Do 1031 Exchange Options Allow Me to Acquire Replacement Property In a Different State?

Do 1031 Exchange Options Allow Me to Acquire Replacement Property In a Different State?


Hello, David Moore, Equity Advantage, IRA
Advantage once again here with my brother and partner, Tom, and he’s going to be answering
questions today. I get to ask them. So we’re going to do the ask the experts between
the brothers, so that’ll be fun and you won’t have to listen to me talk quite as much. Today’s question of the day, 1031 is do 1031
Exchange Options allow me to acquire the replacement property in a different state than the state
of relinquished? And the short answer is yes. Section 1031 is a federal tax code and it
is recognized in all the different states so you can exchange from state-to-state. We regularly are dealing with transactions
from our home state of Oregon and into California, Washington, vice versa. We do a lot of transactions on the east coast,
up and down the east coast, New York, New Jersey, Florida, Maryland all over the place. We do a lot of stuff all over the country. How about foreign stuff? Foreign? You cannot exchange domestic for foreign. So if you’re exchanging out of property in
the states, you cannot go into a foreign property. However, you can exchange foreign for foreign. Foreign for foreign is considered like kind,
just not domestic or foreign. Okay. So on that question, Tom, are there any other
things that investors need to be aware of? Any other guidelines that might hit them? If we’re in state-to-state is there anything
if you’re going to leave Oregon and you think, “Hey, I got a great idea, I’m going to exchange
out of California or out of Oregon with estate tax and go into Nevada or Washington State
or Texas or Florida where there’s no state tax. And hey, I’m going to save myself 10%.” Is that something that’s going to work or
what happens? Yeah, it is a tax-deferred exchange, and ultimately,
in the end, if you end up selling those properties in a state in which you have no state income
taxes you still are going to end up having to pay the capital gains taxes for that state
in which you initially deferred out of. So Oregon and California have sort of followed
Oregon. They keep their hand in the cookie jar, sort
of. I mean, so you can exchange out, you’re going
to defer everything as long as there’s tax deferral. But if there’s a future sale realizing triggering
gain they’re going to get it back? At that point in time, they will. Yeah, They keep that hand in that cookie jar. Yeah, exactly. They want their tax dollars. The other thing to keep in mind if you are
selling different properties, different states have different rules on nonresidents of the
state. Oregon has nonresident withholding’s for four
people selling properties. If they’re nonresident selling property here
than they have a withholding but you can have that waived. So if you’re doing a 1031 Exchange transaction
and you expect to defer all of your capital gains taxes, then you can have the withholding
of the expected taxes waived. There’s a form that is filled out by escrow,
typically at closing, if you’re doing a 1031 Exchange to how those withholding’s waived
and it’s similar in most other states as well. So you always want to find out if you are
selling a property in another state, if there’s withholding’s, you find out if there is a
waiver for that, typically there is for a 1031 transaction. So if we’re looking at it and this is not
something we were scheduled to be talking about today, but since we’re on the topic
of withholding’s or what happens on a sale, what about let’s say FIRPTA, the Foreign Investment
Real Property Tax Act. We have to wrestle with that every so often
and in that situation, once again, I think it’s something where it’s critical that you
talk to your tax people earlier, sooner rather than later and we address these things. Yeah, FIRPTA if you’re foreign or selling
domestic property here and FIRPTA kicks in, it’s really something you’ve got to do some
planning for it because it oftentimes will take three months or so to get the waiver
for that. So there’s certainly paperwork that has to
be filed prior to going into closing. If we get a call from somebody who wants to
do an exchange transaction and they’re a foreign party selling property here chances are those
funds will be withheld at closing and then they’ll have to come in with additional cash
on the acquisition side so that when those funds do get released to them, they can have
that. So what you’re saying is if we’re in a situation
where nobody’s planned ahead or planned ahead far enough, that FIRPTA could trigger a withholding
that it’s going to pull some money out that would be looked at as boot, unless you put
some funds into offset it. Right? Yeah. Basically, the taxpayer typically is going
to put the money in that would be representative of what was withheld, complete the transaction. Then when the withholding is approved if it’s
approved, then they get the funds back, but otherwise, they’re going to have tax exposure
if they don’t supplement with that additional money. What you’re saying is going to have tax exposure. So I think it’s very important thing to understand
that little nugget of knowledge. Yeah. As you said, it’s planning. Planning is big in any 1031 Exchange and unfortunately,
it doesn’t always happen. So anytime you’re contemplating a sale, get
in front of your tax advisors and talk to your escrow officers too to find out what
sort of withholding’s they expect to have if any at a closing. Great. Well, thank you very much. Once again, David and Tom Moore, co-founders
Equity Advantage, Ira Advantage and thank you very much for the time today and look
forward to having you back. Thank you, Tom, for joining. Thank you.

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