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What you need to know about 1031 exchanges

August 12, 2021

What you need to know about 1031 Exchanges

 

Nicole welcomes Tracey Wilson of Investment Property Exchange Services. You can find him at ipx1031.com. Ipx1031 has provided its clients with superior qualified intermediary services for three decades. And each year they assist thousands of clients and their tax and legal advisors by providing proven exchange solutions that best achieve the client's goals of enhancing their business portfolios and preserving equity. But he'll tell you more about that at the beginning of this episode. This is a two-part episode. There is so much to learn. This first one covers the basics you need to know as an agent and as an investor, about a 1031 exchange to avoid capital gains taxes. He will give you guidance, no matter how creative you think you are, he will have solutions and some recommendations to keep you out of hot water with the IRS. Listen to this episode now.

6 Rules of a 1031 Exchange:

1. Held for investment
    Owned and treats as investment for usually 1 year and 1 day.
2. 45-day ID rule - up to 3 properties
3. 180-day rule - 180 days to close on one or more of identified properties
4. QI requirements
      IRS Mandates client us a QI
     QI cannot be their attorney or accountant
     Client cannot touch the money during the exchange
5. Reinvestment requirements or equal or up Rule:
     Zero taxes: buy = or higher, and reinvest all the cash
     If you buy down, then perhaps it's "boot" and there is some tax, but the rest of the exchange is OK
6. Title Requirements
     Must close and take title on the new property exactly as title was held on the old property but tax return trumps title.

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The full transcript for this valuable episode is here:

Announcer (00:14):

Welcome to another episode of the Double Comma Club with your host Nicole Rueth of the Rueth Team, the number one lending team in Colorado. Join us today for this special episode of the Double Comma Club, where Nicole welcomes Tracey Wilson of Investment Property Exchange Services. You can find him at ipx1031.com. Ipx1031 has provided its clients with superior qualified intermediary services for three decades. And each year they assist thousands of clients and their tax and legal advisors by providing proven exchange solutions that best achieve the client's goals of enhancing their business portfolios and preserving equity. But he'll tell you more about that at the beginning of this episode. This is a two-part episode. There is so much to learn. This first one covers the basics you need to know as an agent and as an investor, about a 1031 exchange to avoid capital gains taxes. He will give you guidance, no matter how creative you think you are, he will have solutions and some recommendations to keep you out of hot water with the IRS. Listen to this episode now.

Nicole Rueth (01:26):

So Mr. Tracey Wilson, love it that you're joining us. Thank you so much.I work with a lot of investors, my husband and I, in fact, we had a small house that we did a 1031 exchange with, with you earlier this year, because we were like, we don't know where that's going now. Could we have held onto that home and continue to allow it to grow? Yes, but we also had an opportunity. And so I'd love to hear where things are going. And I definitely know there's a lot of money moving in 1031 exchanges. I continue to hear the story where people get caught, not fulfilling some of the guidelines. That you've got to spend all the money you make, not just the net revenue and there are nuances that I know that you're going to share that I know catch people by surprise.

Tracey Wilson (02:19):

Sure. You don't have to do the exchange for all the money, if you sell for 300 grand and you buy something that's 250,000, you can certainly do that, it's just that you'll pay the tax on the difference, demand you buy down. But you're right, if you want, no taxes buy something that's equal or greater in value. So yeah. You're spot on. You guys did that, didn't you?

Nicole Rueth (02:40):

We did. Well, we didn't spend it all. We paid some taxes. Although, having said that my CPA was very happy about that. He says you could use a little bit of a loss.

Tracey Wilson (02:50):

You could use, wow. Okay. There are weird CPAs. All right. Okay. We're going to dive right into it here. We're going to first start talking about 1031 exchange changes, and then we're going to transition into something that I think is probably as important, if not more important and that is the coming proposed tax changes. So I'm going to dive into this. I like it when people feel free to interrupt and ask questions as we go along. Let me tell you a little bit about our company. The name of it is Investment Property Exchange Services. You can see with a big, long name like that we're trying to short it up just IPX, the one which is also our website, it's a very user-friendly website. Who the heck are we? We are 33 of us now attorneys and CPAs nationwide, including our paralegals and the exchange coordinators and the banking staff. We're about 400 and some employees, we're wholly owned by Fidelity. So we have some very deep but natural pockets.

