1031 transfer and capital gains

[timberland]

so I am looking at selling my hunting property and using a 1031 exchange to avoid as much tax liability as possible. I have a potential buyer for mine and a property I can purchase. The issue is my property has about 75,000 more value than the new property. I believe I would have to pay capital gains on only the difference, but thats still a bunch.

I heard I can buy the new property under a mortgage equal to the sale price of mine, and pocket the difference. I was wondering if anyone has gone through this process?

I have considering using land contracts for both transactions, but would end up paying a lot of income tax with that strategy.

Any other suggestions or things I should consider?

 

[Wapiti7]

Talk to a CPA.

Generally, have to go up in value and up in debt. If your property is worth more than the replacement by $75k, will you net the difference in cash? If so, generally that is going to be taxable boot.

If you use a real estate contract on the sale of your property, you will blow the 1031, as the REC will be treated as boot.

1031 is very form driven. Talk to a CPA, hire a decent qualified intermediary, and the follow the specifics to the T.

 

[Bachto]

Talk to a CPA.

Generally, have to go up in value and up in debt. If your property is worth more than the replacement by $75k, will you net the difference in cash? If so, generally that is going to be taxable boot.

If you use a real estate contract on the sale of your property, you will blow the 1031, as the REC will be treated as boot.

1031 is very form driven. Talk to a CPA, hire a decent qualified intermediary, and the follow the specifics to the T.

This is great advice.

You may be able to put the $75k into a separate REIT and split it up. Again, A CPA and qualified intermediary will be able to confirm this.

 

[180ls1]

This is great advice.

You may be able to put the $75k into a separate REIT and split it up. Again, A CPA and qualified intermediary will be able to confirm this.

Likely a DST not REIT. This is a good way to go.


OP, land improvement may be an option as well for offsetting.

 

[Quandary]

First thing I would do is ask the administators to delete this thread. "my hunting property" would constitute a personal use asset and not qualify for a 1031 exchange.

 

[Subliminal1]

Buy multiple properties, and or use the extra funds to "repairs/upgrade"... talk to CPA and 1031 company, they will keep you inline haha. I have nothing but good things to say about the team who I worked with here - https://exchangeresources.net/

 

[Boog304]

as others have said seek help from a CPA that commonly deals with land transactions.

My first thought is how did you acquire your current property, did you buy, inherit, etc.? Through that transaction you should have established a basis in the property no matter how it was acquired. Thus you may not have as much taxable gain as you expect. Ie, if you purchased the property 10 years ago for $100k and sold it today for $120k there would only be a $20k gain. If the land was inherited you would receive what is called a “step up in basis” and your basis would be the fair market value at the time of inheritance. Even though you don’t pay anything upon inheritance you receive the fair market value at that time and that basis can shield you from some/maybe all capital gains.

If you have sold anything like minerals or timber of your property during ownership that can reduce your basis and increase your capital gain.

Inversely if you have spent $$ on capital improvements like a survey or road construction, that could add to your basis…

A good accountant should be able to help you through this with sound advice

1031 is an excellent way to shield yourself from a gain, I’m just saying you may not have as big of a gain as you are thinking.

 

[Davyalabama]

You've got some good advice -- Now mine, make sure you have a good CPA that knows what he's doing with all this. I will promise you, not all of them know what they are doing when it comes to transactions such as this.

 

[Coopsdaddy]

Dealing with this as well.Must be a like property.
From my understanding if I sale my 120 wooded acres for 600-700000 I must buy wooded land and not a house.Must be a similar style of property.
Also I’ve got 145000 invested but have owned most of it 20 years.
I struggle with giving the government my gain.
I have never once saw them out there cutting trees,building fence or brush hogging.
Im thinking about building a small cheap barn with small apartment up top for 60-70000.
Living in it a few years and then selling or just suck it up and give this great county that steals from its citizens a free 80-100000.

 

[Hnthrdr]

Dealing with this as well.Must be a like property.
From my understanding if I sale my 120 wooded acres for 600-700000 I must buy wooded land and not a house.Must be a similar style of property.
Also I’ve got 145000 invested but have owned most of it 20 years.
I struggle with giving the government my gain.
I have never once saw them out there cutting trees,building fence or brush hogging.
Im thinking about building a small cheap barn with small apartment up top for 60-70000.
Living in it a few years and then selling or just suck it up and give this great county that steals from its citizens a free 80-100000.

