Expert: Dick Dennis - 9/12/2006

Question
Hello and thank you for volunteering!

Question:  In a 1031 real estate exchange....property A is sold for $350k and
property B is purchased for $350k so it is an even exchange and no capital gains
tax to be paid.  However, property B is really purchased for $280k plus a $70k
credit to be put in escrow at closing as a "sellers concession" for repairs and
improvements to the property...making the "sales price" $350k. [the property is
appraised at $350k but discounted due to improvements needed]. Does this pass
the "smell" test re taxes or other legal considerations?

Thanks,
dj murphy

Answer
The way I see it, it is a $350,000 purchase because the purchase agreement says so. It's just that $70,000 of that is used for repairs and improvements. However, you have not mentioned anything about the loans. The above example indeed would qualify for a 1031 (I strongly suggest you run this by your local tax expert) if there was no loan obligations involved on either side.

Please remember that while the prices must be the same (or more for the second property), the loan obligation for the second property must be equal or more than the first property. That is the true description of a 1031.

I do wish you well, DJ

Dick Dennis              dixiedee13@aol.com