Hello Mr. Collier,
I hope all is well with you.
When you have some time, could you please answer the following question?
Thank you so much for your time, consideration and wisdom.
Once you told me you were an “intensely curious person.” I know the advantages to that, but what are the disadvantages to that?
Not sure there really are disadvantages unless you allow it to take you down a non-productive rabbit hole for too long. I tend not to be curious about rattlesnakes or things that go bump in the dark. I generally just like to know how things work (all the more so when related to or likely to impact my world) and what makes people tick.
As a side note think about some of the following thoughts when considering a “creative” sale or purchase:
Like Kind Exchanges per Section 1031 of the Internal Revenue Code
Like Kind exchanges are often done using “exchange facilitators/intermediaries”. Once you sell you have 45 days to identify the like kind property (the identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant, or similar persons acting as your agent is not sufficient. Then you have 180 days to close from the date of sale or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold. In other words if you designate the replacement property exactly 45 days after sale, then you have a remaining 135 days to close on the new one. Both properties must be similar enough to qualify as “like-kind.” Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. However, improvements that are conveyed without land are not of like kind to land. A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
Cash received in the transaction–known as “boot”–will be taxed as partial sales proceeds from the sale of your property, generally as a capital gain. One of the main ways people get into trouble with these transactions is failing to consider loans. You must consider mortgage loans or other debt on the property you relinquish, and any debt on the replacement property. If you don’t receive cash back but your liability goes down, that too will be treated as income to you just like cash. Suppose you had a mortgage of $1 million on the old property, but your mortgage on the new property you receive in exchange is only $900,000. You have $100,000 of gain that is also classified as “boot,” and it will be taxed.
As always, I share what I most want/need to learn. – Nathan S. Collier