Has anyone ever traded rental investment property with anoughter invester straight across using a 1031 exchange?
Here is the deal
I have been contacted by the broker of a Ca invester that is upside down and way over her head on 4 sfh propertys here in Al. ( Didn’t know the 50% rule)
PM’s she has hired here have been a nightmare.
These are all good rental propertys as far as location etc. I know that I can rent them.
I have a 3 unit rental property in Ca fully rented and has a good manager and maint team in place. I’m thinking of offering her a straight across exchange can it be done.
Yes, it can be done. You need to set it up with an accomodater before you start.
My accomodater has told me it isn’t necessary to set up a 1031 for a straight across swap, but that would make me nervous without getting a lot more information about it.
You’ve got some mortgage issues for a 1031. No one can have less debt when the exchange is over than they had when they started. Your target property has a lot of debt on it and that might be a problem (or it might not) for the other party.
One very good way to get out of overpriced property is to swap one over priced property for another.
Also, there is no equity in the AL properties and it is very very possible that a 3 family in CA is worth a heck of a lot more money than 4 singles in AL.
So be very careful with your math before you present your offer.
Thanks tater, You gave me some good information to research.
It is true that Al has not shown the equity growth that Ca has but this area has held steady and is a great rental market. I’m all about the cash flow. I still have a fair Ca portfolio.
This Seller is sitting to lose 87K no matter how we structure the deal.
:banghead2
This is an example of why newbies should pay attention to the excellent advice that Mike OH, You and others give here about investing out of your area and not doing your math. She overpaid for the rental market and did not know what to look for in property management so now she is trying to stop the bleeding.
Thanks Agian
A simultaneous exchange (or direct exchange) does not require an accomodator, though one could be helpful while you are navigating through the exchange.
My accomodater has told me it isn't necessary to set up a 1031 for a straight across swap, but that would make me nervous without getting a lot more information about it.
This comment is confusing. For a simultaneous exchange there is no need for a qualified intermediary nor will an exchange agreement be needed. However, even a simultaneous exchange IS a 1031 exchange and there is a specific set of guidelines that govern the exchange.
You've got some mortgage issues for a 1031. No one can have less debt when the exchange is over than they had when they started. Your target property has a lot of debt on it and that might be a problem (or it might not) for the other party.
For a simultaneous exchange to be fully tax deferred, the exchangor must trade equal or up in both debt and equity. If one party to the exchange is trading equal or up then the other party is trading equal or down. There is no prohibition against trading down in either debt or equity, but the amount of the net decrease will be taxable income to the affected party to the exchange.
Does an appraisal need to be done to determine the value? Can’t I just sell them for whatever I want? I paid $36,000 for the three houses in Calif.
If the lady from Calif. pays off the mortgages on her 4 Alabama houses before the exchange, can’t she sell them for whatever she wants?
If we agree to put a $100,000 price on both of our properties, yet she paid $180,000 for hers, does that not constitute a loss on her part? Why would she have to pay taxes on a loss?
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You are ignoring the basic structure of the deal. Noone is selling and noone is buying, the parties are trading their properties.
In a simultaneous exchange, you take title to my property and assume my debt, I take title to your property and assume your debt. If the value (established by appraisal) of my property is greater than the value of your property then you pay me the difference in cash. The cash received is taxable income.
If an outcome of the exchange is that I assumed less debt on your property than I previously had on my property, then I have debt relief. The amount of the debt relief is taxable income.
There is no tax loss on the transaction for either party because the value of the property plus cash given in the exchange is equal to the value of the property plus cash received.
I can offset the amount of debt relief gained by the amount of cash given, but if the difference is in my favor, then that difference is taxable income.
I once bought a house with 100% owner financing. I then sold it to one of my tenants with no money down and carried a second.
The IRS taxed me on the “Release of liability” from the first mortgage even though I didn’t make a penny in the transaction. I never did understand that. The liability was not released. It was taken over by the new owner.
As a matter of fact, two years later, the septic went out and he didn’t want to deal with it so he quit claimed the house back to me and I had to start making payments on that first mortgage.
I don’t know if he had a tax consequence on his release of liability. I never thought to ask.
Could I have gone to the IRS and got my money back? LOL
How many times can the IRS get paid on the “Release of liability” on one note that has never been paid off?
I have never heard of the IRS charging a tax on release of liability when there is no debt forgiven. From your comments, it appears that your debt was assumed without a release of liability, or, you sold the property to your buyer with a wrap-around mortgage.
I suspect you really paid a transfer tax or an excise tax levied by your state and county taxing authority instead of being taxed by the IRS. Depending upon the language in your purchase and sale contracts, it is possible you paid these taxes when you bought the property and again when you sold it.
If you had any tax liability to the IRS, it would have been on the sale profit you realized when you sold. Even though you carried back a second and got no immediate cash at settlement, you still made a profit on the deal (you sold for more than your cost basis, right?). If you treated your transaction as a dealer disposition, then your profit is taxable in full in the year of sale even though your profit will be paid in a series of future installments.
If the IRS really taxed you on cancelled or forgiven debt, then consult your tax advisor and prepare an amended return. If your tax advisor is the same person who prepared your tax return for this “release of liability” instead of as a dealer disposition, then get a new tax advisor.
Since you took back the property in a “friendly foreclosure” you will be entitled to adjust your cost basis for the amount of taxed profit. Consult your tax professional for specific details.
Whether your buyer has a tax consequence resulting from your foreclosure is an issue he should resolve with his own tax advisor. In effect, you accepted a deed in lieu of foreclosure, so the IRS will say that the buyer “sold” you the property for the amount of the debt owed. The “sale price” of the property will be deemed to be the amount of outstanding debt. If I am correct in assuming that your buyer’s cost basis was higher than the loan balance, your buyer won’t have any tax liability at all, but, no deductible loss either if the property was his primary residence.