TEE-Shots Newsletter

What is the definition of "closed" to meet the 180-Day deadline?

Can I sell my investment property and then buy a house that I would like to live in?

In order to properly do a 1031 exchange, both your Old Property and your New Property have to be held for investment. This means that in most situations you would have to hold the New Property as investment property for at least a year and a day. Once this period has expired, you may do with it as you wish, including moving into it as your personal residence.

For 1031 investing purposes, a relative is someone that is directly related to you in a straight line. Think of it this way: Linear = NO; Diagonal = YES. Your parents, grandparents, brothers and sisters, children and grandchildren, and your spouse are related to you horizontally and vertically, so they are not allowed.

Aunt Matilda and your cousin Fred are related to you diagonally. Therefore the IRS does not consider them "related," and you are eligible to buy exchange property from them or sell exchange property to them.

"Does §1031 require that I only buy Like-Kind replacement property?"

The "Like-Kind rule" mainly applies to personal property, ie: "things you can move;" like supplies, transportation, machinery, equipment, inventory, etc. This means if you sell a pizza oven in an exchange, the new property must be another pizza oven.

“If I buy more than one new property, how do I allocate my tax basis between them?”

Since your tax basis rolls over from the old property to the new, you would allocate your basis between multiple properties on a pro-rata basis.

For example, if you sell your Old Property for $100,00, which has a basis of $50,000, and you buy two new properties; one for $60,000 and one for $40,000; your $50,000 basis would transfer pro-rata. This means that the basis of the $60,000 property will be $30,000 and the basis of the $40,000 property will be $20,000.

New FIRPTA Filing Requirements Have Serious Consequences for Foreign Real Estate Owners

A properly structured 1031 exchange can eliminate the 15 percent withholding tax from the sale price that is normally required under FIRPTA. But under the new IRS regulations a foreign property seller must now apply for a withholding certificate from the IRS. Furthermore, the seller must have an "International Taxpayer Identification Number" (ITIN) in order to apply for the withholding certificate. Many foreign property owners have never obtained an ITIN.

"If I buy more than one new property, are there rules on how I have to split the cash and the debt?"

No, as long as you buy equal or up, and reinvest all the cash, you can split the cash and the debt however you wish. For example, if you sold your Old Property for $100,000 and $60,000 went to your qualified intermediary (after paying the mortgage and closing costs of $40,000), in order to avoid paying tax you would have to buy properties totaling at least $100,000 and you would have to spend the $60,000.

"My attorney says that he can be my intermediary. He'll have one of his partners handle my exchange. Is this okay?"

No. Section 1031 prohibits an attorney, or their firm, who has had a client relationship with you in the past two years from acting as your qualified intermediary.

--The Experts

I just got a bill from my attorney for his work on the sale of my old property. Can the intermediary pay that from the proceeds they are holding?

Yes -- the intermediary can disburse proceeds they hold to pay bills on the old property that arise subsequent to closing of the sale. Your attorney's bill is one example. Another example might be repair costs that are agreed to at closing, although the amount of the costs are unknown at that time.

--The Experts

Can I pull the money that I invested in my Old Property out when I sell it?

No -- not without paying tax. You must reinvest all of the cash from the sale of your Old Property in order to avoid paying tax, even if some of that cash is money that you put in. Think of it like a hard-boiled egg: the money you put in is the yellow yoke, but to get to it you have to go through the white part, and the white part is all taxable.

--The Experts