Re­verse 1031 ex­change pos­si­ble but can be tricky and ex­pen­sive

Sun Sentinel Broward Edition - Homespot - Broward East - - H.O.A. LAW - By Ilyce Glink and Sa­muel J. Tamkin

Tri­bune Con­tent Agency Q:

I am a real es­tate agent in New York City. I have a client who lives out of state but owns a sec­ond home here in New York, which is a co-op­er­a­tive apart­ment. The apart­ment is sub­leased and is an in­vest­ment property for her.

She is in­ter­ested in buy­ing a sec­ond in­vest­ment property in the city prior to sell­ing her cur­rently owned in­vest­ment property. Is it pos­si­ble for her to close on the pur­chase of her sec­ond home prior to sell­ing her first in­vest­ment property and still take ad­van­tage of the like-kind ex­change rule pre­vent­ing her from pay­ing cap­i­tal gains taxes? If so, how does she do this? A:

Tra­di­tion­ally, a like-kind ex­change of real es­tate -- also known as a 1031 ex­change -works like this: A seller closes on the sale of an in­vest­ment property and de­posits the pro­ceeds in a qual­i­fied ex­change with a com­pany that spe­cial­izes in 1031 ex­changes. Then, fol­low­ing spe­cific rules, the per­son des­ig­nates a re­place­ment property within 45 days of that sale and closes on the new property within 180 days of the first clos­ing. There are quite a few other rules that go along with that sum­mary but you get the sense that you sell first and buy later.

How­ever, you can also do it the other way, but it can be quite ex­pen­sive and may not work in your sit­u­a­tion. In a de­layed ex­change or re­verse ex­change, you buy the new property first, but the property isn’t pur­chased by you but rather by the ex­change com­pany. Then when you have the old property sold, you pro­ceed to ex­change new property for the old one.

Here are some pit­falls we see in your sit­u­a­tion. When you own a co-op apart­ment, the board wants to know ex­actly who will own the apart­ment. In the re­verse ex­change sit­u­a­tion, an in­ter­me­di­ary com­pany would be the buyer. The coop board may not go along with this ar­range­ment. Also, you have to keep in mind that you have ex­ten­sive additional trans­ac­tion and clos­ing costs in this ar­range­ment. Those costs could out­weigh the ben­e­fits of try­ing to get the trans­ac­tion done.

Try talk­ing with the seller of the property your client wants to buy and see if you can work out an ar­range­ment to de­lay that clos­ing un­til the ex­ist­ing unit is closed. Your client may have to put down a sub­stan­tial down pay­ment that could be for­feited if she fails to close on the pur­chase.

An­other op­tion is to set the sales price of the cur­rently owned co-op unit ag­gres­sively enough that it sells quickly and work with the co-op board to get the deal closed as soon as pos­si­ble.

We rec­om­mend that you talk to a 1031 ex­change com­pany that can walk you through the ex­act de­tails of the cost of a tra­di­tional ex­change and then give you the costs of a re­verse or de­layed ex­change. When ask­ing about the com­pany’s fees, get spe­cific de­tails about additional trans­ac­tion costs you’ll in­cur, in­clud­ing le­gal, record­ing and fil­ing fees, doc­u­ment prepa­ra­tion fees, and any other additional lender fees and ex­penses.

(Ilyce Glink is the cre­ator of an 18-part we­bi­nar and ebook se­ries called “The In­ten­tional In­vestor: How to be wildly suc­cess­ful in real es­tate,” as well as the au­thor of many books on real es­tate. She also hosts the “Real Es­tate Minute,” on her YouTube. com/ex­pertrealestatetips chan­nel. If you have ques­tions, you can call her ra­dio show toll-free (800972-8255) any Sun­day, from 11a-1p EST. Con­tact Ilyce and Sam through her web­site, www.thinkglink. com.)

(c) 2014 Ilyce R. Glink and Sa­muel J. Tamkin. Dis­trib­uted by Tri­bune Con­tent Agency, LLC.

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