Want to avoid the tax hit on your remaining "boot" from your exchange?
A good example of how Meridian helps with solving a common 1031 exchange problem --- taxes due on the boot in a commercial 1031 exchange --- is shown below.
Example: Jane Investor owns a 50-unit apartment building that she bought in California in 1990. Over the course of 20 years, she finally paid off the building, which she knows she can sell for $5,000,000. Her property is in a 5% cap market and is now paid off. Unhappy with her cash flow (5% of $5,000,000, or $250,000 per year), Jane wants to retire and improve her cash flow in retirement.
Jane decides to buy another 50-unit apartment in Idaho for $4,000,000 where she will get an 8% cap rate, or income of $320,000 (8% of $4,000,000). In order to avoid capital gains tax of $750,000 (15% of $5,000,000), Jane decides to do a 1031 exchange. But her problem is that since her replacement property is being bought for less than her relinquished property, she will have a boot of $1,000,000, on which she will be liable for capital gains tax of $150,000 unless she does something about it. Unfortunately for Jane, she did not realize that she was going to have a big tax bill on the boot until she was 160 days into her 180-day Exchange Period. She only has 20 days to solve her tax problem on her boot.
Sale of Current Asset
In a panic, Jane calls her commercial broker looking for guidance. The broker knows that Meridian Pacific Properties could provide his client, Jane, with quality performing properties with good returns and all of the due diligence already done in a hurry. Meridian could provide 5 single family properties in Jackson, MS and 5 more in Memphis, TN in a portfolio that averaged a 9% cap rate. The 10 homes averaged $100,000 apiece, enough to eliminate her $1,000,000 boot and defer paying capital gains tax.
Cash Purchase of 10 Meridian Pacific Homes
Since the properties were being sold in a cash transaction, Meridian closed all 10 properties in 10 days for Jane. She would receive additional cash income annually of $90,000 from these properties (9% of $1,000,000). That $90,000 when combined with the $320,000 from her replacement apartment building, totaled $410,000 per year in income, a huge increase from the $250,000 she was getting before her 1031 exchange.
Thus by working with Meridian Pacific’s 1031 Exchange Replacement Property Program Jane not only avoided the $150,000 tax hit from her sale, she was also able to increase her income by $160,000 annually. Jane was thrilled.
This is a good illustration of how Meridian can work with an investor and their broker to creatively solve a common problem in commercial real estate 1031 exchanges: eliminating the boot and deferring the associated tax bill. Meridian Pacific can work with investors, QI’s and brokers to solve a wide range of 1031 exchange and other investment problems.
Please contact us for further information on how we can help you today.
