Technical topics regarding tax preparation.
13-Apr-2021 1:37pm
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I think this is OK since there is no related party involved, but I wanted to check my gut here:
My client wants to exchange his rental property for another and wants to know if this is allowable.
He will lend $ to a trusted friend who will purchase the replacement property now. That friend takes full title to the property and my client's loan will be recorded as a deed of trust against that property.
My client will then sell his rental property and purchase his friend's property utilizing a qualified intermediary.
My client will get his loaned funds back upon the friend's sale. This will occur outside of the exchange.
13-Apr-2021 8:07pm
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I have had clients use a friend on small deals as a convenience.
I would hesitate, and recommend hesitating using a non-professional qualified intermediary for a deal involving significant gains since it takes a mere technicality to blow the exchange. The risks also come from a "friend's" bankruptcy, disappearance, and not adequately protecting the property through, for example, insurance.
I think California requires Qualified intermediaries to be bonded and have errors and omissions insurance, bit that is a memory from many years ago.
All in all, give money to a qualified intermediary to purchase and hold the replacement property and have a reciprocal exchange?
14-Apr-2021 8:37am
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If I read this correctly, doesn't the proposed arrangement, in practice, extend the 45-day and 180-day time limits? Clever, but client really, really needs to trust the friend.
14-Apr-2021 9:45am
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Yes. There are some other issues with this arrangement. But from a tax code standpoint, there is no problem.
16-Apr-2021 1:13pm
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This is nothing more than a reverse exchange.
He will lend $ to a trusted friend who will purchase the replacement property now.
Why doesn't your client do this without this third party? Give the money to a QI. The only benefit is the extension of the 180 day rule. The pitfalls, if this was me, far exceed this small benefit.
Now you have to hire an attorney to guide the transaction.
16-Apr-2021 3:35pm
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1. The market is hot and he plans on buying it immediately.
2. Reverse exchange are very expensive. He said it will cost around $7,000. It includes the QI setting up an LLC.
16-Apr-2021 4:02pm
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Wiles wrote:The market is hot and he plans on buying it immediately.
So transfer the money and the relinquished property to the QI immediately.
16-Apr-2021 4:13pm
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Wiles wrote:He said it will cost around $7,000. It includes the QI setting up an LLC.
Find another QI.
16-Apr-2021 4:26pm
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His gain isn’t big enough if he doesn’t want to pay for a QI, tell him to pay the tax
16-Apr-2021 4:31pm
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16-Apr-2021 5:58pm
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But why pay extra when he is a legitimate, less expensive alternative
19-Apr-2021 11:50am
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Doug M wrote:The pitfalls, if this was me, far exceed this small benefit.
Now you have to hire an attorney to guide the transaction.
Agree 100%. Your client should have engaged an attorney to draw up all the necessary paperwork. Once that cost, plus the risk premium of performing a well outlined process in a very unorthodox manner is accounted for, you are back to where you've started OR this isn't worth the effort of a 1031 as also noted above.
My advice to anyone contemplating a 1031 exchange: Do it right or don't do it at all.
~Captcook
19-Apr-2021 11:53am
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Exactly. And good atty's should handle this for around 2k....but for 7k in tax DEFERRED, is it worth it? Tough call.
19-Apr-2021 12:01pm
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I understand the conservative approach is to do this the conventional way - use a QI. I have explained the same to the client.
But he just wants to know if there is anything in the tax law that prohibits him from structuring such a transaction. I see nothing.
19-Apr-2021 12:56pm
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The tax law merely codified what had been done...that's what Starker was all about. So it was done, it was legal....they just created rules and boundaries. But so many land mines....
19-Apr-2021 1:51pm
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Isn't the QI regime a safe harbor?
20-Apr-2021 7:29am
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A wiser man than I told me, when I was still a greenhorn, "Never let the tax tail wag the commercial dog." If client's only question is if there is anything in the tax code to stop his proposal, I would wonder why he is going down that route. Being a cantankerous, Bolshie old goat, I would wonder out loud.
20-Apr-2021 8:45am
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He just doesn't want to spend the money.
20-Apr-2021 9:07am
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He is a real estate broker. His close friend is also in real estate. They own over a dozen properties together. He is going to lend his friend the money to buy the property. His friend will hold it for him to buy until he sells his other property.
20-Apr-2021 9:23am
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Now it makes more sense.
I think he needs to adhere to the regulations in regard to timelines....that's the one important one, I think, other than not touching the money.
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