Ouch, tax bills like that suck, I would find someone who specializes in this, if I sell my rental I was thinking about a vacant land/ ag property and I think 1031 is still a possibility

 

[timberland]

as others have said seek help from a CPA that commonly deals with land transactions.

My first thought is how did you acquire your current property, did you buy, inherit, etc.? Through that transaction you should have established a basis in the property no matter how it was acquired. Thus you may not have as much taxable gain as you expect. Ie, if you purchased the property 10 years ago for $100k and sold it today for $120k there would only be a $20k gain. If the land was inherited you would receive what is called a “step up in basis” and your basis would be the fair market value at the time of inheritance. Even though you don’t pay anything upon inheritance you receive the fair market value at that time and that basis can shield you from some/maybe all capital gains.

If you have sold anything like minerals or timber of your property during ownership that can reduce your basis and increase your capital gain.

Inversely if you have spent $$ on capital improvements like a survey or road construction, that could add to your basis…

A good accountant should be able to help you through this with sound advice

1031 is an excellent way to shield yourself from a gain, I’m just saying you may not have as big of a gain as you are thinking.

this is great I never thought about the logging i did a few years back. I also built a cabin that added a lot of the value i will get from the sale. thanks for the ideas

 

[Bachto]

Dealing with this as well.Must be a like property.
From my understanding if I sale my 120 wooded acres for 600-700000 I must buy wooded land and not a house.Must be a similar style of property.

That is not true. I manage rental properties and deal with this stuff all the time. I had a client sell 1000's of acres of ranchland and buy 20 single family houses as rentals. "Like Kind" just means real estate for real estate. You can't 1031 real estate into stocks or something.

 

[180ls1]

It's also important to "not let the tax tail wag the investment dog."

You can pay the tax and put the rest of the money in a better investment. We have historic low tax rates and you've made money on it (good problem).

 

[Coopsdaddy]

That is not true. I manage rental properties and deal with this stuff all the time. I had a client sell 1000's of acres of ranchland and buy 20 single family houses as rentals. "Like Kind" just means real estate for real estate. You can't 1031 real estate into stocks or something.

Well that’s great news.
Ill look into that and if that’s the case it opens up more options.Im 3-5 years away from that as well.
Thanks

 

[cfounta1]

Like kind is a very loose term. I know a guy that sold his ag business and did a 1031 exchange to buy a remote hunting property. He claimed "Future commercial development".

 

[Wapiti7]

Like kind is a very loose term. I know a guy that sold his ag business and did a 1031 exchange to buy a remote hunting property. He claimed "Future commercial development".

I agree that like kind can be a liberal term, but under current law it is very clear that you can only 1031 real property. I bet he sold his ag "land" not his ag "business". Current intent (with facts that support that intent) at time of transaction plays very heavily into 1031/like kind property. As has been said before, talk to a CPA that understands this stuff. People play pretty fast and loose with 1031, but the fact that they didn't get examined/challenged does not mean that the taxpayer was right, it only means that they won the audit lottery and didn't get a lovely notice. We used to get a lot of notices when Form 8824 was included with a return, but haven't seen many in the last 5 years.

 

[SDHNTR]

That is not true. I manage rental properties and deal with this stuff all the time. I had a client sell 1000's of acres of ranchland and buy 20 single family houses as rentals. "Like Kind" just means real estate for real estate. You can't 1031 real estate into stocks or something.

Partially correct. Like kind means investment property exchanged for another investment property. You cannot 1031 exchange investment property for a primary residence or vice versa.

 

[Quandary]

Like kind is a very loose term. I know a guy that sold his ag business and did a 1031 exchange to buy a remote hunting property. He claimed "Future commercial development".

Just because "a guy" files a fraudulent tax return doesn't mean that it is a like kind exchange. But then very few returns ever get audited, so there's that.

 

[Coopsdaddy]

So my first thought was partially correct.
So if I sale my land thats not investment land can i sale and by a home not investment in another state.It would be my personal residence not an investment property.

 

[moewells100]

Talk to a CPA.

Generally, have to go up in value and up in debt. If your property is worth more than the replacement by $75k, will you net the difference in cash? If so, generally that is going to be taxable boot.

If you use a real estate contract on the sale of your property, you will blow the 1031, as the REC will be treated as boot.

1031 is very form driven. Talk to a CPA, hire a decent qualified intermediary, and the follow the specifics to the T.

This is the answer