Tracey Wilson (03:51):

We actually are the largest qualified intermediary in the United States. We even do exchanges internationally as well. So last year we did just a smidgen under 11 billion with B dollars, 1031s. In Colorado, we set a record of which I own a franchise of $600 million in 1031 exchanges. That was for all of last year. I need to tell you something, so far this year as of July the ninth, Friday numbers. So we are on target, who knows what's going to happen. We're on target to almost double last year's volume, which last year was a record-breaking year already. So there is a heck of a lot of 1031 exchanges being done nationwide. So we do all types of 1031 exchanges, the regular forward exchange, we do reverse exchanges where you want to buy, the client wants to buy their new replacement property first, we also do exchanges on things other than just real estate.

Tracey Wilson (04:50):

We do exchanges on the oil and gas and water rights and minerals and waste systems, air rights. We also do exchanges in which the client may want to make improvements or do some construction to their new replacement property. And there's a way to do that while the property is parked or temporarily owned by us IPX. And just for whatever it's worth, we used to be able to do exchanges on businesses. Like when somebody sold, for example, a 711, we did the exchange not only on the real estate but also on the gas pumps and on the hotdog rollers and on the slaggy machines, the capital assets of the business. We are no longer able to do those personal property exchanges, cars, price, boats, equipment. We were the largest, exchanger of intellectual property from Microsoft, Amazon, Facebook, Oracle, all that is gone. It was wiped out of the tax code with the tax cuts in Jobs Act. We can only do exchanges now on real property.

Tracey Wilson (05:52):

If you have any questions about a 1031 exchange, give me or Denita a phone call, we can help answer your questions right there on the phone. But as a good resource, our website, you can actually start an exchange immediately online. You don't even have to talk to anybody. We have calculators that'll figure out what your capital gains and basis is. I prefer that you would call me in that regard because the calculator is limited in terms of its assumptions. And I can do the same thing in about three or four minutes, and you actually understand what's going on. We also have calculators for the 45, 180 days, and we have a knowledge center that has a single-page answer to any 1031 exchange question you could possibly have. And a brand new feature on our website, are little one and two-minute videos that you get right off the homepage on almost any topic on 1031 exchanges.

Tracey Wilson (06:48):

So enough of all that, as I said, I am in charge of the franchise for Colorado Yukon, Wyoming. And again, we are part of the Fidelity family of Title Insurance companies. That's Alamo Title, Chicago, Commonwealth, Fidelity. In Colorado, Commonwealth is actually called Heritage Title. We also own and do business through Lawyer's Title, Ticor Title, through to Union Title. And then as a part of that big family IPX is the exchanger for all those title insurance companies, again, nationwide. All right, let's dive into it that's enough how it's keeping in advertising. What the heck is a 1031 exchange? What is section 1031 of the tax code? It's two pages out of the thousands of pages of the tax code that allows for non-recognition of gain. That sounds like CPA pitch peek for the following. If you're selling an investment piece or real estate, and let's say the gain is a hundred thousand dollars. Not a lot of people know this, but the taxes, the capital gains taxes on that 100,000 are going to be about 30 ish percent.

Tracey Wilson (07:57):

Now we know where is that 30% coming from briefly because we're going to take a deeper dive in just a minute or two, but that 30 some percent consists of these capital gain taxes. It's either 15 or 20% on the appreciation, but then when you're doing investment real estate, there's always un-recaptured or the recapture of depreciation it's taxed at 25%. Then both of those gains are hit with the Affordable Care Act, Obamacare at 3.8%. And both of those gains, the appreciation, and the de-appreciation recapture are taxed by the State of Colorado. It's now 4.55%. You add all those capital gains taxes up and they blend together to be about 30%. If you are dealing with someone selling property, investment property in a high tax state like California and New York or New Jersey, Chicago, or Iowa, Illinois, or Iowa, for example, California's income tax rate for capital gains is 13.3%. You can see why then that the capital gains taxes can range anywhere from 30 up to as high as 40%.

Tracey Wilson (09:15):

So when you're dealing with us, we're talking about investment property. So when I need to pause and need to go 1031 exchanges are not for the sale of someone's home, where they live, it is not for your personal primary residence. There's a better deal in the tax code, section 121. So if you've lived in your home for at least two years out of the most recent five, then when you sell it, you get to have your gains tax-free, that's better than a 1031, which is nearly tax-deferred. Tax-free up to how much? Well, if you're single, you get up to 250 grand tax-free, or if you're married finally joined, you get up to $500,000 tax-free. And oh, by the way, you get to use that personal home exclusion over and over and over as often as you want once every two years. So it's no longer a once-in-a-lifetime exclusion.

