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  • 1.  Partial 1031 Exchange

    Posted 04-25-2023 11:29 AM

    Hi All! Haven't done a partial 1031 before so looking for some advice!

    Does anyone know the rules for a partial 1031 exchange? Client has a fourplex out in Alaska that he wants to do a partial 1031 exchange with being that the property he is selling is larger than the one wants to invest in. 

    1) If a partial 1031 is done and only a portion of the proceeds are deferred, what is the metric where the new property has to be greater than? Is it based on the desired deferment, the proceeds (boot) received, or the portion of the value of the property itself?

    2) Does the property need to be the same type of property? (ex: single family, multi-family etc.) In this scenario, he has a fourplex he wishes to sell, does it need to be another multi-family residence? Could he use it on a smaller single family home if desired?

    3) if the owner wanted to owner occupy the new one and get a multi-family residence, is this disallowed since a 1031 exchange is really for investment purposes only, or could it be allowed since the owner occupied portion would be from the non deferred portion of the partial exchange and the part that is invested would be from the partial exchange? 

    Thanks in advance!



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    Matthew R. Savello, CPA
    Prestige Tax & Accounting, LLC
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  • 2.  RE: Partial 1031 Exchange

    Posted 04-25-2023 11:34 AM

    1) Any value not replaced with like-kind property is taxed as boot.  This includes both equity and debt.

    2) Like-kind for real property is a vey broad definition.  Going out of a four-plex into a single family home is fine, but make sure it's for qualified use (i.e., no personal residence and no inventory).

    3) You could theoretically engineer an exchange into the investment units and an out-of-pocket purchase on the personal residence unit, but it's complicated.  There are guidelines for this, but structuring is rather complicated.



    ------------------------------
    Matthew E. Rappaport, Esq., LL.M.
    Vice Managing Partner
    Chair, Taxation Group
    Falcon, Rappaport & Berkman PLLC
    (516) 558-3377
    mer@frblaw.com
    ------------------------------



  • 3.  RE: Partial 1031 Exchange

    Posted 04-25-2023 11:45 AM

    For part 1, I understand that any value not replaced is taxed as boot, but in terms of determining the value of the new property is where my question lied. For example: say value of old property after depreciation is worth 1 mil, and sold for 1.5 for 500k gain. Say he wanted to do a 50/50 partial exchange. 250k taxed as capital gain; 250k deferred. Does the new property just need to be greater than the 250k deferment? Or is it half of the property value itself? I am led to believe the property just needs to exceed the 250k in value but am confusing myself with the lingo of equal or greater value because then I am thinking of the value of the property itself



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    Matthew R. Savello, CPA
    Prestige Tax & Accounting, LLC
    ------------------------------



  • 4.  RE: Partial 1031 Exchange

    Posted 04-25-2023 11:50 AM

    If the relinquished property sells for $1.5 million, the replacement property needs to be at least $1.5 million for full deferment (not counting deductible closing expenses on both legs).  Anything below $1.5 million in new property purchase price will result in a taxable differential.  For instance, if the like-kind property purchased is $1.1 million, there is $400k of boot.



    ------------------------------
    Matthew E. Rappaport, Esq., LL.M.
    Vice Managing Partner
    Co-Chair, Taxation Group
    Falcon, Rappaport & Berkman LLP
    (516) 558-3377
    mer@frblaw.com
    ------------------------------



  • 5.  RE: Partial 1031 Exchange

    Posted 04-25-2023 12:06 PM

    Oh I see so it has nothing to do with the % or the gain, just the value of the property itself? So if sells for 1 mil and buys like-kind property for 500k, there is 500k boot but the book value is only 750k resulting in 250k gain, how does the gain vs the boot play effect?



    ------------------------------
    Matthew R. Savello, CPA
    Prestige Tax & Accounting, LLC
    ------------------------------



  • 6.  RE: Partial 1031 Exchange

    Posted 04-25-2023 07:42 PM

    Yes, it's overall property sale price (FMV).  The fact is that 1031 requires a complete reinvestment for a totally tax-deferred rollover, unlike the QOZ program, which only requires a rollover of gain.  Book value here is not relevant; when Section 1031 rolls over adjusted basis, the first dollar not replaced is boot from the beginning.  So if you have a 500k adjusted basis on the relinquished property and you buy at least 500k of replacement property, that purchase soaks up all your basis and any cash (or debt not replaced) is taxed from dollar one after that.



    ------------------------------
    Matthew E. Rappaport, Esq., LL.M.
    Vice Managing Partner
    Co-Chair, Taxation Group
    Falcon, Rappaport & Berkman LLP
    (516) 558-3377
    mer@frblaw.com
    ------------------------------



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