This is also from March 2005:

Q-1:

Subject: Exchange Question

 

I just ran across your site and found it very interesting.  I was wondering if you could help us with this question.  My husband and I purchased a home in 1987.  We lived there until 1994.  We are a military family and have been stationed away from this home ever since.  It has been rented from 1994 until now.  We plan to sell it.  It is in Florida.  We plan to move to Branson, Missouri.  We were wondering if we could reinvest in a small hotel type business, for example 10 rooms or a B&B type business  and or a 4-plex.  We would wish to live in the business.  We would like to use the proceeds to pay off existing mortgage, car, and college loans, while financing the business with a modest down payment.  Is any of this possible without paying huge chunks of taxes?

Thank you for your advice.

 

Sincerely,

A-1:

To have a valid tax deferred exchange, you will need to reinvest all of the cash proceeds from the disposal of your Florida rental property into new like kind property, which could be a hotel type property in Branson, as long as enough of that purchase price is allocated to the real property portion of the property to meet or exceed the selling price of the Florida property.

Any portion of the new property that will be used as your primary residence cannot be counted.

No part of the cash proceeds can be used for non-reinvestment things, such as paying off other debts that are not secured by the Florida rental.  It is possible, after you have taken title to the Branson property, to refinance it and use the new loan proceeds to pay off other debts without any tax consequences.

You really need to consult with a tax pro to work out the best strategy for your plans and circumstances.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

Thank you so much for your advice.  Since it appears that we have to move in this direction, we were wondering about buying another house for rental purposes.  We plan to sell our home in Florida for a net of $167,000.  We are looking at houses in the Branson area and are considering purchasing one and paying cash in the neighborhood of $120,000 and then purchasing a small hotel/live in business with the remainder of the proceeds acting as the down payment for the investment. This would be making an exchange with two properties in mind.  Is this possible? If so of the $167,000, $120,000 goes to pay in full for rental property with a remainder of 47,000 or so toward the purchase of the hotel units.  Since the hotel that we are looking at is around $215,000, there is no way to pay for this business in full, but we would rest easy knowing at least one property is completely paid in full and with the opportunity to bring in income. 

Another question is, can you count closing costs in the transactions of the $167,000 or must the entire amount go into the properties themselves?  And am I understanding what I’ve read on the internet correct in that we need an Accommodator for these transactions?  If so, which would be best, to obtain one from Florida where we are selling or from Branson, where we are moving?

I know I have a lot of questions and I do so appreciate your time.  Thank you so much.

Sincerely,

A-2:

You have me a bit confused here.  Is the home you are planning to sell for $167,000 your primary residence or a rental?

If it’s your primary personal residence, there is no replacement requirement.  You can see all of the rules on my website.
 

Kerry Kerstetter

Q-3:

Kerry,

This house which was our primary residence for seven years,(due to military orders), became a rental property and has been for the last 10 years.

Thanks again for the help. 

A-3:

Thanks for the clarification.  Terminology is critical; so describing it as “our home” muddies the issue tremendously. 

After ten years as a rental, it long ceased to be your primary residence and a 1031 exchange would be necessary to avoid any taxation of the profit you will be having.

Another ambiguous term that you used is “net of $167,000.”  If you are referring to the cash after paying off existing loans, you are off track.  The requirement for a completely tax free exchange is the net sale price after deducting the direct selling costs, such as commissions and escrow fees. Payments of loans and operating costs, such as interest and property taxes, do not lower the target replacement price. 

That said, the answer to your original question about using the proceeds to acquire two replacement properties is yes.  That is quite common.  As long as the total combined cost of the new properties meets or exceeds the net sale price of the old property, you are covered.  The only thing you would need to be concerned with is that you can’t count the cost of the property in which you will be living as suitable like kind.  This means that you will need to allocate the purchase price of that property between the business portion and the primary residence portion to see if you are reinvesting an adequate amount.

You can count the closing costs on the acquisition legs as part of the reinvestment.  Anything that would normally be capitalized as part of the property cost qualifies.

You do need to use an exchange accommodator to hold the proceeds and prepare the proper documentation for all legs of the exchange.  If you touch any of the money yourself, even for a split second, you will be taxed on it, even if you do apply it to the new property. 

You can use an accommodator anywhere in the country.  It really doesn’t matter.  For example, most of the exchanges my wife’s company, Tax Free Exchange Corporation, handle are not even close to Arkansas, and are between states all over the country.

Good luck.  I hope this helps. 

Kerry Kerstetter

Q-4:

Thanks Kerry for all the valuable information.  Before we clicked on your site, we were clueless about what all was involved in selling and reinvesting.  My husband is retiring from the military and we are leaving Germany is a few weeks and are really looking forward to getting involved in the business side of things.  Thanks so much for your help.

 I have a large number of items in my “To Be Posted” folder.  This was from March 2005. 

