1031 And Wholesaling...
Our REI club yesterday had a person in from a 1031 Exchange servicing company. I learned some good things, but also have some more questions.
1. It is my understanding that if I use proceeds from the sale of a property and do a 1031 on two successive properties in a year, that I am forever labeled as a broker by the IRS. So here is a scenario. I sell property A and roll the money over to a new property B, I sell B and roll it over to property C, I sell C and roll it over to property D.
If all of the above transactions happen in my tax year, then I am a marked man. If I rollover only to B and C in a year, but not D, then I'm okay.
I could also sell property E and roll it over into properties F and G consecutively and in parallel with the first scenario and because the proceeds being roller over came from different investments, not be labeled as a broker, even though I have rolled over more than 2 properties in a year. Is this correct?
Now the real question. If all of the above is true, then when I do a double closing (two sets of closings costs and my name is on the title, even if momentarily) that transaction (if I do a 1031) is going to count toward my 2 per year threshold. Is this correct?
If I do an assignable contract, my name does not end up on the title and therefore I am not allowed to take a 1031 and I therefore not subject to the broker label by the IRS. Is this assumption correct?
Thanks in advance to all.
Robert
Robert,
Most of my investing is wholesaling - Flipping (Land, Commercial, SFR etc.) I do 1031 exchanges primarily. One to different/many replacements.
I do far more than what IRS would consider you as a Dealer.
My Tax Accountant has been able to maintain my status as a Real Estate Investor over the last 15 years (full time).
I would talk to a number of Tax Accountants who specialize in Real Estate. They should be able to help you.
Taiyo
Quote:
On 2004-05-21 14:06, Taiyo wrote:
My Tax Accountant has been able to maintain my status as a Real Estate Investor over the last 15 years (full time).
I guess it never stops being about who is on your team. Setting up working relationship with a REI savvy accountant has been on my schedule for weeks, but I put it off thinking they were too busy with tax season. I guess it's time to get busy again.
Thank Taiyo. This is very helpful..
Robert
Taiyo,
I had a thread on this locked out in the tax forum and I have no idea why. I was under the impression that there's no way to flip and qualify it for a 1031, and I was asking about L/O'ing to qualify since execution takes time... mainly I got the impression I can't even do this without being a dealer.
Can you share at least some of the basic thinking your accountant uses?
For clarification, when I Flip I am doing a Double Escrow. One for purchase and one for sale. Everyone who buys and sells is doing a Flip. It may take a year or longer depending on the circumstances and Business Plan. I have the luxury of being able to accomplish this in a matter of minutes.
I can not address your question about Lease Options. I have not used L/O to invest. I am currently building my knowledge pertaining to it and Subject To’s.
I believe there are many Investors using Lease Options as their primary or as another tool to invest. They are not classified as a Dealer.
In doing 1031 Exchanges, I almost always use a Accommodator. I negotiate the fixed fee down by letting them keep 100% of the interest earned. I never have control of the funds. The funds go directly from Escrow to the Accommodator. Some Exchangers will keep a percentage of interest earned. This implies control.
I have never been Audited by the IRS for any of my Real Estate Investment transactions.
My advice – I ask a lot of questions (even to this day). If I can get 2 or 3 same answers to my question after asking 10 persons. I have some confirmation. The No or it can’ be done (this way or that way) may imply they don’t know how or by contraints out of their control, they can not do it.
If it is not illegal and all parties are happy (for my ease of mind) it can be done.
Hope this helps,
Taiyo
Hmm... interesting.
You lost me on one part, though. I'm assuming in a 1031 that you need to roll into something of equal or greater value in order to exclude the entire profit from the previous sale, and if you are doing simultaneous closings, you only actually "own" the new property for 5 minutes, so...
... where is the sum that the accomodators earn the interest on? Are you just talking about the $ that floats for 90 days or whatever until it's reinvested in the next one? Am I misunderstanding something?
... hmm... if you're just flipping every time, then the money would be back out 5 minutes after the new closing, and float for a month or two 'till the next one... rinse... repeat.... am I starting to get it?
If so, is there any way in which you get access to funds using this method? For instance, can you take out a HELOC or other instrument on the new property to pull cash out if you keep it for a while?... or is it a warchest you can't open?
I think the above questions make sense, but I'm just starting out here, so feel free to correct me if I'm just not getting it.
thanks.
You are correct, I do only own the investment for 5 minutes.
The profits of my sale (less costs) over my buy are transferred to the Accomodator’s account. This the principal for interest earned. The monies will stay there until I need it to close on my new buy (investment). I have used the monies within two weeks to close a buy. You have 6 months or your tax filing date to place these funds.
You can buy different types of investments (SFH, land, etc.) and as many as the funds will buy.
You can get a HELOC on the new property (you have not sold it) if there is enough equity.
