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by Edward J. Schnee, CPA, Ph.D.
Published July 01, 2014
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ISOLATE SALE AND ACQUISITION EXPENSES: Can expenses relating to the acquisition of a replacement property in a 1031 EXCHANGE be paid as part of the relinquished property settlement? Although a 1031 EXCHANGE is a series of transactions treated as one continuous transaction, it is best to isolate the expenses relative to the respective disposition and acquisition. A formal identification of the target property and an executed Assignment of replacement property contract is needed prior to disbursing 1031 funds on behalf of the property. Without these documents, the Exchangor runs the risk of tainting the entire exchange. 01/28/2014
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In a 1031 EXCHANGE involving a foreign person, whether an Exchangor or Non-Exchanging party, the FIRPTA requirements are different for simultaneous (direct swaps) and deferred (delayed) exchanges. The responsibility and liability for reporting, withholding and payment lies with the transferee.
FIRPTA: In a 1031 EXCHANGE involving a foreign person, whether an Exchangor or Non-Exchanging party, the FIRPTA requirements are different for simultaneous (direct swaps) and deferred (delayed) exchanges. The responsibility and liability for reporting, withholding and payment lies with the transferee. 01/22/2014
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BUILD-TO-SUIT IMPROVEMENTS: In a Build-To-Suit 1031 Exchange (where improvements to the replacement property are made during the exchange process), funding of the property acquisition and improvements can be loaned to the EAT (temporary titleholder) by the QI from the relinquished property sale, a 3rd party lender with the T/P as guarantor of the loan, and/or from the T/P directly. 08/13/2013
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EXCHANGING VACATION HOMES: To meet the requirements of Rev. Proc. 2008-16, Safe Harbor for 1031 EXCHANGES of Vacation Homes, when renting to a family member, the safe harbor will apply if the family member uses the property as a principal residence and pays FMV rent. The qualifying period is 24 months before and after the exchange, applicable to whichever property is utilized by the family member. 6/27/2013
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STOCK OWNED COOPERATIVES IN NJ: NJS 46:8D-1 defines stock owned cooperatives in NJ as "real estate" thus making them eligible for a 1031 real property exchange. 5/16/2013
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HUSBAND AND WIFE EXCHANGE OPTION: A 1031 EXCHANGE of an investment property by a husband and wife can be bifurcated within the same exchange or separate exchanges allowing each party to acquire a property of their choosing. 01/15/2013
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PERSONAL PROPERTY ASSET CLASS: In a 1031 Personal Property Exchange, the IRS ruled that properties can still be "like-kind" even if classified in different general asset classes, as those differences may not be in nature and character, but merely in grade and quality. 10/10/2012
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MAKING IMPROVEMENTS TO PROPERTY ALREADY OWNED: Making improvements to property owned by the taxpayer is not "like-kind" to a fee simple interest and does not qualify as replacement property in a 1031 EXCHANGE. Rev Proc 2004-51 further restricted this application by setting timeframes for past ownership of the property. Owning properties in different unrelated taxable entities affords the taxpayer flexibility to utilize this type of transaction. 10/03/2012
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1099S PREPARATION: The IRS is notified of a property sale by the preparation of Form 1099-S. If the selling party is selling as a 1031 EXCHANGE, the proper way to complete the 1099-S, where all funds are included in the exchange, is to enter "zero" in Box 2 and enter an "X" in the checkbox of Box 4. 09/26/2012
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TRANSFER TAX IMPLICATIONS - BUILD TO SUIT/REVERSE: In a REVERSE and BUILD-TO-SUIT 1031 EXCHANGE using an Exchange Accomodation Titleholder (EAT), the EAT has to acquire the full benefits and burdens of the relinquished or replacement property, resulting in a second ownership transfer, and potentially a second real estate transfer tax upon final transfer depending on the State and the method of ownership transfer. 09/06/2012
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TRANSFER TAX SAVINGS - FORWARD EXCHANGE: In a FORWARD 1031 EXCHANGE using a Qualified Intermediary, the transaction is completed by an assignment of contract rights (not obligations) whereby the IRS permits a direct deeding to/from the Exchangor to/from Buyer/Seller thus avoiding additional state and local real estate transfer taxes. 09/06/2012
