Posted by Nate(DC) on September 26, 2002 at 12:58:50:
NT
1031 Exchange - Time Requirement? Help Quick! - Posted by Ron M
Posted by Ron M on September 23, 2002 at 14:24:04:
A partner and I purchased a 4 plex via an LLC, in May of 2002 for $32,000. We subsequently invested approximately $30,000 in major renovation repairs. We have now sold the property for $110,000. We understand our taxable basis is $62,000 + sales costs.
We spoke to a 1031 intermediary and he said that he didn’t know if we qualified for a 1031 deferred exchange because we had only held the building for 5 months. He referred us to a CPA, who said that we were not considered dealers because we hadn’t bought and sold more than 7 properties in one year and he thought we did qualify for a 1031. We have conflicting stories from 2 guys who are supposed to know.
We are scheduled to close on the property in 2 days, can anyone tell me the rule?
Re: 1031 Exchange - Time Requirement? Help Quick! - Posted by ray@lcorn
Posted by ray@lcorn on September 24, 2002 at 18:41:53:
Ron,
You’ve entered an area where there is actually no “rule” in the IRC regardig how long a property must be held. The acid test is whether it was held for “investment”. That typically means the property was purchased with the intent of renting and holding. If your intent was to flip, then I would agree with the intermediary. But at the end of the day, it’s a judgment call made by you, along with the counsel of your advisors. If the CPA says yes, then I would be inclined to go forward with it. My tax attorney has a saying… he considers the 1040 as a good first offer!
As to your question about exchanging into multiple properties, see my article on 1031’s in the How To Articles section here on CRE Online. The direct URL is http://www.creonline.com/articles/art-159.html
Oh, and I’m not an attorney. Get one.
ray
Re: 1031 Exchange - Time Requirement? Help Quick! - Posted by John Merchant
Posted by John Merchant on September 23, 2002 at 15:02:19:
Since it costs you nothing to have the 1031 language included in the purchase/sale agreement, and could cost you plenty if you DON’T, just make sure the 1031 paragraph is included in the P & S Agreement before you close. Then you have time to consult with a knowledgeable 1031 facilitator (Starker Co, et al) and make your determination as to whether it does or does not apply to your case.
Re: 1031 Exchange - Time Requirement? Help Quick! - Posted by Bill (CA)
Posted by Bill (CA) on September 28, 2002 at 17:07:20:
Ray is right, there is no ‘rule’ in the IRC. The folks at Starker.com are experts in this area and actually work with the IRS in formulating rules for the exchanges. What they have told me about this area is under one year, you can bet that the IRS is going to question the transaction.
Over one year, especially 18 months and beyond, you are generally safe.
And yes, you probably should find an attorney to put on retainer…
Bill
My accountant is KPMG and he says… - Posted by Ben (NJ)
Posted by Ben (NJ) on September 25, 2002 at 14:33:03:
the same thing Ray just told you for free! (you saved yourself a fortune). One other valuable piece of advice, to tip the scales even further toward “investment”, my accountant advises the purchasing entity to not only hold this property but other “investments” as well (stocks, bonds, other real estate, mortgage notes,etc). Now the entity is a legitimate “investment” company involved in a myriad of different areas.
Re: 1031 Exchange - Time Requirement? Help Quick! - Posted by Ron M
Posted by Ron M on September 23, 2002 at 16:31:12:
I agree, we will definitely include the language because we have nothing to lose by doing so. Except I don’t want to pay an intermediary $700 or so if I’m going to have to pay the tax on the gain at the ordinary income level.
The other thing weighing on my mind is the value of the property we exchange up to. If the sale price is $110,000 less commissions and excise taxes of around $8,500 it is my understanding we must purchase real estate of like-kind in excess of 101,500. Can this be 2 properties of $50,750.50 to qualify for the deferred exchange?
be careful! - Posted by ray@lcorn
Posted by ray@lcorn on September 25, 2002 at 15:03:05:
Ben,
I would agree to a point about putting other investments into the entity, but would caution about mixing “safe” assets (stocks, bonds, etc.) with real estate. That violates the first canon of asset protection best practices. Other real estate may be okay if well leveraged, but I still get nervous with anything but single-asset entities anymore. It’s a dangerous, and litigatous, world out there.
ray
Re: 1031 Exchange - Time Requirement? Help Quick! - Posted by JHyre in Ohio
Posted by JHyre in Ohio on September 24, 2002 at 06:55:37:
You can exchange up into multiple properties…I’d make sure their combined value were > $110k to be on the safe side.
John Hyre
Good point but… - Posted by Ben (NJ)
Posted by Ben (NJ) on September 25, 2002 at 15:20:10:
with the sorry state of my portfolio I couldn’t give my stocks away! (JDSU- anyone, down only 95%!)Thanks.