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Anonymous
Does anyone know when why you would need to do a 1031?
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Anonymous
Thanks msscamp, site was informative. I have heard that as long as transaction was less than 500 thousand you didnt need one. Any one else heard of this?
Arnold Ziffle
Well-known member
I think somebody might have given you some bad info. The $500,000 limit you mentioned applies with respect to gain on the sale of your principal residence. A married couple pays no federal income tax on any gain on the sale of a principal residence, up to $500,000 gain. Any gain in excess of that amount is taxed at the normal capital gains rate of 15%. The limit is $250,000 for single people.
The allure of Section 1031 exchanges has, in my view, been dimished somewhat since the capital gains rate is now only 15%. Nevertheless, many taxpayers seek to defer paying taxes even at 15% (plus possibly deferring taxes to a state) by reinvesting the sale proceeds in qualifying property. For example, if your farm, ranch or investment property has appreciated greatly due to encroaching cities you might cash out by selling and then pay 15% capital gains tax. But what if you intend to buy a different farm, ranch, etc. soon thereafter? In that case you would generally like to avoid paying the taxes, so that you have more cash in hand with which to make your replacement property purchase. So alternatively, you could arrange a qualified 1031 exchange and use all the cash to buy a replacement farm or ranch (or some other qualifying property --- but not a personal residence) and avoid paying the tax currently. The tax on the sale is deferred, perhaps for a very long time, since the tax cost of the replacement property is generally the actual cost you pay minus the gain you deferred on the sale of your original property. So until you actually sell that replacement property you essentially keep deferring the tax on the gain from the sale of the initial property. There are some very specific, pretty much hard & fast rules that you must comply with in order to have a valid 1031 exchange, particularly if it is a 3 party exchange or, most commonly found, a deferred 1031 exchange.
The allure of Section 1031 exchanges has, in my view, been dimished somewhat since the capital gains rate is now only 15%. Nevertheless, many taxpayers seek to defer paying taxes even at 15% (plus possibly deferring taxes to a state) by reinvesting the sale proceeds in qualifying property. For example, if your farm, ranch or investment property has appreciated greatly due to encroaching cities you might cash out by selling and then pay 15% capital gains tax. But what if you intend to buy a different farm, ranch, etc. soon thereafter? In that case you would generally like to avoid paying the taxes, so that you have more cash in hand with which to make your replacement property purchase. So alternatively, you could arrange a qualified 1031 exchange and use all the cash to buy a replacement farm or ranch (or some other qualifying property --- but not a personal residence) and avoid paying the tax currently. The tax on the sale is deferred, perhaps for a very long time, since the tax cost of the replacement property is generally the actual cost you pay minus the gain you deferred on the sale of your original property. So until you actually sell that replacement property you essentially keep deferring the tax on the gain from the sale of the initial property. There are some very specific, pretty much hard & fast rules that you must comply with in order to have a valid 1031 exchange, particularly if it is a 3 party exchange or, most commonly found, a deferred 1031 exchange.
And your house had better be worth $500,000 if you claim that big an amount. Selling a farm with some little shack on it and claiming that deduction will get you into real trouble. My accountant once represented a dude who sold a 20 acre estate (big house, big grounds). The IRS claimed that 15 acres of that was a farm (even though the dude had had no horses, cows, crops, or had sold any timber)and was subject to capital gains. He won in tax court; but the IRS took them through the whole 12 rounds.
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Anonymous
Arnold thanks you have cleared up my misunderstanding of this. At least now I Know what and how I should move foward. Lots of great people on here. 
denoginnizer
Well-known member
Arnold, what if there is a house on the acerage that you intend on buying with 1031 money? Can I use this house as my main residents . Lets say I am wanting to buy a 500 acre cattle farm and it just happens to have a house allready on it.
madbeancounter1
Well-known member
We did one a while back that had a house on the replacement property 3 times the size of the one on the property being sold. We split the properties and exchanged land for land and included the original house and an acre in the exclusion as sale of the personal residence. The client uses the home that was on the replacement property and their residence.
As Arnold was saying there are rules and they are hard and fast.... Something to keep in mind though as long as you are exchanging income producing property for income producing property they don't have to be identical in nature. The boss' father was a Veterinarian in California for a number of years and owned the building that a practice was renting from him. Last year he sold it.... We put it in a 1031 and he purchased a rent house and some ranch land here... two seperate properties. In another one we did last year we had an Angus breeder, who between him, his brother, sister, mother, spouses and their kids and a couple of grandkids had an FLP set up. They were approached by a developer who wanted to purchase about 60 acres that the FLP owned. This was land that the FLP ran cattle on. Some of the FLP members took cash and some took part in the 1031 exchange. One of the brothers exchanged his share of what was being sold off and bought a self storage business in town.
If you are going to pursue the 1031 make sure that whoever you have do it for you knows it forward and backward. The boss does several every year and frequently receives requests to speak on the topic. We also have a couple of legal guys well versed on the subject that we call on for help in making sure that all the T's are crossed and I's dotted.
As Arnold was saying there are rules and they are hard and fast.... Something to keep in mind though as long as you are exchanging income producing property for income producing property they don't have to be identical in nature. The boss' father was a Veterinarian in California for a number of years and owned the building that a practice was renting from him. Last year he sold it.... We put it in a 1031 and he purchased a rent house and some ranch land here... two seperate properties. In another one we did last year we had an Angus breeder, who between him, his brother, sister, mother, spouses and their kids and a couple of grandkids had an FLP set up. They were approached by a developer who wanted to purchase about 60 acres that the FLP owned. This was land that the FLP ran cattle on. Some of the FLP members took cash and some took part in the 1031 exchange. One of the brothers exchanged his share of what was being sold off and bought a self storage business in town.
If you are going to pursue the 1031 make sure that whoever you have do it for you knows it forward and backward. The boss does several every year and frequently receives requests to speak on the topic. We also have a couple of legal guys well versed on the subject that we call on for help in making sure that all the T's are crossed and I's dotted.
One thing to remember is if you decide to do a 1031 the money can never enter your hands or the deal is over. In the old days I think the way they use to do it is the parties involved would all have to sign at the same time. Now it isn't like that, but you can still never except payment. Our farm business guy told the story of one of his clients sold his farm for a very hefty price, then called him and asked him how long he had to reinvest to avoid taxes. It was already too late and he had to go ahead and pay the tax. Any lawyer or bank person could help you out with it.
Larry Sansom
Well-known member
As a Farm broker and an Auctioneer - I can say that very few farms are sold without the 1031 help. Most save $100,000++ or more on the deal - sure 15% sounds small- until you multiply it by what farms sell for and most have substantial gain on them. Good advice above - and the rules are very strict - example if the 90 day declaration period falls on a Sunday - you had better get it done on the previous Friday, because most trust officers (QI) are not open then. Best advice is to deal with people who know this deal and do not accept any cash until you have a plan.
TheBullLady
Well-known member
Another thing to keep in mind about doing a 1031 exchange is the time frame involved. You have to adhere to time limit in finding a replacement property (you can have more than one) and getting the deal closed. 45 days and 180 days I believe.
Most title companies have attorneys in their offices that routinely do 1031's. That's a good place to start.
Most title companies have attorneys in their offices that routinely do 1031's. That's a good place to start.