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CONSTRUCTIVE RECEIPT: In Morton v. US, the taxpayer mistakenly received 1031 proceeds from the sale of their property, even though they had the proper Exchange documents and restrictions in place. The funds were immediately returned to the closing agent. The courts ruled in favor of the taxpayer citing the taxpayer had the legal obligation under the Exchange Agreement to return the funds and should not be penalized for the mistakes of others. To avoid legal costs and court battles, avoid constructive receipt issues if you are doing a 1031 Exchange! 09/05/2012
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SELLER FINANCING/INSTALLMENT SALE: When a transaction requires Seller financing, the most common method of converting an Installment Sale into a 1031 Exchange is for the note to be made payable to a 1031 Intermediary at the beginning of the transaction and sold to the Seller or a related party prior to or at the time of acquisition of the replacement property, thereby avoiding taxes upon receipt of the installment payments. 08/20/2012
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3.8% TAX FOR 2013 & HOW TO AVOID IT: Beginning January 1, 2013, appreciation and depreciation recapture from the sale of a 2nd home/investment property, when added to income from all other sources, results in an AGI over $200,000 (single) or $250,000 (married), the lesser of the excess over the 200,000/250,000 or the total gain will be subject to a 3.8% additional tax. The 3.8% tax can be avoided with a 1031 EXCHANGE. 08/16/2012
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VACATION HOME RENTAL / PLEASURE USE: The IRS will not review a 1031 on your Vacation Home if in each 12 month period of the 24 months before sale of the old and after acquisition of the new you: (1) rent to an unrelated party for 14 days at FMV (2) do not us the property for pleasure more than 14 days (repairs & maintenance days have no limitation). Simple requirement to save thousands of tax dollars! 08/04/2012
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COMBINING § 1031 WITH § 121: Many of the sales we see this time of year are B&B's or Motels with owner's quarters, or a detached rental apartment over a garage. The business/rental portion of these properties can exclude gain under a Section 1031 EXCHANGE while the owner's quarters/residence can exclude gain under Section 121, primary home exclusion. The allocations used in the tax returns sets precedent for the allocation of gain. 07/17/2012
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PASSING ON PROPERTY BEFORE OR AFTER DEATH: Passing property to your heirs BEFORE death passes the property at your basis along with the gain and potential tax liability. Passing property to your heirs AFTER death passes the property at fair market value on date of death. A 1031 EXCHANGE can be utilized to eliminate taxable gains generated before or after death. 07/12/2012
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THE 1031 EXCHANGE TIMELINE: (1) Assign relinquished property contract rights to Intermediary prior to closing, (2) Identify up to 3 replacement properties by 45th day following relinquished property closing, (3) Assign replacement property contract rights to Intermediary prior to closing, (4) Close on replacement property by 180th day following relinquished property closing, (5) File tax return and pay NO taxes! See more details on our "1031 Exchange Process" page. 07/11/2012
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REDUCTION OR ELIMINATION OF TAXES: A 1031 EXCHANGE deferment of taxes may become a reduction or elimination of taxes through (1) conversion and sale of the property as a primary home, (2) death, or (3) sale in a lower or non-income tax state. 06/20/2012
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TAXABLE GAIN ON A SALE WITHOUT CASH TO SELLER: A sale without "Cash to Seller" does not always mean a sale without a taxable gain. If a Seller refinanced, received the property as a gift, took depreciation deductions, acquired the property in a 1031, or at a low cost or as a distribution from another legal entity, they may be facing a large tax bill. Selling with the benefit of a new 1031 Exchange can avoid an unanticipated tax bite. 06/08/2012
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PERSONAL PROPERTY EXCHANGE FOR FURNISHINGS: Investment property is often sold or purchased with furnishings. If the furnishings are customarily transferred as an accommodation to the real estate with no value or a value of $1, a separate personal property 1031 Exchange does not have to be established. If the furnishings are assigned a value, then a separate personal property 1031 Exchange should be considered to avoid taxable gain. 06/06/2012
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PASSIVE LOSS OFF-SET: Losses from rental activities are considered passive and generally only offset passive income, such as interest income. An exception exists whereby passive losses up to $25,000 can offset ordinary income, such as wages, if you actively participate in the rental activity. This exception phases out with an AGI of $100,000 to $150,000. 05/31/2012
