Creative 1031 Exchange?
Just learning about 1031
Is this creative or outright wrong?
Selling a rental for 110K (really for 100K) listed on contract received 10K deposit to help buyer with loan but did not. Buyer signs receipt I paid him back 10K for repairs so I end up with 100K. To buyers lender it looks like buyer put 10K into deal. On my end it looks like I received 10K but paid back out 10K for repairs. Buyer has an agreement with his lender but of course I do not, so I don’t think I am hiding anything.
I Purchased property for 70K so will have 30K capital gains.
Next I have a replacement property to buy for 85K but need it to be 100K to do the 1031.
So I get the sellers to increase the price to 100K and we say I gave a 15K deposit. So they don’t pay tax on the 15K we say they paid 15K back to me for repairs. I will properly actually put the 15K back into it for repairs after the exchange.
Any suggestions and how to handle this? Want to make the deal work but don’t want to do anything illegal.
Quote:Next I have a replacement property to buy for 85K but need it to be 100K to do the 1031. So I get the sellers to increase the price to 100K and we say I gave a 15K deposit. So they don’t pay tax on the 15K we say they paid 15K back to me for repairs. I will properly actually put the 15K back into it for repairs after the exchange.
Your $15K "rebate" for repairs will be considered contructive receipt and taxable cash "boot" outside the exchange umbrella. Your tax liability will be the same as though you just exchanged down from a $100K property to an $85K property.
If you are using financing for the replacement property purchase, the lender will not loan against a $100K purchase price if the property does not appraise that high.
Your exchange fees will be more expensive, but if the qualfied intermediary purchases the property for $85K, then uses $15K of your exchange escrow to order the rehab work while the intermediary has title to the replacement property, then all your rehab cost is covered by the exchange umbrella. Your cost basis in this scenario will be $100K. Any cash not used by the intermediary for the rehab will be taxable cash boot to you. I suspect that the exchange fees will be as great if not more than your tax liability if you just exchange down.
To preserve the exchange, the intermediary must complete the acquisition, complete the rehab, and transfer title to you within the six month exchange window.
Your explaination of the sale numbers crunching to make it appear that the buyer paid money down sounds at best questionable and at worst illegal. The word used by the Feds is fraud.
If you lied or participated in the lie, a Fed insured lender makes the loan, the loan goes bad, the Fed loses $, you may be legally cuplable, if tried and proven, you spend time in the Fed pen. Remember the world of S... that Martha Stewart is experiencing.
[addsig]
I agree with the last post. You are deceiving a lender and that is a federal offense. You are also manipulating the transaction to avoid taxes and that is tax fraud. Always keep it simple and clean, never get too creative.
John is right about the build-to-suit exchange. That might help.