1031 Question
Does 100% of what goes into the 1031 have to be used towards down payment? Could it be used for daily rehab costs or closing costs.
Does 100% of what goes into the 1031 have to be used towards down payment? Could it be used for daily rehab costs or closing costs.
To keep the exchange fully tax deferred, ALL of your exchange proceeds must be applied to the acquisition of the replacement property.
1031 exchange funds can be applied to acquistion costs, but not to any rehab or improvement you want to do after you take title. Acquisition costs include closing and settlement costs, but exclude prepaid escrows (hazard insurance, property taxes), prorated homeowners association fees, and interim interest on your new mortgage loan.
thanks kid!
NewKidd is right on the money. You may wish to explore an improvement exchange depending on what your are rehabbing. These types of exchanges are more complicated, the Qualified Intermediary (Accommodator) has to take and hold or "park" title to the replacement property, but you can use excess exchange funds to pay for improvements that are capital improvements (not repairs).
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Bill,
Would that type of exchange be considerably more expensive to complete than the normal exchange. What percentage more expensive would you estimate?
Thank you.
Triggering DOS is a separate issue from income taxes.
Signing over the deed does create a gift tax issue for you. If your son sells the property later, he has a capital gain based upon your adjusted basis, whatever that may be ($85K plus capital improvements minus depreciation).
Some may tell you that transferring title to your son is one of the Garn-St Germain exceptions to the DOS trigger. However, I am of the opinion that the exceptions only apply to your primary residence and not necessarily to your rental property. If the lender does try to exercise the DOSC, you can always appeal that your transfer is one of the Garn St. Germain exceptions. You have nothing to lose.
Tax free gift exclusion is now $12K per individual per year.
We need more details to really be of assistance. What exactly are you trying to accomplish? Do you want to exchange into another property? You can complete a 1031 exchange, but there will be special rules involved since this is a related party transaction.
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There are really two issues involved when related parties are involved in buying or selling property that will be part of a tax-deferred exchange. First, the reqlinquished property and the replacement property must both be held for two years after the completion of the 1031 exchange. As long as both properties are held for two years this issue goes away. Second, there is a revenue ruling that came out about five years ago in order to curb some abuse in the 1031 exchange arena. It can get a little complicated, but it is trying to curb tax avoidance between related parties knows as basis swapping. The best and easiest way to determine if you may be subject to this ruling is to look at who ends up with the cash. If the investor doing the 1031 exchange sells to related party there is no problem. If the investor doing the 1031 exchange buys from related party there may be a problem. If the related party does their own 1031 exchange then the problem goes away. If the related party "cashes out" and does not do their own exchange the transaction would probably - but not definitely - be disallowed under an audit. It all depends on whether the IRS determines the transaction to be avoiding tax via basis swapping.
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