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ALLOCATING VALUE TO NON-LIKE-KIND PROPERTY: Allocating a value to non-like-kind property, such as furniture & furnishings, in the 2nd leg of a real property 1031 EXCHANGE will impact overall exchange value, mortgage financing, depreciation deductions, rental loss write-offs, long-term capital gains, depreciation recapture and transfer taxes. Call us before negotiating allocations. 05/22/2012
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RENTS & SECURITY DEPOSITS HELD BY SELLER: When selling an investment property in a 1031 EXCHANGE, prepaid rents and security deposits held by the Seller should be conveyed to the Buyer from the Seller's funds outside of closing and not deducted from the 1031 proceeds. Deducting these funds from 1031 proceeds could disqualify the entire 1031 exchange as the IRS would deem the Seller in control of the proceeds. 05/18/2012
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DIVISION OF PROPERTY OWNERSHIP: Purchasing property of lesser value in a 1031 EXCHANGE may not save tax dollars if the property being purchased is less than the tax basis of the property given up. However, to maximize tax savings, a division of the property(s) being sold by ownership or deed into smaller components may afford the taxpayer partial tax savings. 05/15/2012
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STATE TAX VS FEDERAL TAX LEVELS: Taxable gain at the state level may be different than the taxable gain at the federal level due to differences in depreciation and expense deductions, loss carry-forwards and deductibility, and applicability of a 1031 EXCHANGE. 05/10/2012
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EXCHANGE 1 JOINTLY OWNED WITH 2 INDIVIDUALLY OWNED: A husband and wife taking advantage of the tax benefits of a 1031 EXCHANGE can replace the jointly owned property with 2 properties, owned individually, availing them estate tax, divorce planning, and transfer or mansion tax benefits. The best advantage is you can have one property in the mountains and one at the beach, and each party can decorate the property to their taste. 05/08/2012
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EXCHANGING NON-DEPRECIABLE FOR DEPRECIABLE ASSETS: A 1031 EXCHANGE out of a non-depreciable asset (such as vacant land held for investment), for a depreciable asset (such as a rental dwelling), is considered "like-kind" and affords the taxpayer depreciation deductions as well as all operating expenses, repairs and maintenance against rental and other income. 04/03/2012
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BUYING FROM ESTATE WITH RELATED PARTIES: A 1031 EXCHANGE between an executor of an estate and its beneficiaries, or between related heirs to an estate, have restrictions under the related party rules. Buying replacement property from a related party in an estate can be challenged as "basis shifting". The Exchangor would need to satisfy the IRS the purchase fell under the nontax avoidance exception. 04/26/2012
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IMPROVEMENTS TO PROPERTY OWNED BY TAXPAYER: Rev Proc 2004-51 was issued to hinder a 1031 "EXCHANGE of real estate owned by a taxpayer for improvements on land owned by the same taxpayer". Planning techniques involving ground leases, related parties and/or additional timeframes have resulted in a successful exchange. 04/24/2012
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REAL AND PERSONAL PROPERTY ALLOCATIONS: 1031 EXCHANGES are available for both personal property and real property. When negotiating a sale, the amounts allocated to the individual assets, whether personalty, realty or both, will determine the type(s) of 1031 exchanges available. 04/19/2012
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TENANTS-IN-COMMON ADVANCED PLANNING: Husband & Wife investment property owners gift a 1/3 interest in property to their son to avail son tax write-offs as H/W's income is too high to enjoy benefits of write-offs. At time of sale, son opts out of 1031 EXCHANGE and creates taxable event on 1/3 of gain. Advanced planning and discussion with us could avoid tax problem. 04/17/2012
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PARTNERSHIP SLIT-OFF: In a 1031 EXCHANGE of a property owned in a partnership or LLC taxed as a partnership, if one or more partners do not wish to participate in the exchange, the most common method of achieving all partner's goals is through partnership split-off including cash buyout, distribute undivided interests or special allocation of gain. Other methods are also available. 04/05/2012
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REPAIRS & MAINTENANCE DAYS: Many clients focus on the number of days a property is rented as a criteria for qualifying a 1031 EXCHANGE under Rev Proc 2008-16, however, they often fail to focus on the number of pleasure days versus repairs and maintenance days. A prudent taxpayer will keep a log of all time spent and all expenditures incurred in maintaining and repairing their rental property. 04/03/2012
