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I need guidance on how to determine the value of a 1031

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exchange. I purchased a campground on...
I need guidance on how to determine the value of a 1031 exchange.
I purchased a campground on 11/18/2011 for $1,030,000. Of that, the value of the real estate was $975,000 and the remainder was blue sky. Since the purchase I’ve invested $200,000 in capital improvements, including new buildings, renovation of existing buildings, adding a water park, and other minor improvements. It’s under contract to sell for $3,000,000, with the current real estate valued at $1,300,000 with the remaining $1,700,000 in blue sky. There’s a bank lien of $430,000 and a second to a family member in the amount of $450,000.
the second lien can be forgiven if it’s beneficial either way, or I can have it paid at closing.
I’ve identified 4 pieces of real estate that I want to purchase, with a real estate value of $1,300,000. 3 of those are in one deal to purchase a business for $1,360,000, (which includes the 3 pieces of property) and a separate unrelated piece of real estate for $375,000. Total real estate is $1,400,000 and blue sky of $335,000 or a grand total purchase of $1,735,000.
So, in a nutshell, is it beneficial to pay the second lien at closing, or not? It can be forgiven if it’s beneficial for tax reasons. Is my original base calculated with the additional capital improvements and claimed depreciation, or is it strictly the original purchase price? Does the amount of debt affect the basis of the original purchase?
Submitted: 1 year ago.Category: Capital Gains and Losses
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Customer reply replied 1 year ago
I also want to make sure I'm safe with my title company handling the 1031 exchange. this is my first time with this title company and the owner said she's done many of them, but obviously couldn't guarantee anything.
Answered in 5 minutes by:
3/11/2016
Tax Expert: Stephen G., Financial Advisor replied 1 year ago
Stephen G.
Stephen G., Financial Advisor
Category: Capital Gains and Losses
Satisfied Customers: 7,211
Experience: Senior Tax Expert; CPA/PFS(retired)Personal Financial Planner; Small Business & Professional Mergers & Acquisitions
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The debt doesn't enter into the 1031 computations.

You basis in the old property is the 1,030,000. + 200,000. less depreciation = tax basis

It's confusing as to what you are going to purchase, but unless it is in excess of $3,000,000., you'll have tax to pay on the difference.

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Customer reply replied 1 year ago
My new investment is going to be a total of $1,835,000. Does the real estate value have any impact on the exchange amount for capital gains?Also, I've leased the business to the new buyer and received $907,000 that is credited towards the $3,000,000. I know that amount is not eligible to defer, however my gain is approximately $1,750,000. Will I be able to defer the total of $1,835,000 or does the $907,000 come off the top, making my deferral amount only $928,000? based on these numbers, can you tell me what amount is eligible to defer?thanks
jerry
Tax Expert: Stephen G., Financial Advisor replied 1 year ago

The title company acting as what?

The debt doesn't affect basis.

Strongly recommend you have an experienced attorney go over the documents & "bless" your "Qualified Intermediary" & your CPA or a CPA if you don't already have one, bless the transaction, especially the determination of "like kind".

We can answer questions here, but it's just a discussion; doesn't even rise to the level of advice; it's always a caveat to seek your own legal & tax counsel. I've done many of these too & seen a fair share blow up when you get to someone having to sign off on one & there's a question. Better to address it upfront with whomever is going to be responsible for the reporting. This deal as you describe it, is far from straightforward.

Steve G.

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Customer reply replied 1 year ago
the title company would be my 1031 qualified intermediary. The proceeds would be held in her escrow account and applied towards my new purchases. My CPA has blessed the "like kind" aspect and said the title company should be fine. That wasn't the most resounding vote of confidence which is what lead me here.
Tax Expert: Stephen G., Financial Advisor replied 1 year ago

$3,000,000. - 1,230,000. = 1,770,000. + depreciation = gain.

$3,000,000. - 1,835,000. = 1,165,000. maximum deferral.

Presuming the 1,835,000. is as you represent (I'm not doubting) is a qualified exchange.

You are representing that this $907,000. is a lease.

I would question if it was actually a sale?

Analysis of the transaction would also require a review & probably an appraisal to determine your allocation of the $3,000,000. purchase price, the terms of the proposed "lease", etc.

I believe that as you suspect, your new investment for purposes of the 1031 may be $928,000. as this is all part of one transaction, and the "boot" comes off the top in terms of what is taxable.

Way too many variables here. If I were you I would get a written representation of the tax treatment from a tax attorney (CPAs can't give these type of written assurances);

Too much money at stake here, not to be certain up front. Both the CPA & attorney should bless this & the Attorney should commit to it in writing, which is routine for a tax attorney.

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Tax Expert: Stephen G., Financial Advisor replied 1 year ago

Re your last comment; about not being a "resounding vote of confidence"; I hadn't read that before making my last comments.

So, I'll just repeat that this is not the place to come for assurance. Whatever is said here is just to be taken as a friendly discussion among friends. It's not the place to be getting assurances. There's nothing binding on anyone here. So, a word to the wise is sufficient.

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Tax Expert: Stephen G., Financial Advisor replied 1 year ago

You might want to take a look at this link:

https://en.wikipedia.org/wiki/Qualified_intermediary

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Tax Expert: Stephen G., Financial Advisor replied 1 year ago

This link is better:

http://www.1031exchangemadesimple.com/intermediary.html

Notice the depiction of the relationship of the parties at the top right of the 1st page of the above link & the separation of the Qualified Intermediary from the Closing Agent.

Also:

A Qualified Intermediary (QI) must be used to facilitate the 1031 Exchange Transaction and as a matter of fact, by definition, a 1031 Qualified Intermediary (QI) is an independent and professional facilitator who receives the funds. He handles the funds from the original sale and holds the funds until they are needed to purchase the new exchange (replacement) property. The Qualified Intermediary (QI) then directly delivers the money to the closing agent who then, in turn, delivers the deed directly to the real estate investor himself.

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Tax Expert: Stephen G., Financial Advisor replied 1 year ago

Please remember to rate my response as that is the only way we receive credit for our work.

Thanks very much for using JustAnswer.com

Steve G.

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