Tracey Wilson (10:12):

So that's the sale of someone's home, where they live, their personal family residence. I want to get that out of your brains because everything else from here on out is about the sale of investment real estate, rental real estate. So if you do an exchange, instead of just selling it, walk through the rules of what that looks like, and then you buy some replacement property or you can buy multiple replacement properties. Guess what happens? The gains are actually rolled over. They're transferred into the new property, and then you don't have to pay the %30 to 40% capital gains. Yes, the gains are rolled over into tax-deferred into that new property. Let's take a little bit of a deeper dive. Let's say you bought a piece of property for 150,000. I know these numbers are probably, may not be relevant in today's market, but it makes the math or the thinking about it a little bit easier. Because what we're going to do is look at some accounting, but we're not going to do debits and credits, we're just going to use pictures.

Tracey Wilson (11:18):

So you buy some rental house for 150,000, you rent it out and then years later you're going to sell it. And it's gone up to 200 grand. Well, a lot of people think, okay, I bought it for 150, I'm selling for 200,000 I think my gain is about 50 grand. I'm ignoring commissions and closing cost. Well, that is all true to a certain extent, but we want to get some definitions down. When you do a 1031 exchange, the property you're selling is called the relinquished property. You're giving it up, you're selling, you're relinquishing it. And the property that you're going to buy, that you will exchange into is called the replacement property. There are too many Rs I've already had my, so I'm just going to call it the old property and the new property. And so the basis transfers from the old and to the new property when you do an exchange. And so too, does the gain, the gains transfer and that's the whole point of doing a 1031 exchange. Defer, transfer, roll those gains into the new property, do not have to pay the 30% to 40% capital gains taxes.

Tracey Wilson (12:21):

We need to re-emphasize a concept that I just brought up. You buy a house for a hundred grand, you rent it out five years later, you sell it for 150,000. And everybody thinks again, ignoring commissions and closing costs that their gain is about 50,000. Well, just as a reminder, the original purchase price of the house has been going down, on paper it's going down. It's an accounting phenomenon and it unfolds as like this. The original purchase price a hundred thousand has to be depreciated. If it's residential, it's over 27 and a half years, if it's commercial, it's over 39 years. And so this is residential property, a single-family rental house. And that means that there should have been about 3,600 and some odd dollars of depreciation expense every year. We did that for five years, we have a total of $18,000 of accumulated depreciation that has got to be subtracted from the original purchase price. So that on paper, the book value of the property is actually 82,000. In real life, it's selling for 150, but on paper it's only worth 82 grand.

Tracey Wilson (13:33):

So that means when you sell it from 150, there's not just one gain of 50,000, there's actually a second gain, a gain due to the recapture of depreciation, $18,000. So that really the total gain from the sale of this property is $68,000. So whatever the client thinks their gain is, it's going to be a heck of a lot more, that's concept number one. Concept number two, when you sell a piece of real estate, there isn't just one gain, there are two gains. Gain from appreciation, the gain from the depreciation. So what do these taxes look like that we're trying to avoid? 15 or 20% on the appreciation, 25% on the recapture, then the Affordable Care Act on both of those gains and then there's the State of Colorado grand total. Let's add them all up. It adds up about $20,000 in total taxes. Is that really 30%? Well, let's do a little math. 20,000 divided by 68 is 29.8%. That's close enough to 30% for me.

Tracey Wilson (14:39):

So if you are talking to a client or if you are a client, you're thinking about selling property, you're pretty safe in the assumption that if you sell and do not do a 1031 exchange that your tax hit will be about 30% of a much bigger gain than you realize. All right. So now let's go back to the picture of accounting. Bought the property for 150, selling it for 200,000. Again, we thought the gain was 50,000 we know better now that that basis of 150 has actually been shrinking down because of depreciation and the gain is larger than we thought, it consists of two trunks of gain. 50,000, because it went up in value, and 25,000 because of the recapture depreciation. So when you do a 1031 there isn't just one gain being rolled over, there are actually two different chunks of capital gains being rolled into the next property. All right, I think that's it for basic math, accounting-wise, excuse me. Can you sell one property and buy multiple 1031 replacements property?