Q-1:

Subject: Section 179 as an LLC Partner

 

Dear Ms. Kerstetter,

 

Nobody can seem to answer my question.  I am an equal partner of a 3 member LLC (taxed as a partnership).  I purchased a large SUV (over 6000 lbs) in August, 2004.  I made this purchase with my own money primarily for my business activities on a daily basis, but figured it would be a good vehicle to have for certain personal usage (family vacation).  My question is this:

 

Can I deduct the 84% usage on this vehicle as a Section 179 deduction?  If so, where do I make this deduction (what form)?  Do I simply adjust line 17 on the 1040 or must I make this deduction on another line?

 

Any help would be greatly appreciated,

A-1:

Unreimbursed expenses that you pay on behalf of your LLC, including Section 179 and other vehicle costs, can be claimed on Page 2 of Schedule E on a line right under where the LLC K-1 info is shown.

This has long been a very basic part of tax return preparation.  If your personal tax advisor was unaware of this, it may be time to look for someone with a better understanding of how to handle pass-through entities.

I hope this helps.  Good luck.

Kerry Kerstetter

Q-2:

Thank you very much Kerry for your answer.  I assume you were referring to Schedule E, Page 2, Line 28 (i) under Section 179 expense deduction from Form 4562.  So even though I would list my LLC’s name, I would go ahead and list the K-1 info as well as my own section 179 deduction on the same line? That’s where the confusion lies and why no tax preparer (and I’ve asked plenty) here can seem to give me a straight answer.  Some say that Unreimbursed expenses must fall under the condition:  To be deductible, the partnership agreement must state in writing that the partner pay the expenses.

The problem is that I purchased this Large SUV at my own discretion, as I felt it would make my job easier as well as come in handy for the rare trips my wife and I make.  Under these conditions, can I still claim this, even if it’s not in the partnership agreement?

Thank you so much for helping me out,

A-2:

I’m not sure why this is so confusing to tax pros.  For as long as I can remember, my tax software has had an option to code business expenses, including depreciation and Section 179, to a K-1 activity.  It then prepares the appropriate backup schedules, including the 4562 for depreciation and Sec. 179, and prints the total on page 2 of the Sch. E, on a separate line under the info from the K-1. 

You don’t have to put everything on the same line.  As I mentioned in an earlier post on my blog, if there are more K-1s than blank lines on the Sch. E, the program prints “See Attached” and has a backup schedule listing all of the individual K-1 and expense items.  I have had clients with 30 or 40 K-1s, so such backup lists are quite common.

IRS has never had any problems with reporting it like this, and I have prepared thousands of them.

Kerry Kerstetter

Q-3:

I just got back from visiting with another CPA.  She also said that anything declared as a Section 179 on the Schedule E must come from a K-1.  How can I do this if I purchased my SUV with my own money.  All I want to do is deduct 84% of the cost of my SUV, since that is what I use for business.  If I list it on line B, of Schedule E, Page2, line 28, What do I put as the name of that Section 179 deduction since I have no sole proprietorship or other business that made the SUV purchase for me?  Please help.  Do you do taxes for people in Nevada?

Thanks Again,

A-3:

As I said before, my tax software has always allowed me to show Section 179 property purchased by individuals for partnership & LLC business on Page 2 of Sch. E; and IRS has never complained; so I’m not sure why that CPA said that.  She probably just didn’t try it.

If you’re doing your return by hand, I guess you could include the 4562 and carry the numbers to page 2 of Sch. E.  Write in that they were for the LLC activity.

We do have clients all over the country, including several in the Vegas area.  Unfortunately, we are over-extended and are dropping clients in order to balance out the workload with my capacity.

Kerry Kerstetter

Q-4:

Kerry,

Thank you so much for all your help and responses in this matter.  You’re doing a very nice thing in taking time out of your busy schedule to help out people such as myself.  I actually found a tax preparer today who suggested that I can use Form C and just not enter the business name, just in order to get the software to list my Section 179 deduction under my K-1 info.  This way, it will decrease my adjusted gross income like it should.  However, I’m gonna suggest your way better, as I know that the Section C is only for Sole Proprietorships.  I guess in a way, it’s the same thing.  I still wish you could do my taxes over the phone, as I have already done everything else. The only thing I needed was to complete that Section 179 writeoff.  A whole lot of preparers here in Vegas could learn from you.  Anyhow, I’ll have that prepare do it for me just to give me some peace of mind, as I want it done via a tax program rather than by hand.

Again, thank you so much for all your help.  My wife and I are very grateful to you.

Regards,

A-4:

That Schedule C idea is dangerous.  I recently finished resolving an IRS audit case for a client whose original preparer did just that, putting her personally paid K-1 expenses on Sch. C instead of on Page 2 of the Sch. E.

Good luck.

Kerry