1031 Like Kind Exchange

[AZ-Tax]

Got a call from potential new client telling me the sale of the property (property 1) was delayed due to the buyer thus the purchase of the new property (property 2) closed 1 day prior to closing Property 1. Example. Property 2 closed one day prior to property 1 closing.

[Burke]

There are time frames on either side of the transaction which qualify the exchange for like-kind treatment. However, are you sure this was handled correctly through a qualified intermediary? Or did he just purchase the new and sell the old himself?

[AZ-Tax]

Contacting TP on this

There are time frames on either side of the transaction which qualify the exchange for like-kind treatment. However, are you sure this was handled correctly through a qualified intermediary? Or did he just purchase the new and sell the old himself?

I plan to contact TP on this.

[AZ-Tax]

The TP thought......

The TP thought all of this was to be taken care of at tax time therefore did not inform the title company of his intent to transact using the 1031 Like Kind exchange. Don't know if he consulted with his tax preparer prior but his other reason for calling me is his tax preparer is retiring. Think the IRS will bend for its his first offense?

[MDEA]

1031 exchange

If taxpayer received the money it is not a 1031 exchange. Must go thru exchange agent.

[Burke]

The TP thought all of this was to be taken care of at tax time therefore did not inform the title company of his intent to transact using the 1031 Like Kind exchange. Don't know if he consulted with his tax preparer prior but his other reason for calling me is his tax preparer is retiring. Think the IRS will bend for its his first offense?

No, there are strict rules for qualifying for a Tax-Deferred Exchange. Otherwise, it would be thrown out by the Tax Court. (If it ever even got there.)

[AZ-Tax]

TP should have never handled the money?

If taxpayer received the money it is not a 1031 exchange. Must go thru exchange agent.

So the taxpayer should have never had the funds from the first property sale in his or her hands prior to purchasing the 2nd property, correct?

[taxea]

Yep and do the properties even qualify as a 1031? It's to late to do anything about it now other than pay the taxes on the property that was sold.

[Burke]

So the taxpayer should have never had the funds from the first property sale in his or her hands prior to purchasing the 2nd property, correct?

Yes. The rules for this type of transaction can be complicated depending on the number and types of real estate which are involved in the transaction. A key component of preserving the tax-deferred benefits in full, is that the buyer/seller never takes possession of the funds -- most of the time all of the monies go into the new property. The 2nd property can be purchased before selling the first, but as I said there are time frames in which this must be accomplished. He can receive part of the funds (boot), but that will be taxable. A qualified intermediary is necessary to preserve this tax benefit, and there are professional companies who do this all the time. Section 1031 of the IRC governs this procedure, but there are numerous regs as well. There is much information on the Internet about these, and it has been discussed on this and other forums in the past. It requires some study and education. Tax workshops and seminars are also devoted to this one subject if you wish to learn more about it.

[JohnH]

Wonder how much is involved? I've seen plenty of situations in which the 1031 exchange was a really bad idea, or at best only slightly beneficial. By the time the taxpayer jumped through all the hoops and paid the extra transaction costs & intermediary fees, it would have been cheaper to just pay the tax and move on. Not to mention the complications involved when a deal falls through or gets postponed. Some of the tax paid is offset by what would be a higher depreciation deduction on the acquired property, so the tax savings is never as great as it first appears anyhow.

[WhiteOleander]

The taxpayer is at risk of losing his/her money the intermediary has. Several years ago a major intermediary company here in TX bankrupted. All the money they held for the exchanges was gone. Taxpayers were out of luck.

[JohnH]

After I attended my first workshop on 1031 exchanges many years ago, I resolved never to get involved in one nor to give advice regarding one. Whenever a client or potential client has asked me about one, I've always told them to find someone who specializes in them. And whenever I've looked at one after-the-fact, about half the time I've seen potential flaws in how they were handled. I came to the conclusion that a good rule of thumb is unless there's at least $50K or so of potential tax liability involved, therefore justifying the cost/risks of handling the transaction, it's probably not cost effective to undertake a 1031 exchange. After all, the 1031 exchange is primarily a tax deferral, not a tax savings (unless dying is a part of your plan).

[Burke]

Many of your average taxpayers remember the old rules for sale of personal residences, and think if you only buy another property more expensive than the one you sell, the gain is tax-free. And this is what happens when tax time comes around. After the fact, they find out that is not the case for other types of properties. I just had one this year, who sold a second home (used to be his personal residence, but he had not lived there for 8 years) and was stunned to find out he had to pay capital gains tax on the sale. He let his father-in-law live there, but it was not rental property. He even signed documents at the closing attorney's office stating it was his personal residence. I had to send him to the IRC regs and pubs to prove that I wasn't crazy. And, he conveniently forgot I warned him about this 6 years ago. 1031's can be uncomplicated, but I agree that it is probably more advantageous to the high-income taxpayer with cap gains rates so low.