Tracey Wilson (16:42):

You sell one property and buy multiple 1031 replacements properties and you sure can, you can diversify. What about, can you sell multiple properties and mush them all together, combine them and go buy one, perhaps bigger replacement property? Yeah, you can consolidate, in fact, you can do any mix and match arrangement. So here are the six rules of a 1031 exchange. I like unfolding 1031s linearly. In other words, going from what you're selling, I always use the red monopoly house on the left, that's the property you're selling and the one that you'll eventually exchange into, the replacement property, I put it on the right-hand side and it's the green monopoly house. So let's start with the sale. There you are, you've got a buyer. There are several things that change when you do a 1031. First of all, you need by law, a qualified intermediary. Sometimes we're also called an accommodator. There's a shingles plug for our firm IPX. So to do an exchange, you absolutely have to have a qualified intermediary.

Tracey Wilson (17:50):

And then there are a couple of things. The sales contract needs to be assignable. That's the only way that we, IPX can be assigned into it. So just make the contract, and or assign or call us up and we could send you a 1031 language. Also when you're there at the closing table of the sale, the monies have to be wired from the closing table, the net sales proceeds to us. By law, the qualified intermediary has to hold those monies during the 1031 exchange process. Okay, so the closing of the sale is done to be clear you need to call us before the closing of the sales so that we can get documents to you, we use DocuSign, get them signed so that they are in place at, or prior to the closing of the sale. If you call me up afterward, a day later, a week later, a month later, it's too late. You're going to get taxed.

Tracey Wilson (18:47):

All right. So that starts the exchange. And there are two timelines you have to be aware of. So you get 45 days to identify and 180 days to actually close on the purchase of one or more of those properties that you identified within the 45 days. So there you are now as a buyer, no longer a seller, of course, you're now a buyer of the new replacement property and you're allowed to identify up to three properties that you might want to buy. By the way, there is the ability to identify more than three, it's called the 200% rule. And there's also another fancy rule called the 95% rule. We're not going to go through them here in the essence of time, but just know that if you want to identify more than three, call me and I can tell you how to do that rather easily. Okay, so all that said, now you're ready to close on the purchase and that means that we have to be assigned again into the purchase contract, to do the exchange.

Tracey Wilson (19:44):

And then we will wire those monies out to the hydro insurance company. And you've now finished your exchange inside of 180 days and you don't have to pay the 30% to 40% capital gains taxes. So that's the mechanics of doing a 1031 exchange. And an emphasis on time, you can sell almost anything. Rental condos, rental houses, you can sell strip shopping malls, commercial, oil and gas, water, [inaudible 00:20:12] to sell raw land. And Like-kind does not mean I just said this a minute ago that you have to go buy more land. You could buy in fact, sell land go buy a commercial office space. You could sell multi-family product and exchange it to oil and gas. Like-kind simply means that it's real property from any other real property, as long as it's in the United States. If you want to make it like you don't remember what I'm about to say, just make it and or assigns. That's all I have to say and, or assigned.

Tracey Wilson (20:42):

If you want, you can say, "Hey, this is going to be a part of, you could leave out the hey part. This is going be a 1031 exchange at no expense or inconvenience to the buyer." And it really doesn't affect the buyer at all. So all you have to do is say, it's going to be a part of a 1031 exchange. Most real estate agents have their own language. You can get the language off our website or call me up or Denita, and we can send you the language and pretty easy. 1031s are supposed to be about long-term capital gains. I usually don't go through this, but because we're going to be talking about big changes, proposed changes in the tax code in just a little bit, we need to make this distinction. 1031s are supposed to be about owning investment real estate for longer than a year. Because if you own it longer than a year, the type of gain, the increase in price, the appreciation is a long-term capital gain.

Tracey Wilson (21:36):

If you own a piece of real estate and you sell it less than a year, then the type of gain you have is short-term capital gain. And that means you get taxed at ordinary income rates. So 1031s are only about long-term capital gains. That means you cannot do a 1031 exchange on a fix and flip and developers, generally speaking, cannot do 1031 exchanges. So a question comes up, how long do you have to own the old property for it to qualify for 1031 purposes? The answer is, there's no answer. It's a shame. The IRS never bothers to state definitively how long you should have owned it. It's always about your intent. Was it held for investment? Was it used to produce income? I'm telling you that there's a very good rule of thumb, one year and one day it creates long-term capital gains. If you hold it for two full years, there's even a safe harbor under a different part of the tax code.

Tracey Wilson (22:33):

What about the property that you buy, that you roll your gains into the replacement property? How long should you own it before you sell it and maybe do another 1031 exchange, or just sell it and pay the capital gains, whatever? The answer is, there's no defined period of time, again it's always about intent, but again, the really good rule of thumb is one year and one day. And of course there is that safe harbor under a different part of the tax code. One year and one day is pretty typical.

