exchanging, or ownership structures such as LLC’s, land trusts, or similar).

So does the caveat of understanding the biases and preferences of the various parties to the transaction (both principals and third-parties), that inextricably
come into play.

Exchanging in general is perhaps the “King-of-the-Hill” in the real estate investment field, when it fits both the circumstances, and the proclivities of at least
one of the players in the transaction. Over the past 50 years, exchanging has grown exponentially, and the so have the tax benefits that go hand-in-hand
with it. But so have the technicalities.That fact that it is complex, and at times can be very difficult to accomplish does make it one of those types of
techniques that many people won’t bother with. When it’s not worth the extra effort, that is a valid reason to avoid it. More often however, it is not fully
explored because the third-parties, or the other principal, do not fully understand it - or fear the complexities… rightly or wrongly.

Either way… as a result, a great deal of investor profits are often left on the “cutting-room floor” as I mentioned previously.

As Frank has concurred, the Reverse 1031 exchange process is considerably more costly as well? in related transaction costs, and increased Qualified Intermediary
Fees (due to creating the EAT entity, and the increased risk assumed by the Accommodator when acquiring and ?parking? legal title to the Investor?s relinquished
property; or replacement property). There is also the potential for double taxation by local taxing authorities, for items such as transfer taxes, property taxes due
to incorrect or premature reassessment when either the relinquished property is conveyed to the EAT and then transferred to the buyer (?Exchange First?); or the
replacement property is conveyed to the EAT, and then transferred to the Investor (?Exchange Last?).

And whether “forward” or “backward”, while delayed exchanges have brought a great deal more flexibility to a transaction, the time-limit constraint mentioned by
both David K. and Frank definitely presents a distinct challenge for one, or both principals, in many scenarios. Personally, I never understood why the relinquishing
party couldn’t have 120 days to identify the replacement property, and 60 days to close. But there it is. And in today’s dicey real estate market, such time limits
unequivocally pose a definite risk factor.

I mentioned in my previous post a “high-octane” solution(s) we developed several years ago to mitigate both the cost factors and the time-limit constraints
existing in delayed exchanges, and we were fortunate to have some good reception to those by way of the advanced training classes we were invited to
present at national conventions of both the Society of Exchange Counselors, and the National Council of Exchangors, two years ago. As a result, we have
had some very successful applications of these alternative solutions, through our subsidiary Trust Exchange Services. But as with all methodologies, the
particulars and objectives of the principals, and their advisors will determine whether these solutions are applicable for the deal in question.

Best wishes for the successful conclusion of the transaction you have in mind.

David P. Butler
Nascent Equity &
Hotspur Investment Group

Re: 1031 Exchange Questions - Posted by Dave T

Posted by Dave T on January 07, 2011 at 18:02:07:


As I understand the 1031 exchange requirements, only a direct exchange between two parties can be accomplished without a qualified intermediary.

The structure you are proposing is a Starker exchange where there are three principals to the exchange, the exchangor, the buyer for the relinquished property, and the seller for the replacement property. Does not matter that the exchange will be completed in one day, IMHO, a qualified intermediary is still required.

RE: the 45 day identification process… - Posted by David Krulac

Posted by David Krulac on January 10, 2011 at 09:38:08:

I’m going to be completeing a 1031 in 2 days, so it is very familar and currently on my mind.

The 45 day id period is just 1 of the difficulties put into the law/regulation. IMHO, the difficulties were intentional put into the regulation to make it more difficult to actually do a 1031.

The 45 days flies by, ask me how I know, and to meet all of your presonal requirments makes the property selection difficult. I was the high offer on a short sale and the bank could not gareentee that they could give me an answer that they would accept the offer within the 75 days available. (This was 30 days
before settlement on the relinquished property.)

If the regs were lossened then more people would do 1031 and that would result in less tax revenue and not be in the interest of the taxing auhtoiries.

If you really want to level the playing field, then capital gains taxes should be indexed for inflation. As it is today, for property owned a long time like decades, the capital gains tax is mostly a tax on inflation.

Re: Tripping The Light Fantastic! - Posted by David Butler

Posted by David Butler on January 07, 2011 at 20:14:42:

Hello Dave,

Frank is referring to the bread & butter of the exchanging sector, commonly described as the ABC exchange (aka the “Baird” exchange, and my personal favorite
moniker, “The Missouri Waltz”).:-), whereby two principals conduct the exchange of their properties, and as part of the transaction, a cash-out leg is generally
found to purchase the Relinquishing party’s property from the Replacement property’s owner, concurrent with the closing of the overall exchange transaction.