For those, who are full-time investors you can get a BELOC (not tied to a specific property).
Feel free to ask. That is how I started.
Taiyo
If you're generally going from flip to flip, I would think you would run into situations where you are unable to properly identify one of 3 replacement properties, or those three don't work.
Is there anything you do to remedy this, or do you just work extra hard to make sure those targets hit? Is there anything special that you've learned on this part?
As I evaluate the the best of three replacement properties, if I decide it does not fit my needs I discard it and replace it with a new property for evaluation. I then select of the three which is the best, if it fits my needs I purchase it, if not I discard it and replace it with another.
I always have three properties under evaluation for replacement. I do not evaluate all three properties at the same time.
Worst case scenario, I buy all cash. Get my cash back with a BELOC or HELOC (property dictates which one).
Do it again.
Taiyo
Thanks...
I'll have to do a little more research on this before I can ask my next question...
In the meantime, I'm going to cross-thread to a related discussion. I'd appreciate your input on the following:
http://www.thecreativeinvestor.com/ViewTopic28100-23-9.html
I do not know how to respond.
My Tax Accountant is a CPA who used to work for the IRS as a Auditor.
I had been Audited by the IRS from 1990 thru 1997. Always for the same thing my Business Expenses and never for my Investment transactions. In 1998 I received a letter from the IRS for another Audit for my Business Expenses. My Tax Accountant advised my to send a letter to the IRS stating that if they continued with the Audit I would file for harassment. They replied with a cancellation of Audit letter. I have not heard from them since.
The issue of the source and who attaches “Dealer Status” is of no concern to me. My Tax Accountant has taken care of the issue for me and that is all I care about. All this ancillary information and justification is time wasted when I could be evaluating potential investments.
Taiyo
Ahh... well, that is a luxury I don't seem to have. I am not satisfied with my accountant, and I have been through several. The current one was also an auditor, and I could swear I've taught him more than he's taught me. He's just too conservative.
Clearly as my structuring gets more complex, and my tax situation more critical (dealer vs. investor, etc) I will need to find a new guide in this area. Unfortunately, I don't know that I have an adequate knowledge of the REI side at this point to know whether someone is good at what they do... or just good at selling what they do.
I, like you, will push to blaze an agressive path. So long as I'm playing the game correctly, I don't care too much if I'm audited. I just don't want to lose.
My fault, I suppose for not doing more networking... I'll work on it. Thanks.
are you using the 1031 to exclude the tax on the gain?
I guess I haven't run into properties I could flip that quickly, and make enough to have to worry about taxes.
Or do the numbers get better do to the # of deals you have going at once?
To all concerned:
Taiyo has been advised in the Tax Forum that his 1031 strategy is an improper tax treatment, which if specifically audited will not be upheld.
Anyone following this approach is just playing tax audit roulette.
Advice accepted.
But I still defer to my Tax Accountant.
Taiyo
JohnT is right on the money. There is a lot of incorrect information posted above.
The actual requirement that must be met in order for a transaction to qualify for 1031 exchange treatment is that the taxpayer/exchangor must have the INTENT to HOLD the property for rental or investment or use in a business. The Treasury Regulations are very clear that INTENT is very important, but they do not define how to demonstrate INTENT. This is where the amount of time for holding a property comes in. The easiest way to demonstrate your INTENT to hold a property for rental or investment is to do just that - HOLD it. The longer period of time that you HOLD it the better your case of proving that you intended to hold it. Most tax advisors recommend at least one (1) year.
It is also clear that if you qualify as a dealer you do not qualify for 1031 exchange treatment. And, similarly, if your INTENT is to buy, fix up and then flip a property you clearly do not have the INTENT to HOLD the property and will not qualify for 1031 exchange treatment.
Having said all of that, only the taxpayer/exchangor can determine how aggressive or conservative they want to be. The shorter the time frame for holding a property the more aggressive you are positioning yourself, and the longer the time for holding a property the more conservative you are being. A double closing or an immediate flip clearly does not qualify and the only reason the one poster above has been able to maintain those transactions is that he/she has not been audited specifically on their 1031 exchange reporting.
I would NEVER take the position that my accountant has taken care of it for me and that's all I care about. That is like sticking your head in the sand and ignoring what is coming....[ Edited by wexeter on Date 05/26/2004 ]
Quote:
On 2004-05-25 02:01, DaveT wrote:
To all concerned:
Taiyo has been advised in the Tax Forum that his 1031 strategy is an improper tax treatment, which if specifically audited will not be upheld.
Anyone following this approach is just playing tax audit roulette.
Dave, so did you take this thread offline then for awhile?
Thanks,
Robert
[addsig]
DaveT,
Never mind, I see you just moved it to a different forum.
Thank you.
Robertt
[addsig]