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INVENTORY OR INVESTMENT?: A client with a long history of operating motels builds a new motel but sells it at a profit before completion. Inventory or Investment? Several factors will be weighed to determine if the client can use a 1031 EXCHANGE to avoid ordinary income taxes on the sale, including, but not limited to, intent, marketing of the property, client's primary source of income, and 6 additional factors. 03/28/2012
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LLC DISSOLUTION & DISTRIBUTION: A LLC dissolution and distribution of property to the individual members prior to settlement may disqualify the members from 1031 EXCHANGE treatment if the property was marketed for sale or sold at the time of distribution on the basis that the property is "Inventory" and not being "Held for Investment" in the hands of the members. The facts and circumstances of the distribution will dictate the outcome. Alternative solutions are available. 03/27/2012
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CONCURRENT USE AND RENTAL INCOME: A REVERSE 1031 EXCHANGE affords an Investor the opportunity to acquire a new property at a bargain price AND enjoy the concurrent use and rental incomes of both the old and new properties for up to 6 months. 03/08/2012
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BULK SALES = ZERO: A 1031 EXCHANGE would result in a zero gain on the NJ Bulk Sales Asset Transfer Tax Declaration form thereby exempting the Seller from tax escrows. NJ has requested a signed copy of the EXCHANGE AGREEMENT accompany the Asset Transfer Tax Declaration form. 03/07/2012
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SEVEN TAX ADVANTAGES OF VACATION/INVESTMENT PROPERTY OWNERSHIP:
1. Qualifying for acquisition loans utilize rental ability and is not based solely on owner’s income and credit thus affording the owner more borrowing power.
2. Short-term rentals may produce a positive cash flow for the owner’s enjoyment but not taxable income because of non-cash write-offs, such as depreciation expense.
3. Short-term rentals allow the owner to write-off ALL operating expenses, furniture and furnishings, repairs and maintenance and capital improvements (through depreciation) on the property.
4. Visits to the property for repairs and maintenance are deductible and do not count towards pleasure use days.
5. Non-cash deductions, such as depreciation expense, may create a tax loss that can offset the owner’s other income and wages. The loss offset is up to $25,000 per year if the owner materially participates in the management of the property.
6. Tax on the gain (both appreciation and depreciation recapture) can be deferred with a 1031 EXCHANGE affording the owner increased investment in the replacement property, lower debt and greater growth potential and appreciation.
7. Properties can be passed to the owner’s heirs at a “stepped-up” basis and be tax-free through estate tax exclusions. 03/06/2012
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CURRENT 1031 ENVIRONMENT: Our current and past clients are taking advantage of the real estate bargains throughout the U.S. In many instances, clients are replacing their current property with multiple properties aggregating to the same value. In other instances, clients are purchasing replacement properties of lesser value and either keeping some of the cash or reducing their overall debt and paying some tax on the transaction. Most have found that although their existing property may have declined in value, the deferred gain in the current property and the available bargains on newer properties make a 1031 Exchange financially wise once again. 02/16/2012
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CONVERSION EXAMPLE: Client purchases investment property in 2003. Converts to a primary home in 2011 and sells in 2013 assuming full exclusion of gain under 500k. Portion of gain is taxable for non-qualified years 2009 & 2010 and for depreciation recapture for years 2003 thru 2010. Proper planning using a 1031 EXCHANGE would avoid ALL taxes. 02/15/2012
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STATE TAX EXEMPTIONS: Most states provide 1031 Exchangors an exemption from non-resident and resident income tax withholdings, bulk sales taxes, etc. Some states require advance filing and documentation in support of the exemption. Contact us if you have a question about a specific state. 02/09/2012
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PERSONAL USE OF INVESTMENT PROPERTIES: An Investor who exchanges one property for multiple properties in a 1031 EXCHANGE can utilize each property for 14 days of pleasure use plus repairs and maintenance days each year for the first 2 years, thus availing them multiple vacations at multiple locations. 02/03/2012
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ADDING PARTNERS TO THE DEED: When acquiring replacement property in a 1031 EXCHANGE, adding parties to the deed often provides financial strength and purchasing power and can be accomplished without triggering a taxable event, providing the exchanging party has an equitable interest in the new property equal to or greater than their interest in the old property and their interest is tenants-in-common with the additional parties. 01/31/2012
