I still don’t understand how you can do a 1031 exchange to help your kids buy homes, unless they are income producing properties. It’s not like they can just move into the properties, unless you are playing the system in some (hopefully legal) way.
You can sell the property, pay your capital gains taxes on if and help your kids with the deposit. You can also use your income stream from the rental to help pay off your kids’ mortgage. You could do a 1031 exchange on your property to swap for a rental property you rent to your kiddo.
Theee are lots of things to consider.
^^ But you could do those things without converting to a 1031 exchange. And don’t you have to charge fair market rent or you can’t declare it as a rental?
Yes, one really needs to ponder the 1031 exchange and know what they’re doing.
the whole reason for 1031 exchanges is to avoid paying capital gains on the sale of a piece of property.
the property acquired , which must be of equal value to the property sold, can sit vacant as far as the IRS is concerned.
Hmm, I need to think about this one. We have a number of rental properties. I wonder if it would be legal to exchange it for another piece of property in another state, and then let your kids rent it from you…only have to charge fair value rent if you’re writing things off on it, I’d assume. I definitely don’t want to do anything that would annoy the IRS, I’m afraid of them, but if something is within legal bounds, it shouldn’t be a problem.
This is a pretty grey area IMO. In that case I posted, the IRS and Tax Court were looking for evidence that the purchased property was actually intended to be business property. If you buy something and just let it sit, and then it becomes a personal residence, I think that is asking for trouble.
The difference between FMV and what you charge them could be a gift, but I’d be concerned that this would undercut the business/investment nature of the property.
The other issue I have with 1031s is that you are not allowed to touch the proceeds of the sale. They must be held in escrow by a qualified third-party agent, and you have absolutely no control over the money. Well, about 10 years ago several large 1031 escrow companies went bankrupt, and the courts ruled that they hadn’t done the right things to set up the accounts that were holding the money, so everyone in the middle of a 1031 got wiped out. Not only did they lose all of the money from the sale, but they weren’t able to complete the 1031s and therefore had to pay taxes on gains that they lost. And they were liable on the downstream side for not being able to complete purchase transactions they had entered into. It was a huge mess.
So that kind of soured me on the whole 1031 process. How do you know your money will be there at the end? These were not novice investors for the most part.
Yikes. Well, forget it then. I’m into simplifying and less risk.
In our case a 1031 exchange won’t happen on the jointly held properties.The properties are much more valuable in the income they bring.
If it is doable I think gifting percentages of ownership in the rental properties is the best way to transfer wealth to the next generation. That way they have an income stream that they can use for accumulating a down payment and help with a mortgage down the line.
I’ve been having discussions with a friend and this question came up- how much of your financial picture do you share with your adult children?
"The other issue I have with 1031s is that you are not allowed to touch the proceeds of the sale. They must be held in escrow by a qualified third-party agent, and you have absolutely no control over the money. How do you know your money will be there at the end? These were not novice investors for the most part. "
In Calif, the qualified third party agent can be and usually is Title Insurance companies, which are used anyway in all real estate transactions in Calif [ unless you are a fool] . So the question of where is my $$ never comes up. I will say It DOES help to have a knowledgeable real estate broker as a husband. 
@busdriver11,
if the same reputable title insurance company has offices in BOTH states, I dont think the question of “where is my $$” needs to be raised.
In my state, title insurance companies do not act as escrow agents. And it is possible for title companies to go bankrupt. After the debacles in 2007 onward, presumably these companies have tightened up on their paperwork so it is clear that escrowed money is not the property of the escrow company, and people should be smarter about this now, but who knows.
I found a really good summary of how 1031s work, if anyone is interested. If not it will probably cure your insomnia.
Interestingly it says “In preparation for your exchange, contact an exchange facilitation company. You can obtain the names of facilitators from the internet, attorneys, CPAs, escrow companies or real estate agents. Facilitators should not be acting as “agents” as well as facilitators. Escrow companies, attorneys, real estate agents, etc. are agents and should not be used as facilitators.”
But then, this company is in the business of doing 1031 exchanges so of course they talk smack about the competition.
It’s a little dated in that some of the tax-related stuff is no longer completely accurate, but the rest seems ok:
@mom60, that is a good question. With my adult kids, I think they ought to know our financial situation because a) at some point, they will have to deal with our finances as I have been doing with my parents; and b) it can have some impact on their future. In this case, I have had them both meet and talk with our main financial advisor to talk about their plans. They know our lawyer (a good family friend). Neither has met with my accountant, though I suspect he will have retired long before they would need to talk with him.
