S.E.C. Real Estate Observer

• Tweet

• Tweet

As we or our client’s sell property for cash, the funds are often put into a 1031 facilitator account in order to defer capital gain taxes by acquiring a replacement property. Other than the timing challenges, 45/days/180 days, this is a fairly simple process.

What if the deal is not so simple?

1. While marketing a real estate asset, you get offered another asset as all, or a portion of your equity. You don’t want the asset for your replacement property, but feel it is fairly cashable or exchangeable, i.e. single family houses. Rather than taking title to it, have the facilitator take title. You continue to try and sell or exchange it into the replacement property you want. If needed, you can identify it as one of your three target replacement properties and take title. Hopefully, you go through it during the 180 days.
2. You are offered cash and owner carry paper for an asset you own. Give the paper to the facilitator. During the 180 days, sell or exchange the paper for what you want. If you are not prepared to take a discount on the paper, you can buy it from the facilitator at par and thereby fund the 1031 account with cash.
3. Exchange for personal property, vehicles, boats, airplanes, stocks, bonds, etc. Put it in the name of the facilitator and sell during the 180 days.

Other creative tools to use with your facilitator include:

1. Reverse exchange – buy the replacement property first.
2. Improvement/construction exchange – use the 1031 cash to build or rehab an improvement during the 180 day period. You must spend and have constructed enough of the improvement to use all of the money in the account.
3. Exchange for certain mineral rights and oil and gas production (varies from state to state).
4. Related parties transaction – most facilitators will say you can not exchange to a related party (i.e., family member, entity you own 50% interest in, some trust and estate situations). However, there is an exception if the properties are held by both parties for 2 years after the exchange. A sale by either party within 2 years may void the exchange.

Disclaimer: Any 1031 transaction needs approval by both your CPA and the 1031 facilitator. Find a Facilitator who is experienced, bonded, and creative. Never close your relinquished leg of the transaction without knowing where you are going or are willing to pay the taxes, if you can’t close a replacement property.