1031 News This Week


Bankruptcy remote entities and 1031 exchanges

You've just sold your old property in a 1031 exchange for $500,000. You've found the perfect new property, and it's a steal at $2 million. Your exchange intermediary is holding $500,000 for you, and your banker is very receptive to your loan request for the balance of $1.5million. He giving you a break on the loan fee, and the interest rate is better than you hoped to get. There are no structural problems, and a few minor cosmetic changes should allow you to raise the rent a little, giving you a very respectable cash flow. Life is great — until the call…

At first it didn't seem that big a deal; the loan committee approved the loan, but requires that the property be held in what they are calling a bankruptcy remote entity. They want the property held in a separate entity, all by itself. That didn't seem unreasonable, so you called your attorney and hand him set up a corporation to own the property so that you would be protected from liability as well.


Using 1031s to transfer wealth tax-free

A 1031 exchange is a technique that investors commonly use to transfer property tax-free. However, our sophisticated investors are using 1031 exchanges to transfer large amounts of wealth, tax-free to their children.

This is how it works:

Mom and Dad own a building that is worth $100,000 and is free and clear. Finding a new building worth $150,000 the sell their old building and use a 1031 exchange to buy an undivided two-thirds interest in the new building for cash. Their children buy the other undivided one-third interest.

A year or two later they sell the building for $250,000 of which $166,667 is the parents’ two-thirds share with the balance of $83,333 belonging to the children. Both the parents and the children do 1031 exchanges and buy a new property for $400,000 of which $166,667 (or 42 percent) is the parents, and the balance of $233,333 (or 58 percent) belongs to the children.


IRS tightens related - party rules

A recent Internal Revenue Service ruling will now reduce taxpayer flexibility when they complete a 1031 exchange by buying property.


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