I have just started to share in more depth with my son and will do with my daughter. He ran a startup before attending business school and found the finance courses in business school to be trivial, so this stuff is not so difficult for him. My D was a little confused when she had to decide how to allocate savings – she has a non-contributory 401k, a Roth and after tax savings. So, I’m not sure I will go over things with her in the same level of detail. I reviewed the asset level with him and what is in tax-deferred vehicles and what is in the family trust. They both know that there is a trust to benefit us in retirement and then our progeny.
The trust will more than likely be able to help them with down payments when they want to buy a house (or own the house outright, which could be a little more complicated). At the moment, it is organized so that the trust gets most of the new money coming in to what otherwise would have been our estate, thereby avoiding estate tax (and various kinds of liability). Of course, if the Orange One eliminates the estate tax, that virtue of the vehicle will no longer be important.
Both are well-grounded motivated kids. Moreover, there isn’t enough there so that they wouldn’t have to pursue careers – I want to make sure we have enough to retire on and then leave something in there for the kids.
@mom60, IIRC, if you put the rental properties into an LLC, you can gift an interest each year at a discounted valuation (because the kids don’t have control).
We haven’t really shared much with the kids - yet. They are in their early 20s. I debate how much to share at this juncture. They have proven good with money so far for their ages but it’s been nothing complicated. They haven’t had to buy a car, a home,support a family, etc. One recently became self supporting but I don’t think either one yet is grounded in what are assets mean in terms of true buying power - might seem more to them than it is and I don’t want that to affect them and any decisions because who knows what they might get down the road. Too many variables so it could potentially be some decent $ or or next to nothing. It’s hard for me to decide how much to share. My own parents haven’t shared much either over the years, for that matter nor have my husband’s parents. I know I don’t have to worry about supporting y parents and I have a very rough idea of their resources but that’s it.
I’m curious to hear from other families as well on how they handle this.
We could always revisit that topic
Kids have a very rough idea, just based on having eyes in their heads and knowing that what we have is without debt.
I have a document in our safe deposit box that describes how to get to our accounts and Quicken, with a password manager that is backed up to the cloud (every 15 minutes if necessary). Our accounts will run themselves for 6 months or so after I die, (taxes and tuition might be late without manual intervention). I guess I should think of a way to get the information to the kids if DW and I die at the same time. Another reason to see the estate attorney.
The son who is interested in these kinds of things knows more than the others. Not only is he interested, but he has many options to consider in the near term ($$$ job or PhD, the “two body” problem with GF, etc.) that make our discussions naturally include the topic of money and how money relates to other values.
Haha. You’re right, @MomofJandL! And that was my own thread. :"> Guess it is still on my mind - and others.
Our son has been fully informed with a learning ear to all of our financial planning and decisions since about middle school. He has his own relationship with our financial planner. She helped him invest his money prior to leaving for boarding school and she and he handled annual disbursements while he was at school. She also helped him set up a Roth IRA before he left for college. He knows where all our financial documents are and has read through them; he understands our will and our trust, knows our wishes should we become incapacitated, and he knows how we wish to be disposed of at death if he is in the unfortunate position of having to make any of those decisions. He knows our estate lawyer and who to call in an emergency if something happens to us. All of those numbers are in his phone. He is a very mature, level-headed young adult, and we have been completely transparent with him about our finances from a young age as we have taught him how to handle money and build wealth.
Next year, he (and all cadets) will receive a very low-interest $30k loan from the government as pre-commission launch money. West Point advises the cadets on money management, but I think our son is already in a good position to handle that money responsibly.
I just don’t know how much to tell them. They are very grounded, responsible, not obsessed with money, but are interested in saving and making decent money. We’ve been open about our salary, but every time we start talking about details of what we want to happen after we die, they seem uncomfortable to hear about it. I don’t know if it’s because it upsets them, or if they don’t want to seem greedy.
I’m tempted to write it down and tell them every little thing, but I just don’t know. The main thing is, they know where the will and financial details are. The thing is, when you start telling people what they might get when you die, it’s human nature to start thinking about it. Planning for it. I don’t know if I want that. The reality is, depending upon when we die, how much we spend and how well we invest, they could get tens of millions of dollars…or nothing at all.
We plan to die with a dollar, not make our son wealthy. He can plan on inheriting our house, but shouldn’t count on much else. He needs to make his own way in the world; that’s what we hope we’ve equipped him to do.
No idea how to die with only $1 and a house to our names and not our plan anyway.