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Assuming we are talking about selling a property that you just completed. Section 1031 applies to property that has been held for investment and is acquired with the intent to be held for investment. Intent is more important than time and life events can impact holding periods. Call us to discuss your situation!

Thank you for watching! And good question. Profit or gain really has nothing to do with what has to be spent in an Exchange. It just tells us when an Exchange ceases to make sense. In order to be totally tax deferred, one must meet what we call "The napkin test" which simply states you must go across or up in value and equity. Both numbers are net of closing cost, not the gross to be totally deferred! Another way to look at it is every dollar spent overt your basis, represents tax-deferred gain.

@@1031ExchangeExperts thanks for the quick response!!

You can do an exchange and pay off the note but you will have to come out of pocket the extra money needed to satisfy the exchange. Please take a look at the Klarkowski court case, Dealer Status flyer that is available on our website. On the debt, if the property is encumbered it’s going to be paid off upon close. Whatever that debt is, will either have to be replaced in the new property or offset with cash out of your pocket. Otherwise to buy outright would mean you are going down in value in the amount of the previous loan, which would trigger tax.

Damon, the 1031 Exchange is not all or nothing. Think of the Exchange from the perspective that every dollar spent on the Replacement in excess of the Relinquished Property’s Tax Basis represents deferred gain and therefore deferred tax. To be totally tax-deferred the Exchangor must go across or up in Value and Equity. The Value and Equity numbers are net of closing costs such as Broker’s Commission, Title/Escrow Fee’s, our fee, Tax/legal fees and property tax prorations. If the numbers don’t quite cover, you simply have tax exposure on the difference. Here’s a short video on the topic from our UA-cam channel: ua-cam.com/video/tm6__V8KY18/v-deo.html So, using your numbers relinquishing a property for $3m and acquiring a Replacement of $1.245 you would have tax exposure on the difference between the $3M(net of closing costs) while the only gain receiving tax deferral is difference between the Basis and the $1.245. So, if the Basis on the Relinquished Property was $800k and you bought at the $1.245 you would defer the gain the $445k($1.245M-$800k). The tax exposure would be Federal at 20% on Appreciation and 25% on Depreciation Recapture, State Tax on top and finally 3.8% Healthcare tax. These rates are assuming long-term “held for investment” rates… I encourage a call to our office for a more detailed discussion of your situation!

Lenders typically do not favor improvement exchanges because they require us (your custodian) to take ownership of the property.

The fees for a 1031 Exchange can vary widely depending on the complexity of the transaction, value of the properties involved, and the specific services provided by the Exchange company. In this space - you get what you pay for!

If you are taking advantage of the 1031 Exchange for tax-deferral, the money you put into the property for repairs prior to selling will be considered equity in the property. You are correct that any invoices paid at closing for work done will be taxable as Boot. After the exchange is completed, you can apply for a cash-out refinance on the new replacement property to help replenish the funds. Always talk with your tax advisor as to how long you should own the property prior to applying for the loan!

John! Thanks for checking in though I'm not clear on what is being asked. It's no problem converting a Primary Residence to Investment and the property does not have to be rented, it must simply be held for investment. As you stated, the "seasoning period" could have adverse price consequences though with our wonderful inflation you'll likely have price increase with corresponding decrease in buying power, it's a wonderful world at the moment. If you look at our youtube library there are several videos on the conversion topic and as a regular, you likely are already aware of that. Please do not hesitate to give me a call to discuss.

Thanks for your reply. Basically I have 250k basis (pun intended) and IRS 121 is 250k single exclusion so the question becomes if I sell say 750k net 700k I have 200k to play with or just pay tax on.

I was screwed recently by FEMA at my property in OREGON. What was not flood plain now is flood plain I think its the X or 100 year designation. Anyway my thought is why develop and even single wides like I have there on one lot are pricey. I do like tuff sheds and no permits under 200 sf. Well to the question if I do just RV parking say vs RV park does that make sense? Then people can leave their RVs there and if they want to stay say 30 days total a year you are not really letting them live there just vacation type stuff. I could provide water septic and garbage. Anyway its a concept but in OR dreams are routinely turned to nightmares.

