1031 Exchange Blog
In this whiteboard video, we explain how 1031 exchange drop and swaps work. Check out more 1031 whiteboard videos here.
Defer the tax. Maximize your gain.
© 2017 Copyright Jeffrey R. Peterson All Rights Reserved
In this whiteboard video, we offer a few tips for 1031 exchanges of railroad cars. Check out more 1031 whiteboard videos here.
Defer the tax. Maximize your gain.
© 2017 Copyright Jeffrey R. Peterson All Rights Reserved
In this 1031 FAQ video, Jeff Peterson talks about earnest money deposits in a 1031 exchange. Watch more 1031 educational videos here.
Alright so you're doing a 1031 exchange, you’ve sold your relinquished property, and parked your proceeds with the intermediary. If you're like a lot of real estate Investors you are real estate rich and cash poor. You don't have a lot of extra cash laying around to advance for an earnest money deposit.
How can we make an earnest money deposit on the replacement property if all of your cash is tied up in the 1031 intermediary’s account?
Very easy. Enter into a purchase agreement for the replacement property, give it to the intermediary and say “Hey intermediary, please assign yourself into this contract so that you can advance a portion of the exchange funds to the seller or the seller's title company as the earnest money deposit.”
Once you have a contract for the replacement property it's very easy to assign that contract to the intermediary so that they step into the shoes as the buyer of that property and can advance the exchange funds.
What you can't advance money for are loan related expenses, so if you have a loan origination expense don't plan on funding that out of the exchange account.
Sometimes taxpayers don’t want to wait for the slow intermediary to wire transfer the earnest money deposit. Instead they want to write a check and attach it to their offer so it looks more appealing to the seller. Then they say “when can I get my earnest money cash back?”
At the closing of the replacement property you can instruct the settlement agent to not apply the earnest money deposit towards the purchase price, but instead to refund your money at the time of closing. Then your intermediary can come in with all the 1031 funds to fund the acquisition and you’ll get that earnest money back at closing.
Defer the tax. Maximize your gain.
© 2017 Copyright Jeffrey R. Peterson All Rights Reserved
In this 1031 FAQ video, Jeff Peterson talks about the same taxpayer requirement in a 1031 exchange. Watch more 1031 educational videos here.
Let's say that you have a husband and wife (Mark and Sandra) doing a 1031 exchange.
Mark and Sandra own the old relinquished property. When they go to acquire the replacement property the same taxpayers that owned the old property should acquire the new replacement property. So in our example Mark and Sandra should purchase the replacement property so that when they report their taxes on IRS form 8824 they can show that they disposed of a relinquished property and acquired a new replacement property.
But what if Mark wants to set up an LLC to buy the replacement property? Will that LLC be deemed to be the same taxpayer as Mark and Sandra individually?
The answer to that question can depend on what state Mark and Sandra live in. If Mark and Sandra are in a community property state such as Wisconsin or California the common ownership of that LLC by Mark and Sandra will still be viewed as a disregarded entity - a pass-through – where the IRS sees Mark and Sandra as the taxpayers behind the LLC according to Rev. Proc. 2002-69. In this situation, both spouses also have to file a joint tax return.
In that case Mark and Sandra could buy the replacement property by and through that disregarded LLC. The problem is that most states are not community property states – they’re common law states. In those states a husband and wife are not considered to be a single member or owners of a disregarded entity. A husband and wife in an LLC could create and would create a separate and distinct taxpayer.
So in non-community property States the options for the taxpayers are either to:
There’s still a continuation of investment by the same taxpayers, they’re simply bifurcating their ownership into two separate and distinct single member disregarded LLCs.
Defer the tax. Maximize your gain.
© 2017 Copyright Jeffrey R. Peterson All Rights Reserved
In this 1031 FAQ video, Jeff Peterson discusses construction improvement 1031 exchanges. Watch more 1031 educational videos here.
When you're doing a 1031 exchange you’ve got to find a replacement property. Wouldn’t it be awesome if you could build your replacement property exactly to your own specifications so you get exactly the property that you need and want?
A build-to-suit exchange may be the trick that you need to use to complete your exchange and get exactly the property you want. This is the way it works - you sell the relinquished property and the proceeds come to the intermediary. Then you find your piece of raw land or ugly duckling - some property that needs a lot of rehab work (could be an existing building or rental home with extensive deferred maintenance) and you sign a purchase agreement on it at the best and lowest price that you can get it.
But rather than having you close on that replacement property (because your exchange would be over once you received it), you instead have the qualified intermediary form an LLC and the intermediary buys the replacement property by and through this LLC. The qualified intermediary then holds title to the replacement property during the 180 day exchange period – exhausting the exchange funds that are held by the intermediary to fund the improvements.
Further, the improvements can be funded by either third party financing or additional cash advanced by the taxpayer. The idea is that you use all this time during the 180 day period to construct and remodel and fabricate real property improvements that count towards the 1031 exchange so that when the taxpayer receives this newly constructed replacement property, ideally they’re receiving a property of at least equal or greater value and equity as the property they gave up.
Defer the tax. Maximize your gain.
© 2017 Copyright Jeffrey R. Peterson All Rights Reserved
