Like Kind Exchange?

[Possi]

My client sold a rental property at a gain and bought another rental property outright with the funds. 

Wouldn't he have had to go through special channels to be considered a Like Kind Exchange? 

Or is there any salvation from the $20k he owes in taxes that I can do?

[Abby Normal]

Yes, the rules for like kind exchanges are very strict. He must pay the taxes. Tell him that's his punishment for not calling you first. A 5 minute phone call could have saved him 20 grand!

[Roberts]

I don't know if he owes. Whenever asked, I tell clients to talk with a real estate attorney to make sure it is handled properly. Most of the time I've had them, people claim they are like kind exchanges but they aren't IMO. Selling farm land and buying a commercial property. Selling the property, mixing the funds with their own and then a year later buying another and claiming it's all fine. Had a guy yell at me because he insisted his selling a debt free farm for a debt financed commercial development property in the city was a like kind exchange. After that - my response is they need to get an attorney.

[jklcpa]

If he touched the money from the sale, no exchange!  The original poster's client will fail the rules of 1031 exchange based on this fact alone. He must use a qualified intermediary to handle the funds. Any accountant or attorney that has provided services within a 2-year period prior to the exchange is disqualified from acting as such.

 

[Possi]

21 minutes ago, jklcpa said:

If he touched the money from the sale, no exchange!  The original poster's client will fail the rules of 1031 exchange based on this fact alone. He must use a qualified intermediary to handle the funds. Any accountant or attorney that has provided services within a 2-year period prior to the exchange is disqualified from acting as such.

 

Thanks, that is what I read, too. I just wanted to be sure there weren't any other avenues before I hit him with the bad news. 

[Max W]

10 minutes ago, Possi said:

Thanks, that is what I read, too. I just wanted to be sure there weren't any other avenues before I hit him with the bad news. 

Well, it's not all bad.  The tax is only deferred and tax rates may be much higher when the new property is eventually sold.

[Possi]

7 minutes ago, Max W said:

Well, it's not all bad.  The tax is only deferred and tax rates may be much higher when the new property is eventually sold.

That's a great prospective. 

[jklcpa]

19 minutes ago, Max W said:

Well, it's not all bad.  The tax is only deferred and tax rates may be much higher when the new property is eventually sold.

There is no deferral.  The client sold a property and owes taxes now; there is no 1031 exchange relief on the sale because he didn't follow the rules.

 

[Max W]

2 hours ago, jklcpa said:

There is no deferral.  The client sold a property and owes taxes now; there is no 1031 exchange relief on the sale because he didn't follow the rules.

 

I thought that that was being implied  More precise grammar would be "the tax would only have been deferred".  I wasn't trying to say it was deferred. 

[TAXMAN]

Ran into this also. My question to tp was who got the $ and what did you do with them. Game over.

[DANRVAN]

6 hours ago, jklcpa said:

The tax is only deferred and tax rates may be much higher when the new property is eventually sold.

And some taxpayers have the impression that it is permanently deferred!

1031's are great for estate planning with step up in basis.

They are also useful when real estate is sold in a high income year.  Currently have a client who exchanged for multiple properties and now selling off one at a time over course of several years while in retirement.

 

JKL EDIT TO CLARIFY - Quote above attributed to me was actually posted by Max W. 

Edited March 26, 2020 by jklcpa
clarified author of quote

[RitaB]

14 hours ago, DANRVAN said:

And some taxpayers have the impression that it is permanently deferred!

 

Hahaha, yes, this reminded me of my client who came in with her stuff and told me that her husband said to make sure I knew that they wanted the dividends and capital gains distributions on her individual account to be tax deferred.

Oh, is that what you want?  Ok, good move, savvy investor.  I see you're all over it now this fifth year you've had this account and the first year you've opened the envelope before giving it to me.