Nicole Rueth (23:05):

So one had a client, sold the property, bought three properties using a 1031 exchange. He now wants to sell one of the three he bought, is there any nuance to that he wants to 1031 exchange that one?

Tracey Wilson (23:18):

Have they owned the three properties, including the one we're talking about and selling, have they owned it for at least a year and a day?

Nicole Rueth (23:26):

That she did not say.

Tracey Wilson (23:28):

Let's say they did, let's just go there. And the answer is yes, they can exchange it. No problem. The only nuance is to call me, 3038 835 8-

Nicole Rueth (23:35):

And then Amos asks, are there rules about a cashout refinance timing after 1031 exchange? And he gives an example.

Tracey Wilson (23:45):

Great question. Yeah. So you did the exchange, you bought the new property, the exchange is done and over, that very next day after your exchange is over, you can refinance and pull the cash out, no taxes. That's great. What about the old property? What if you decide to pull cash out a month or two or three before you sell and do the exchange? The IRS says, wow, you avoided one of the rules of doing the exchange and they will tax. And they could even collapse your 1031 exchange because you've pulled money out prior to the sale and the start of the 1031. So where this is applicable, this is why this is a great question, people will say, Tracey, if I sell for 400 grand, I would like about 40 grand out of it. I know I'm going to get taxed on it, I know it's called boot, but I need the 40,000. I want to pay off some credit cards, I got a kid going to college next year, and I tell them, you could do that, you can pull 40 grand out, but you're going to get hit 30 some percent on it.

Tracey Wilson (24:44):

That's $12,000 of taxes on the 40 grand. Instead, do what we just talked about. Leave all the money in the exchange, put all the money into the new replacement property. And then when your exchange is over, the very next day, refinance, pull the 40 grand out and there are no taxes. Yes, you might pay a little bit higher in interest rates, you may pay some more points or fees, but it's got to be better than paying 30% capital gains or $12,000. So Nicole obviously you're in the lending business does that sound to be true?

Nicole Rueth (25:19):

It sounds to be very true, especially since you can roll the cost of that refinance [crosstalk 00:25:24] a loan. So it's not going to cost you anything out of pocket. You'll still walk away with a full $40,000. Edward asked, do you pay any taxes if you lease it for a year and a day and then move into it as a personal residence?

Tracey Wilson (25:36):

Oh, beautiful question. The answer is no, maybe, perhaps yes. So why isn't there a definitive answer? Here's the deal. So you do an exchange, you buy the new property, you treat it as a rental for the first year. Maybe you want to be super-duper safe with the IRS, you want to be squeaky clean and fine, you rent it out for two years, and then you move in and then you make it your personal primary residence. Then year two, four, five or seven years down the road, whatever you decide to sell the property you're done. What you've done is you've turned an investment property that you acquired under section 1031. You've turned it now into your personal primary residence. Wow, that means that if you're, for example, married, filing joint, that you get to use your $500,000 exclusion? Yes you do. Does that mean all of your gains if you deferred by doing this exchange now come out tax-free? No, not quite.

Tracey Wilson (26:36):

The IRS says, yes, we will let you use your personal home exclusion, but not all of it, they apply a fraction called the qualified use fraction. And what I'm going to describe is best if you could look at your hand and we've got five fingers. To do the following, you need to own the property, the new replacement property, the one you exchanged into, you have to own it for five years, five fingers. And at least the thumb and the index finger are the first two years if you rent it out and after that, you move into the property and you live there, but you live there for three years. And let's say that you sell it at the end of year number five. Now you don't have to sell it, you can stay living there, but just for the story, let's say that you do sell it at the end of the fifth year.

Tracey Wilson (27:25):

So what happens? The IRS says, you get to use your $500,000 exclusion, but not all of it. The fraction is a numerator, the top number is the number of years that you've lived there, three years divided by the denominator. The bottom number is the total number of years that you own the property, which was five. So that makes our fraction three-fifths and three-fifths, so 500,000 is 300 grand. So instead of getting $500,000 tax-free, you only get $300,000 tax-free. Nonetheless, it's a pretty good deal. It's the only place I know in the tax code that allows you to take deferred gain and turn it into tax-free money. I do want to mention though that when you do this magic trick that I just outlined, remember when you sell the relinquished property, the red monopoly house on the screen, and you did the exchange. How many gains were there? There were two chunks of capital gain. The gain because the property had gone up in value over all those years. And the other gain was from the depreciation recapture.

