Home Selling in San Jose>Question Details

Jim S, Both Buyer and Seller in San Jose, CA

1031 Expert Advice Needed

Asked by Jim S, San Jose, CA Fri Jan 11, 2008

I am investor and have done standard 1031s. I have some negatives on my rentals. I am trying to improve my cash flow position by offering an owner carry on 95% of the mortgage at a good rate. Say for example I sold the place for $350k and asked for a $17k deposit and had a positive cash flow of $500 a month. Would only the cash flow and the $17k be taxable. Then when the note comes due in 24 months - could I 1031 to defer the cash or does the owner carry still trigger a full tax event against the $350k.

Any serious advise here would be greatly appreciated. I know I can call a 1031 company and speak to my tax man but I'd rather get some second opinions since I know this isn't the traditional way to do a 1031

Thank you for your hel

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7
Thank you everyone for all your answers. I AM SO CONFUSED>>>>>>>>>>>> Just kidding.

I wonder what our next Presidents going to do to all us RE people.
1 vote Thank Flag Link Tue Jan 15, 2008
Web Reference: http://www.mattirvin.com
1 vote Thank Flag Link Sat Jan 12, 2008
Jim, check out this link. It answers your question.

https://www.1031cpas.com/1031%20literature.htm#carrybacks
Web Reference: http://www.terrivellios.com
1 vote Thank Flag Link Fri Jan 11, 2008
You absolutely need to talk with a CPA or tax attorney on this one - This suggestion is not advice but something that I would ask my CPA or tax attorney to explore if I were in your shoes...I would ask my CPA or tax attorney if a lease purchase contract or a lease with an option to buy would be a feasible solution for me. I would further ask if, once the purchaser exercised their option or were ready to close on the lease purchase, would I then have the time allowed by the 1031 tax law to identify a new property (or properties), and then would I have the enough time to close on that new property before I would be liable for taxes on the sale of the original property.

Also another thought..... if you have a currently have a mortgage on the property you "owner carry" and you have a due on sale clause on your mortgage, you may just find yourself having to pay off your exisiting mortgage in order to finance this sale for your "owner carry" buyer.

My advice is to consult to a CPA or a Tax Attorney - the last thing you want to be is penny wise and pound foolish.
0 votes Thank Flag Link Wed Jan 30, 2008
I have a 1031 Exchange section in my website (listed below) under Buyers/Sellers that can provide you some basic information from the National Association of Realtors (NAR). NAR has another link there to the Federation of Exchange Accomodators, however, In my professional opinion, your tax person is best qualified to help you with this matter.
0 votes Thank Flag Link Tue Jan 15, 2008
You will have a taxable event in two years if you do this transaction. The cash flow is always taxable as normal net operating income. The portion of the sale that you receive ($17,000) is a capital gain. You may also have a taxable event sooner if the note gets refinanced or paid off. It's best to include a prepayment penalty to avoid that early cost to you.
0 votes Thank Flag Link Tue Jan 15, 2008
Mario Pinedo,…, Real Estate Pro in Cupertino, CA
MVP'08
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The articles referenced by Matt and Teri offer valuable information. A word of caution anytime you are "going around" the basics of a 1031 is to talk with a tax specialist who really knows 1031 exchanges as these can be very tricky.

Depending on what you want to accomplish sometimes it may make tax sense to not do a 1031 exchange on a property but to sell it outright. By taking back the mortgage you can defer taxes to be paid to the portion of monies you receive each year if you do an installment sale. Sometimes if you have a very low basis in a property an installment sale can make sense but you need to consult with your CPA.

What ever yoiu choose to do be sure to get advice from a qualified 1031 CPA or tax attorney. This is one area where you don't want to make any mistakes as they can be very costly.
Web Reference: http://kayethomas4homes.com
0 votes Thank Flag Link Sat Jan 12, 2008
Kaye Thomas, Real Estate Pro in Manhattan Beach, CA
MVP'08
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