@@JohnDoe-np3zk we have a response from our Expert, Mark! "Historically, some properties in floodplain areas of Oregon have been approved for various RV and Campground use especially on navigable rivers. Each property in Oregon has its own approval process. Some communities require an alternate location that is out of the flood plain to move RVs in the event of a notified flood risk and some properties are only allowed to be open when there is no historic flood risk say for 6-9 months of the year. The question is, “What do you want any approvals and improvements to the property to accomplish for you and your family?” Is a goal for cash flow where holding the property until an alternative use is allowed or is it to improve the property to an RV park, season it with tenants, develop historic NOI, and then sell? Developing for an eventual sale requires knowing how long the property is allowed to be used for RV (with some restrictions) and providing at least water and power to a site (otherwise you have dry camping). I have sold properties in West Coast states that did not have sewer or septic and required holding tanks to collect wastewater, affluent, and solids from RVs and any publicly used on-property amenity that is required to be pumped out regularly and has a separate expense. These are identified as camping in some jurisdictions. If your site is unique it may be worth doing a feasibility study to determine if your property should be fully improved ($15,000 to $40,000+ cost per site depending on improvements and amenities) and if the sites can be rented (seasonally or year-long) to achieve a reasonable rate of return. As mentioned in the interview with David, RV sites are being developed in many communities around the USA (even in high flood-likely states along the Gulf Coast and major US rivers) for long-term resident stays and used by communities to meet their low-income housing quotients." Thank you for the comment and please let us know if you have any other questions.

Thanks for your detailed reply. My site is along the creek with a Mt. Hood view and dead end road. I have a single wide on one of 3 lots that has septic. The other two lots I was planning on adding community water and underground power as both are "right there". There was a detailed soil evaluation done before I bought it. I would just do septic on each lot with a drain field rather than just a holding tank. If septic an expensive type system needed then maybe just a holding tank. As to my goal these initial steps would open perhaps small houses vs an RV park or some RV parking as well. The 200 sf no permit reqt opens up less expensive buildings. Thanks again for your reply.

Yes he is!

Thank you for your question! In the scenario you described, the Exchangor is going across or up in value, equity and debt, so all capital gains tax would be deferred. The increase in mortgage is NOT taxable.

You can say that again!

We will keep it coming, thank you for watching!

Thanks for watching Tricia!

Thank you! Stay tuned for more.

I highly encourage you to call in and get on the phone with one of our exchange coordinators! The webinar above is an advanced 1031 class we put on for brokers who already have a base knowledge in this area. For something slower please check out our basic class with Tina Colson-Jones, or her series of SHORTS or give us a call! We will be able to give you a much more precise and customized explanation of your situation and options.

121 is not an Exchange, it is straight exclusion of gain on the sale of a primary residence. A property lived in as a primary residence for 2 out of the preceding 5 years qualifies and entitles an individual the $250k exclusion on gain while a married couple receives $500k exclusion. You can do this once every two years!

@@1031ExchangeExperts, ment to say exclusion... Friggin auto correct.

Thank you for tuning in!

Thank you for watching! Let us know if you have any questions.

You mean you actually understood what he's talking about? Seriously?

Hello Mike! If you sell your relinquished property for $203,000 and acquire new property for $90,000 in a 1031 exchange, you would have approximately $113,000 in “boot” which would be taxable. The amount of the loan is irrelevant in this calculation. To determine if a 1031 exchange is worth doing, you will need to know the amount of your gain that you will owe capital gains taxes on if you were to sell without doing an exchange. You can use this calculator to estimate but it is always best to consult your tax professional: Capital Gains Calculator www.1031exchange.com/calculators/ If your gain is similar to or less than the $113,000 of taxable boot in the above scenario, it would not be worth doing a 1031 exchange.

My base price after depreciation cost would be around $60,000. So my gain would be $143,000 without doing the 1031 exchange.

Hello Roberta! First - to qualify, the property will need to be debt free. The property will need to be placed in the trust prior to sale. If your primary residence is debt free, I believe it will qualify. To set up a charitable remainder trust, you will need to reach out to the 501(c)(3) charity of your choice or an estate planning attorney.

Thank you for watching! Hopefully now you can let the good times roll.

Thank you for the support!

Thank you for watching Tricia! Stay tuned for seller financing PART 2!