Tracey Wilson (28:37):

This magic trick, where they usually, you get the 300,000 in my made up example, a tax-free does not apply to the un-recaptured depreciation part. That part will always be taxable unless you die and then the gums tax-free to your heirs. Does that help on that story or example?

Nicole Rueth (29:01):

That really helps because I talk a lot about, that's my retirement strategy. I'm going to buy my retirement home with one of my investments. So that's great to know how to work those numbers. You do have a couple people ask a very similar question asking, can you buy a duplex or something that has additional rental opportunities, whether it's a mother-in-law suite or some sort of situation, can you move into where you're living in one side and you're renting out the other and still use it for a 1031 exchange?

Tracey Wilson (29:29):

Good questions. Yeah. So we need to be a little careful, let's say, for example, that the property you sold started the exchange on, let's say that it was sold for 300 grand and the property you're going to buy is a $500,000 piece of property. And you're going to live in part of it. Maybe it's a duplex, whatever scenario you can think of or dream of, you're going to live in part of it. The part that you will live in cannot count as a part of your 1031 exchange. So in my example, when you sell for 300 and buy for 500, then the 300,000 of the 500 has to be the part that gets rented out. If you want to live in part of the new property, then it can only be the $200,000 that is not part of the exchange. I want to make sure that I explained that clear enough.

Nicole Rueth (30:28):

Well, and if it's a duplex for 500, the theory would be is each side would be valued at 250.

Tracey Wilson (30:33):

Exactly. Yeah. And you sold for 300. So yeah, one side doesn't count because that's where you live. The other side is 250. You sold for 300 so you have a little bit of a buydown.

Nicole Rueth (30:43):

So this would be a CPA type of a question in determining the percentage of the property that was used for each position.

Tracey Wilson (30:50):

I would certainly encourage CPA to use it. They'll use two different factors. They'll either use the economic utility or they'll use a simple square footage, but I can tell you common sense usually prevails. If you buy a $500,000 house and you say, oh, I'm going to live upstairs and it's the nice part. And it's only worth a hundred thousand and the bottom basement is not finished, you're going to rent it out. That [inaudible 00:31:15].

Nicole Rueth (31:16):

And D, this might be a question or two ago. She says, if you don't rent it and you just let it open, what effect does that have?

Tracey Wilson (31:24):

Oh, that's good. I like creative people out there. They're the ones that get audited.

Nicole Rueth (31:27):

That's a good one.

Tracey Wilson (31:30):

If you do an exchange and you buy some new property, that's usually this type of question, usually crops up when you're talking about a vacation home, maybe it's up in the mountains and you say, well, I really don't want to rent it, have you seen what renters do to a place? I'm just going to let it sit empty for a year and then I'll move into it or whatever. The IRS will say, you're not required to rent it, that's true, but is there a reason that you didn't rent it? You need to advertise it, you need to list it at fair market value rent. And in today's market, if you tell the IRS, I just couldn't rent it, they're really going to come down on you. And they'll probably fail the exchange because anything can be rented today, the demand is quite high.

Tracey Wilson (32:14):

This type of question came up a lot more in 2008, 2009, then maybe you could have gotten away with not "not renting the property out at fair market value" but in today's market if you're not showing rental income and the IRS will know, you have to report the income on your Form 1040, your expenses on schedule 80. They don't see any and noted the fact that you did an exchange the year or two prior because you file the Form 8824, they're going to know. So you'd need to rent it out at fair market value, or they're going to come looking for you.

Nicole Rueth (32:50):

Can you buy 1031 exchange property and lease it to a relative? If so, how long will that go?

Tracey Wilson (32:55):

Sure. At fair market value.

Nicole Rueth (32:57):

And then if you sell a property in 1031 exchange into a new property worth more than the old property, can you then have somebody else buy-in for a percentage of the new property?

Tracey Wilson (33:08):

You could, but you'd be essentially, let's say that the new investor that comes along is going to buy 25% of the property, meaning you'll end up owning the remaining 75%. And when you have someone buy, in my story, 25%, you're effectively selling them a 10 common interest or 25% that you will be taxed on the capital gains. I suppose you could sell that investor and do a 1031 exchange, that is possible.

Nicole Rueth (33:38):

Okay. So yeah, he's saying, if you sold something worth 500 but buy something worth a million, can another investor come in for 300,000?

Tracey Wilson (33:46):

Yes. I certainly could. And you can do it in a variety of ways. If you sell for 500 then the minimum amount that the exchanger needs to buy is 500 grand. And the other investor could come in as a tenant and common owner for the other 500,000.

Announcer (34:10):

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