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BUILD-TO-SUIT CONSTRUCTION INCOMPLETE: In a Build-to-Suit 1031 EXCHANGE, the property being constructed does not have to be completed by the 180th day in order to complete the exchange. However, the IRS will only give the taxpayer credit for materials installed in the property and not for materials laying on the ground or prepayments to the contractor. The property received by the taxpayer should also not be materially different as to completion than the property identified on the 45th day. The 45 day identification can provide for varying percentages of completion using the 3 property rule. 01/26/2012
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DEPRECIATION RECAPTURE: Reducing taxable rental income with depreciation expense provides a tax benefit in the current year at the owner's tax bracket. Upon sale of the property, depreciation expense is recaptured at a flat federal rate of 25% plus state tax. A 1031 EXCHANGE may avoid both federal and state taxes. 01/16/2012
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DOWNSIZE AND SAVE TAX DOLLARS: An Investor who has depreciated a property or has received a property as a gift can downsize their investment in a new property and still save tax dollars with a 1031 EXCHANGE. 01/04/2012
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CLAWBACK PROVISION: A 1031 EXCHANGE of properties in different states may be subject to a "clawback" provision, whereby an exchange originating in CA, MA, MT or OR and replaced in another state will be subject to tax in the originating state upon subsequent sale in the replacement state. There is potential for double taxation upon sale if the replacement state also has a tax. 12/15/2011
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QUALIFYING PROPERTY WITH FACTS AND CIRCUMSTANCES: A property owner's intent, length of ownership and usage are all considered when deferring taxes in a 1031 EXCHANGE and may result in a favorable outcome where the property owner fails to meet the safe harbor of Rev Proc 2008-16. 12/13/2011
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FORM 1099 INTEREST: If you completed a 1031 EXCHANGE during the year or currently have an open Exchange, anticipate receiving a Form 1099-INT from your Qualified Intermediary for interest earned on your exchange funds. Interest earned on exchange funds is taxable in the calendar year earned regardless of distribution or reinvestment in the exchange property. 12/01/2011
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GOOD FAITH DEPOSIT - RELINQUISHED: When selling a property in a 1031 EXCHANGE, a Good Faith Deposit received by the Exchangor or an agent of the Exchangor must be relinquished to the closing agent as "available" funds prior to closing to avoid tainting the exchange under a "control and access" challenge. "Non-Refundable" GFDs require special treatment. 11/29/2011
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HELD FOR INVESTMENT: Qualifying a property outside the safe harbor of Rev Proc 2008-16 whereby a property is not rented but is "Held for Investment" under Section 1031, the Moore decision provided guidance resulting in a list of 6 items to substantiate the taxpayer's position, including but not limited to, reporting mortgage interest as investment interest and property expenses as investment expenses. 11/17/2011
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TAXPAYER SATISFACTION OF NOTE HELD: taxpayer who is a lien holder on a replacement property to be acquired in a 1031 EXCHANGE, secured by an arm's length Fair-Market-Value note & mortgage, can receive satisfaction of the note from the proceeds of the relinquished property sale. 11/15/2011
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PASSING ASSETS TO HEIRS: A taxpayer who received a property as a gift and then granted the Donor a life estate was afforded a stepped-up basis upon death of the Donor as opposed to acquiring the Donor's basis upon receipt of the gift. 11/03/2011
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SHORT TERM RENTALS: From the Nov. 2011 Journal of Accountancy: Bailey v. Commissioner: The 750-hour material participation test to treat rental activities as non-passive cannot be met on properties with short-term rentals of less than 8 days. 10/31/2011
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RENTING TO RELATED PARTIES: When an investment property is jointly owned by a taxpayer and a related party, the related party may use the property as a primary residence without disqualifying the taxpayer for 1031 deferment as long as the related party pays the taxpayer fair market value rent for the taxpayer's percentage ownership of the property. 10/19/2011
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QUALIFIED & NON-QUALIFIED PERIODS: When a property is converted from vacation/investment ("nonqualified") use to primary ("qualified") use after December 31, 2008, the gain on the sale of the property will be allocated between the periods of "nonqualified" use and "qualified" use. The $250,000/$500,000 exclusion will be applied to the "qualified" use period only, hence, making the "nonqualified" use period taxable. The "nonqualified" use prior to January 1, 2009 does not negatively impact the calculation. Conversions from primary use to vacation/investment use do not have the same tax implications and may be afforded 1031 tax deferment. 10/11/2011
