1031 3-party exchange with purchase...
I did not get any responses in the newbie section but have found some great stuff here by doing a 1031 search. I have not been able to relate it all to my particular situation:
I am interested in purchasing the lot behind me but the owner (lets call him John) is not interested in selling. He would however be interested in "swapping" for a like-kind property. I have found such a property and it is suitable to John. The owner of the property I have found (lets call him Tom) is selling me the property for $18000. John's property was purchased by John two years ago for $5000. Tom's land was purchased for even less than this but he is well aware of the tax liabilities he will incur. John however is willing to do the deal only as long as it is "seamless" to him... Meaning no tax burden or change in his "value"/ Cap gains for him until such time as he actually sells. So my question would be two fold, what's the best way to go for John's sake as well as what my best interest? Do we do a 1031 or can I just buy Tom's lot for 18k and turn around and sell it to John for $5k and he sell me his for $5k in a cash deal where no cash actually changes hands? Also, whom handles this? Do I need a CPA and a RE attorney, just a CPA? Just an Attorney? Trying to keep the expenses down but I want a good professional. Thanks all, I appreciate any help!
You'll need an attorney exp. with exchanges & an Intermediary to facilitate the exchange...title companies & RE attorneys are good sources of such professional referrals. Your target propt. will be exchanged for the swap propt. through the Intermediary, subject to 1031 Code provisions and your attorney's advise. Values are then stepped-up per the closing statements prepared & accepted by each party at closings. Yours is a simplified 3-party, good luck.
Thanks RAM, the Title co advise was sound, I contacted a co I have used in the past and sure enough they have done plenty of 1031's and use specific lawyers for such. Also, they will be the intermediary so it simplifies things for me, possibly reduces my associated costs.
I was a bit confused about what you said about "stepped-up". Will the "John" party in my scenario be liable for additional cost? This would not be acceptable to John.
Also, could I just buy the property from John for the $5k he originally paid for his and then sell him mine(which I just purchased from Tom) for the same amount. Would I then qualify for a deduction because the next effect on me would be a $13K loss? Thanks again!
Here is one way this exchange could work.
You agree to buy Tom's property for $18K. Tom's property becomes the relinquished property in a 1031 tax-deferred exchange. Now Tom "replaces" his property by purchasing John's property for $18K.
The proceeds of the transaction between you and Tom are held in escrow by the escrow exchange agent, then used entirely to pay John for the purchase of his property. All parties will have to bring closing costs to the settlement table.
At the end of the deferred exchange, you have Tom's property with a cost basis of $18K. John sells his property for $18K in a taxable transaction. Tom acquires John's property in a tax deferred exchange, with a cost basis of $5K (the cost basis of the relinquished property becomes the cost basis of the replacement property).
Thanks Dave, this would be a good scenario except that the whole point is that John's property is the one that I want. Tom's property is not good for me and Tom just wants to "cash out" of this type of investment all together, so I'm not looking to do Tom any favors, he is getting a premium from me as is.
Really I think this is not a 1031 situation at all. If I buy Tom's and then turn and sell it to John, lets say two minutes later, for $5k, I've just lost $13k, no tax liability on my part...my only question would be could I write off this $13k loss?
Then I turn and John sell's me his lot. The selling price being $5k that he paid a few years back. Now, John has not gained or lost, he should have no liability and his basis is still the $5k...the cash passed back and forth accross the table between John and I and we're square. Tom pays Uncle Sam, but as I said, that's Tom's thing...
Quote:Thanks Dave, this would be a good scenario except that the whole point is that John's property is the one that I want. Tom's property is not good for me and Tom just wants to "cash out" of this type of investment all together, so I'm not looking to do Tom any favors, he is getting a premium from me as is.Sorry, I got the names backwards. Just switch John and Tom in my scenario, the outcome will still be the same. I was just starting from the point where you said the owner of the property you wanted did not want to sell, but would "swap" for a like-kind property.
Quote:Really I think this is not a 1031 situation at all. If I buy Tom's and then turn and sell it to John, lets say two minutes later, for $5k, I've just lost $13k, no tax liability on my part...my only question would be could I write off this $13k loss? I agree that a deal structured this way is not an exchange. It seems that you do realize a capital loss on this transaction, but with the $3000 limitation on a net capital loss deduction per year, you will not be able to take full advantage of this loss on your next tax return.