TEE-Shots Newsletter


Commingled exchange accounts...

My intermediary holds my exchange funds in a commingled account.

Should I be worried about this?

Yes. A commingled account means that your intermediary is putting every client's exchange funds into one account.


Collecting interest on proceeds...

While the intermediary holds the money, can I withdrawal the interest monthly?

The answer is NO. Section 1031 will not allow you to touch the money in between the sale of your old property and the purchase of your new, not even the interest. At the end of the exchange, you may have the interest sent to you in a separate check, or you may include it in proceeds that the intermediary transfers to the purchase of the new property. And yes, it is taxable to you, no matter how it comes to you.


Exchanging in two different States...

Does my New Property need to be in the same State as the one I sold?

You may buy your new property anywhere in the United States. You do not have to buy your new property near where you sold the old. This could allow you to move your rental property with you when you move to another part of the country. You may also want to buy a rental property near where your elderly parents, or perhaps your grandchildren live.


The definition of "closed"...

What is the definition of "closed" to meet the 180-Day deadline?


Exchanging into a personal residence...?

Can I sell my investment property and then buy a house that I would like to live in?

In order to properly do a 1031 exchange, both your Old Property and your New Property have to be held for investment. This means that in most situations you would have to hold the New Property as investment property for at least a year and a day. Once this period has expired, you may do with it as you wish, including moving into it as your personal residence.


Exchanging with Relatives

For 1031 investing purposes, a relative is someone that is directly related to you in a straight line. Think of it this way: Linear = NO; Diagonal = YES. Your parents, grandparents, brothers and sisters, children and grandchildren, and your spouse are related to you horizontally and vertically, so they are not allowed.

Aunt Matilda and your cousin Fred are related to you diagonally. Therefore the IRS does not consider them "related," and you are eligible to buy exchange property from them or sell exchange property to them.


Like-Kind replacement property...

"Does §1031 require that I only buy Like-Kind replacement property?"

The "Like-Kind rule" mainly applies to personal property, ie: "things you can move;" like supplies, transportation, machinery, equipment, inventory, etc. This means if you sell a pizza oven in an exchange, the new property must be another pizza oven.


Allocating tax basis...

“If I buy more than one new property, how do I allocate my tax basis between them?”

Since your tax basis rolls over from the old property to the new, you would allocate your basis between multiple properties on a pro-rata basis.

For example, if you sell your Old Property for $100,00, which has a basis of $50,000, and you buy two new properties; one for $60,000 and one for $40,000; your $50,000 basis would transfer pro-rata. This means that the basis of the $60,000 property will be $30,000 and the basis of the $40,000 property will be $20,000.


New FIRPTA Requirements...

New FIRPTA Filing Requirements Have Serious Consequences for Foreign Real Estate Owners

A properly structured 1031 exchange can eliminate the 15 percent withholding tax from the sale price that is normally required under FIRPTA. But under the new IRS regulations a foreign property seller must now apply for a withholding certificate from the IRS. Furthermore, the seller must have an "International Taxpayer Identification Number" (ITIN) in order to apply for the withholding certificate. Many foreign property owners have never obtained an ITIN.


Splitting proceeds...

"If I buy more than one new property, are there rules on how I have to split the cash and the debt?"

No, as long as you buy equal or up, and reinvest all the cash, you can split the cash and the debt however you wish. For example, if you sold your Old Property for $100,000 and $60,000 went to your qualified intermediary (after paying the mortgage and closing costs of $40,000), in order to avoid paying tax you would have to buy properties totaling at least $100,000 and you would have to spend the $60,000.


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