Depending on what other factors and objectives the parties bring to the table; and when a cash-out leg or a third-party property is readily available, balancing
equities is not a factor, and tax issues are not a concern to at least two of the Parties to the transaction? the Missouri Waltz may likely be the route to go. In
fact, it is generally the route commonly taken, because the factors in play in many transactions preclude a simple two-way exchange.

But just as the likelihood of accomplishing a straight across two-party exchange is relatively low ? finding the perfect balance of factors for accomplishing the
ideal Missouri Waltz is also a rarity. Instead, closing a successful Missouri Waltz transaction is generally a matter of one or more of the Parties finding an
acceptable compromise somewhere in the mix.

The most prominent example of perhaps the most common issue in play, is the development of the Delayed (Starker) Exchange. As can be expected, a cash-out
leg for suitable replacement property is generally not immediately available. But other issues are equally common:

  1. Too little ? or too much ? equity is often a problem on at least one side of the deal in many instances. Or,
  2. The cash-out leg has significant tax issues in play, causing possible properties to drop out of the mix, or otherwise call for a painful resolution for that owner. Or,
  3. A debt-relief, or mortgage-over-basis issue; or
  4. related difficulties with balancing or netting equities.

Perhaps most common in today?s marketplace? one of the Parties has a significant mortgage-over-basis issue that presents some real challenges. Or it may be
some estate planning issues, looking for a path-to-cash resolution, where one of the principals simply can’t accept a straight exchange scenario.

Whatever circumstances and/or objectives may be in play, we have used some custom designed devices of our own devise, which, in keeping with the exchange
industry’s penchant for creatively named solutions, we call our “Illinois Mambo Solutions?” (forward delayed, i.e. “Starker” exchanges) and “Backdoor Shuffle
Solution?” (in lieu of “Reverse [Starker’” Exchanges).

These present highly versatile strategies for solving a number of issues that can?t be as easily, or completely, resolved by any other means - in many otherwise
difficult exchange scenarios. Subject to the circumstances of the transaction of course.

Hope we’ve helped clarify the differences, and any misconceptions you may have had with regard to multiparty exchanges.

David P. Butler
Nascent Equity &
Hotspur Investment Group

Re: 1031 Exchange Questions - Posted by Frank Chin

Posted by Frank Chin on January 07, 2011 at 19:06:03:


Here’s an article to various simultaneous exchanges. I was talking about the “3 way format, without the use of a QI” mentioned here, as I knew someone who has done one some years back. The 3 way is an expanded form of the “2 way exchange”, a swap, illustrated in the article.


My understanding is an QI is absolutely needed if there is a delay in the exchange of the 2 legs of the property, where the seller relinguishes his property first, then close on the the upleg property some time later, with rules on identifying and closing.

However, I found local lawyers foggy on the issue of exchanges, so QI’s are nice to get involved even though they might not get involved in holding funds in between for simultaneous exchanges, as compared to delayed exchanges.

What I have found is most articles had been written on the “non simultaneous delayed exchanges”, mostly by QI firms, as there is not much money to be made in doing the simultaneous exchanges.

Eradicating the “Time Flys”! - Posted by David Butler

Posted by David Butler on January 13, 2011 at 16:33:38:

Hello David,

Yes… I’m with you there. But I still have to say that I’m glad we have the option, as opposed to the limitations we were faced with before the series of “Starker” decisions gave us this new flexibility for deal structuring.

Nevertheless, you are absolutely right… there is no question that the 45 day ID period is a major issue in too many cases.

That is the reason we looked for creative ways around it several years ago through the judicious use of the title-holding land trust vehicle several years ago, as I alluded to in several of my replies here. The intent is to avoid any time limit restrictions altogether, whenever possible.

Like it is with most exchanges (and other CREI techniques generally), the other circumstances in the deal (including individual state law) will ultimately determine if our solution(s) will facilitate the transaction. But this has been an elegant finesse tool in our own transactions, and for the several folks who have consulted with us for some of their exchange related transactions.

Not certain I follow you on the capital-gains argument though. For a truly-level playing field, that advantage would have to be taken off the field entirely. I’m not advocating that… just pointing out the fact that in general, the capital gains rate is a significant tax benefit as it is, for the relatively tiny percentage of Americans who gain direct benefit from its existence.

In any event… best wishes for your successful, and TIMELY :slight_smile: conclusion of this particular transaction, and a very prosperous 2011.

David P. Butler
Nascent Equity &
Hotspur Investment Group