1031 Exchange

[Dick Adams]

On a 1031 Exchange where a property is sold and the
proceeds are invested in another property, am I
correct that the acquired propery must be of equal
or greater value of the property sold?

Example:
Property A is sold for $X (net of selling costs)
and its mortgage of $Y was paid off. Therefore,
as long as Property B must cost $X or more for
the transaction to be completely tax exempt?

Dick

 

[Bill Brown]

On a 1031 Exchange where a property is sold and the
proceeds are invested in another property, am I
correct that the acquired propery must be of equal
or greater value of the property sold?

Keeping in mind that the taxpayer cannot touch the sales proceeds (an
intermediary must be used), to defer all the gain on the property
given up, the acquisition cost of the new property must equal or
exceed the sales proceeds of the old property.

Example:
  Property A is sold for $X (net of selling costs)
  and its mortgage of $Y was paid off.  Therefore,
  as long as Property B must cost $X or more for
  the transaction to be completely tax exempt?

If $Y is a part of $X, yes. (If $Y is in addition to $X, then the new
property must cost $X + $Y for all the gain to be deferred.)

Regards,
Bill

 

[D. Stussy]

On a 1031 Exchange where a property is sold and the
proceeds are invested in another property, am I
correct that the acquired propery must be of equal
or greater value of the property sold?

Based on those facts, that's not a 1031 exchange.

 

[Dick Adams]

(e-mail address removed) (Dick Adams) wrote:

Keeping in mind that the taxpayer cannot touch the
sales proceeds (an intermediary must be used), to
defer all the gain on the property given up, the
acquisition cost of the new property must equal or
exceed the sales proceeds of the old property.

Thanks, Bill. That is what I thought.

Are there specific qualifications for who can be the
intermediary?

Dick

 

[Gil Faver]

Based on those facts, that's not a 1031 exchange.

I knew it! Let's quibble!

In fact, based on those facts, it might very well be a 1031 exchange.

and to think I was about to post a compliment to this group, grateful to
have gotten beyond its sins of the past where any use of the term "sold"
would immediately be pounced on as not being a 1031 exchange.

 

[Gil Faver]

Are there specific qualifications for who can be the

intermediary?

I was under the impression that pretty much anyone could serve as the
Qualified Intermediary, but you would want someone who could make sure all
the paperwork is done right. So maybe your buddy is not the best choice.
In addition to the standard (and not to be trivialized) "make sure they have
lots of experience" and "make sure they are bonded and/or insured", I noted
these limitations, which sort of surprised me:

from http://en.wikipedia.org/wiki/Qualified_Intermediary

Anyone who is related to the taxpayer, or who has had a financial
relationship with them within the two years prior to the close of escrow of
the exchange can not be used as the QI. This means that the taxpayer cannot
use their current attorney, certified public accountant or real estate
agent. A corporation or other entity to act as Qualified Intermediary owned
by your CPA, CPA firm, real estate agent or attorney is likewise
disqualified.

 

[D. Stussy]

I knew it! Let's quibble!

In fact, based on those facts, it might very well be a 1031 exchange.

and to think I was about to post a compliment to this group, grateful to
have gotten beyond its sins of the past where any use of the term "sold"
would immediately be pounced on as not being a 1031 exchange.

Without indicating that there's an accomodator (or middleman - for a
multi-way exchange), a sale followed by a purchase isn't an exchange.
Otherwise, a sale does not constitute an exchange. If there's a sale,
there's no exchange - by definition.

 

[Mark Bole]

Without indicating that there's an accomodator (or middleman - for a
multi-way exchange), a sale followed by a purchase isn't an exchange.
Otherwise, a sale does not constitute an exchange. If there's a sale,
there's no exchange - by definition.

For purposes of discussion, it was already a given by the OP that it was
indeed a 1031 exchange. He wasn't asking if the transaction qualified
as a 1031 exchange, he was asking about one of the many rules that apply
to deferring some or all of the taxable gain from such a transaction.

-Mark Bole

 

[Bill Brown]

Thanks, Bill.  That is what I thought.

Are there specific qualifications for who can be the
intermediary?

The intermediary can have no other business relationship with the
taxpayer. That omits the taxpayer's accountant, banker, insurance
agent, etc. There are firms that exist to serve as accomodaters on
1031 exchanges.

Regards,
Bill

 

[Gil Faver]

Without indicating that there's an accomodator (or middleman - for a
multi-way exchange), a sale followed by a purchase isn't an exchange.
Otherwise, a sale does not constitute an exchange. If there's a sale,
there's no exchange - by definition.

on the contrary, it is impossible to have a 1031 exchange WITHOUT a sale.

 

[D. Stussy]

on the contrary, it is impossible to have a 1031 exchange WITHOUT a sale.

No, it's not.

I give you property A and you give me property B. A and B are approximately
the same value, so no "boot."

That's an exchange and nothing was sold.

 

[Bill Brown]

In tax law, "sale" and "exchange" have different definitions. For IRC
Section 1031 to apply, the transaction has to be an "exchange" from
the taxpayer's point of view. If it is a "sale," then the taxpayer
cannot use Section 1031 to defer recognition of gain.

Folks who cannot cope with specific, legal definitions existing for
tax terms that have slightly (or significantly) different meanings in
general usage should find another line of work. Although I sometimes
do the same thing Dick did in the first post (use with its general
meaning a term that has a different tax meaning) it's sloppy and leads
to time wasting exchanges such as the one between Stussy and Faver.

 

[Gil Faver]

I give you property A and you give me property B. A and B are
approximately
the same value, so no "boot."

That's an exchange and nothing was sold.

yes, but that is not a 1031 "exchange". in a 1031 exchange, the qualified
intermediary SELLS the relinquished property.

 

[Gil Faver]

In tax law, "sale" and "exchange" have different definitions. For IRC
Section 1031 to apply, the transaction has to be an "exchange" from
the taxpayer's point of view. If it is a "sale," then the taxpayer
cannot use Section 1031 to defer recognition of gain.

Folks who cannot cope with specific, legal definitions existing for
tax terms that have slightly (or significantly) different meanings in
general usage should find another line of work. Although I sometimes
do the same thing Dick did in the first post (use with its general
meaning a term that has a different tax meaning) it's sloppy and leads
to time wasting exchanges such as the one between Stussy and Faver.

my point exactly.

 

[Gil Faver]

yes, but that is not a 1031 "exchange". in a 1031 exchange, the qualified
intermediary SELLS the relinquished property.

of course, I am wrong here. Lack of sleep allowed me to forget that there
are not separate code sections for simultaneous and delayed exchanges; they
are both covered under section 1031.

Mark Bole: your posts have been spot on. I feel no need to comment
further.

 

[D. Stussy]

yes, but that is not a 1031 "exchange". in a 1031 exchange, the qualified
intermediary SELLS the relinquished property.

I suggest that you read section 1031 for yourself. There is NO REQUIREMENT
to use an intermediary.

Where are you getting that from?

 

[Stuart Bronstein]

(e-mail address removed) (Dick Adams) wrote:
Keeping in mind that the taxpayer cannot touch the sales proceeds (an
intermediary must be used), to defer all the gain on the property
given up, the acquisition cost of the new property must equal or
exceed the sales proceeds of the old property.

The last time I checked, this was technically not the case. The
replacement property can be worth less. If it is, however, the excess
is taxable.

Stu

 

[Bill Brown]

The last time I checked, this was technically not the case.  The
replacement property can be worth less.  If it is, however, the excess
is taxable.

That would be, technically, why I said, "to defer all the gain."