The taxpayer’s basis in the acquired property is generally his basis in the relinquished property plus the increase in cost of the acquired property over the sales price of the relinquished property. For example, if the taxpayer exchanges property with a basis of $100,000 and a fair market value of $250,000 for property with a fair market value of $400,000, the basis in the new property will be $250,000 made up of the old basis of $100,000 and the increase cost of $150,000. Pursuant to IRS Notice 2000-4 the new property will be depreciated as follows: $100,000 of the basis will be depreciated in the same manner and on the same schedule as it was for the old property and $150,000 will be depreciated based upon the rules in effect at the time of acquiring the replacement property as if the property was purchased new.
Many times, in order to dispose of the taxpayer’s existing property for the price desired, it is necessary to take back a purchase money mortgage of a portion of the sale price. The question that arises is: “Is the amount of the mortgage currently taxable or is it deferred?” Section 1031 only defers “like kind” exchanges. If the taxpayer in an exchange receives something other than like kind property, gain is recognized to the extent of the fair market value of non-like kind property received. When a taxpayer receives a note and mortgage as part of the transaction, the note and mortgage is not like kind and therefor gives rise to current tax. However, section 453 of the IRC allows a taxpayer to report the income on the installment method, i.e. as it is received. Assume that an exchange has a $300,000 realized gain. If as part of an exchange the taxpayer receives $100,000 mortgage payable at $10,000 per year plus interest, the taxpayer would annually report the interest income received and report $10,000 capital gain of the $100,000 each year that the principal payment is received. While the receipt of the purchase money mortgage does give rise to a taxable situation, by utilizing the installment method, the tax bite may not be as large.
The answer is yes. As long as the leasehold interest has at least 30 years remaining, the leasehold qualifies as real estate. When it comes to real estate, all real estate is like kind to all other real estate and therefor a fee interest in an apartment building can be exchanged for a leasehold interest in a shopping center as long as the leasehold has at least 30 years remaining. The determination of the time on a lease entitles the tenants options to extend.
1. Generally, in order to obtain Installment treatment of a note, the taxpayer must receive the note directly from the Buyer. (IRC 453). Reg. 1.1031-J(j) (2) (iii) provides that if a note is transferred to the QI, who in turn transfers the note to the Taxpayer, it will be deemed to be received directly from the Buyer. Also note that to avoid any issue of constructive receipt by the taxpayer during the exchange period the taxpayer should not receive either the note or any interest payments. (Reg. 1.1031(k)-1(g) (6))
2. Simplest way to avoid this issue is to have the taxpayer purchase or some other person purchase the note from the QI for FMV just at the time of the purchase of the Replacement Property. QI has cash used for purchase. Taxpayer has a note that is fully paid for and only reports the interest. If for some reason the exchange fails, the taxpayer will obtain the note from the QI and report on the installment method.
For a typical delayed exchange, Newport charges a total of $1,300. $650 is paid at the time the relinquished property is sold and $650 is paid at the time that replacement property is purchased. If for some reason the replacement property is not purchased or no property is timely designated, only the fee for the front end of the transaction is to be paid. For reverse exchanges or construction exchanges, the fee will vary and will be agreed upon prior to entering into the exchange agreement.
The answer is yes. Since 1031 only applies to business or investment property, the section would only apply to the portion of the proceeds attributable to the rental unit. Assume that the two family will sell for $500,000 and that the property originally cost $350,000, of which $200,000 was attributable to the residential portion and $150,000 attributable to the rental portion, and that the rental portion has depreciated by $50,000. The rental portion was 42.86% of the initial purchase price and that percentage of the sales price ($214,285) would be attributable to the rental unit. The realized gain of $114,285 ($150,000 less $50,000 depreciation for a basis of $100,000 subtracted from the sales price attributable to the investment portion) can be deferred by utilizing section 1031. It should be noted that the sales price attributable to the residential portion is $285,715 and the gain is $85,715. Provided that the ownership provisions and personal residence use by the taxpayer complies with section 1031, no gain will be recognized on that portion of the sale. This same principle applies to the taxpayer occupying a portion of any multi-family property so that if a taxpayer occupies as his residence one unit in a four-unit building, the portion that is attributable to the rental investment will qualify for section 1031.
The answer is maybe. Section 1031 does not apply to the sale of partnership interests. If the property is owned by two of you as tenants in common, then the answer is yes. The exchange agreement would reflect that only your half of the transaction is being utilized under section 1031. Upon the sale, Newport would receive half the proceeds and the other owner would receive the other half. If the property is owned by either a partnership, an LLC or a corporation, then it is more difficult to bring about the result that you want, but it can be done. Newport will discuss with you the ways and risks involved in such situations.
Newport Exchange Corp places each exchange in a separate account at Northern Bank & Trust Co. This separate account arrangement avoids commingling and makes accounting and reconciling very easy. While most Qualified Intermediaries keep for themselves any interest earned on the account, Newport splits the interest with the client. As of June 1, 2016 the total annual interest earned is 75 basis points, with the client and Newport earning 37.5 basis points each.