The IRS considers the debt on a property to be its sales price when the debt exceeds the sales price. Therefore, if the debt exceeds the basis there will be gain upon a transfer! There is relief from Phantom Gain on a primary residence under certain conditions, so make sure you understand the guidelines for qualification! Investment property does not have any exclusions. Sit down with David Moore as we cover DEBT RELIEF in a 1031 exchange.
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David Moore: Hi, David Moore with Equity Advantage in today’s short is Debt Relief in a 1031 Exchange. So, as you’re probably painfully aware out there in this recessionary time, we’ve got a situation where we’ve got a reduction in loan to value, and with the loans that are out there available, and a lot of times we’ve got people relinquishing properties and their equities evaporated somewhat, too. So it’s very common for people to call up and ask, “Hey, my lender needs more money and I’ve got to put more money into this deal to be able to get where I want to go.” So 1031 does require you go across or up in value in equity for total deferral. And if you think about what you commonly hear about people wanting to tell you that you have to replace debt in an exchange, you do not have to replace a debt.
Number one, 1031 is not all or nothing, you choose to defer what you want to choose to defer. But debt can go away in two ways, one, by going down in value, the other is by adding cash and in times like we’re in, it’s very common that you’re going to add cash to the transaction and as long as you’re meeting that value number, that relief of debt via the additional cash being injected is totally fine. So don’t let people tell you you have to replace the debt in an exchange, that’s not the case. David Moore, Equity Advantage, 1031exchange.com. Thank you.
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"WASHINGTON STATE LAW, RCW 19.310.040, REQUIRES AN EXCHANGE FACILITATOR TO EITHER MAINTAIN A FIDELITY BOND IN AN AMOUNT OF NOT LESS THAN ONE MILLION DOLLARS THAT PROTECTS CLIENTS AGAINST LOSSES CAUSED BY CRIMINAL ACTS OF THE EXCHANGE FACILITATOR, OR HOLD ALL CLIENT FUNDS IN A QUALIFIED ESCROW ACCOUNT OR QUALIFIED TRUST." RCW 19.310.040(1)(b) (as amended)