Posted by dealmaker on October 17, 2006 at 18:41:48:
I’m not sure I would use the phrase, “disclose to the buyer”, to me it’s more a matter of putting whoever is handling the closing that YOU will NOT be touching funds from closing. Although now that I think about it you’re putting the buyer on notice that the closing has an extra step and could take a day longer to “settle”.
Any equity that you take out is “boot” and is taxable this year.
I suggest you read up as quickly as possible on this. Either read up on irs.gov code section 1031 or “google” the phrase 1031 exchange and you’ll get a boatload of places to read up.
BTW, it should cost about $400 or so for the third party facilitator, remember YOU CAN’T TOUCH the money.
We are suppose to close on a rental house at the end of November and I’m trying to determine if I should do a like kind exchange to defer the taxes. I have a couple of questions:
I was told that you would have to disclose to the buyers that the transaction will be a like kind exchange. Why do you have to do this? And if so when are you suppose to disclose this information? I would think that it would not be any of their business.
Are there limitations on acquiring a loan against the equity in the new property that you exchanged once the like kind exchange is finalized?
We’re wanting to take equity out of property to do a flip in order to generate cash for other properties. That’s another question what are some ways for us to reduce our tax liable on any flips that we do?
I would appreciate any suggestions. By the way I’m from Alabama if that makes any difference.
The 1031 Exchange on the sale side is a “double closing”. In it you will sign transferring the property and sales contract to the intermediary who then will sign the papers finalizing the sale and taking posession of the proceeds. This is how you keep your “hands off” from the funds so they don’t get taxed and why you need to have the 1031 disclosures. The buyer will actually be buying from your intermediary and not you.
On the purchase side, you will be signing sales contracts but the paperwork you and the seller signs will assign the contract to the intermediary who will complete the purchase and transfer the property to you. This way no cash touches your hands.
They call cash you take out “boot” for reasons nobody ever explained to me. This can be done on the front end as part of the closing instructions or at the end just by running down the clock after which the intermediary will send you a check. The boot gets taxed, though it could be at the S/T cap gains rate if you held the sale property long enough.
Posted by David Krulac on October 19, 2006 at 18:16:32:
The IRS says so. It should be written on the sales agreement/contract. The buyer will have to sign some paperwork for the 1031, but it will not cost them anything.
2.YES, Your new debt can’t be less than your old debt or there is debt relief and possible taxation.
If you are a DEALER, which most flippers are you are INELIGIBLE to do a 1031. Exchanges are reserved
for investors, not flippers per the IRS code.
Other things that you need are:
a. an intermediary to hold the proceeds from the relinquished proeprty. If you touch the money, or your attorney holds the money, the exchange rules are violated.
b. you have to identify the acquired property within 45 days from settlement of the relinquished property.
c. you have to settle on the acquired property within 180 days of the aforementioned settlement.
Posted by ray@lcorn on October 18, 2006 at 11:05:14:
Tammy,
Usually the seller includes language in the contract to the effect that the buyer agrees to cooperate with the seller’s 1031 at no cost to the buyer. This is to provide for the assignment of the contract and proceeds to the Qualified Intermediary (QI) on behalf of the seller. It’s not really a disclosure, just a way to insure there is no problem with the assignment. It won’t (shouldn’t) delay closing at all. (Do not make the mistake of naming your attorney as the QI. Some attorneys are not aware that this disqualifies the exchange.)
As to refinancing to access equity post-exchange, most advisors recommend waiting about 30 days before closing the refi, and the proceeds are not taxable. However, remember that the original exchange must meet the requirements of trading equal to or up in debt and equity. The big no-no is to refi right before the exchange property is sold. That will disqualify the exchange altogether. For the basics of 1031 exchanges, see this article: http://www.real-estate-online.com/articles/art-159.html