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INSTALLMENT SALE BALLOON PAYMENT: A balloon payment received in an installment sale is taxable in the year received and is not exchangeable for real property in a 1031 EXCHANGE. A properly structured installment sale at inception could avoid taxation and utilization of a 1031 EXCHANGE. 10/04/2011
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HOLDING PERIOD: A property acquired in a 1031 EXCHANGE acquires the holding period of the property given up. Therefore, if the new (replacement) property is disposed of in 1 year or less, it may still receive long term capital gains treatment and rates providing the combination of the old (relinquished) and new (replacement) property's holding periods are more than 1 year. 09/27/2011
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PASSIVE LOSS CARRYOVERS: Passive loss carryovers may be useful for offsetting gains from the sale of property on Federal returns, but may not be allowed on State returns resulting in a state tax liability. In NJ, the liability can be as high as 9% of the gain thus making a 1031 EXCHANGE a viable alternative to paying State taxes. 9/21/2011
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IMPROVEMENTS - CAPITALIZED OR EXPENSED: When determining the deferred gain in a 1031 EXCHANGE, improvements made to a property being sold are considered. Clients are often uncertain whether the improvements were capitalized and depreciated or expensed. Absent this information, a client cannot accurately determine the tax basis of the property given up or the property received in the exchange. 09/01/2011
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EXTENSIONS TO TIME SENSITIVE ACTS: Extensions to time sensitive acts, such as the 45 day identification and 180 day deadlines of a 1031 EXCHANGE, are granted to "affected taxpayers" in a "Presidentially declared disaster" area. This includes, but is not limited to, hurricanes, tornados, earthquakes, floods, mudslides, etc. 08/25/2011
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HOUSEBOAT - LIKE-KIND TO REAL PROPERTY: In a 1031 EXCHANGE, a houseboat is generally "like-kind" personal property exchangeable for another houseboat. If the houseboat is permanently moored, subject to real property taxes, classified as real property under state law, rented and minimally used for pleasure, it may be exchanged for real property, including a fee simple interest in real estate. This may be contrary to the manner in which lenders classify loans on houseboats. 08/23/2011
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1099S FILING: When relinquishing a property in a 1031 EXCHANGE, a 1099-S has to be filed with the IRS showing "zero" in box 2 (Gross Proceeds) and an "X" in the checkbox in box 4 to indicate the transferor will receive property as part of the consideration. 08/18/2011
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PURCHASING WITH ADDITIONAL PARTIES: Purchasing investment property with additional parties in a 1031 EXCHANGE is permissible and will not create a taxable event providing the exchanging party(s) replace equal or greater debt and equity from the relinquished property and the ownership interests with the additional parties reflects their respective contribution and is tenants in common. 08/16/2011
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BUILD TO SUIT STRUCTURING: A Build-To-Suit or Improvement Exchange can be structured as a forward deferred 1031 EXCHANGE utilizing the proceeds from the relinquished property to fund the acquisition and improvement of the replacement property, or as a reverse 1031 EXCHANGE utilizing 3rd party or taxpayer funding to acquire and improve the replacement property. 08/11/2011
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PARTNERSHIP PARTIAL PARTICIPATION IN A 1031: A property held in a partnership or an LLC taxed as a partnership, where upon sale, some but not all of the partners/members wish to complete a 1031 EXCHANGE, the continuance of the qualifying tax entity for the exchanging parties would be preferable for a successful exchange. The remaining parties can be spun-off or receive a special allocation of cash within the entity. 08/09/2011
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RENTING TO FRIENDS AND FAMILY: Allowing friends and relatives to use your investment property for less than fair market value rent is tantamount to personal use and may disqualify a 1031 EXCHANGE and/or the deductibility of expenses on your tax return. 08/04/2011
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RENT & SECURITY DEPOSITS DEDUCTED FROM 1031 PROCEEDS: When selling investment property in a 1031 EXCHANGE, rent & security deposits previously collected by the Seller and not turned over to the Buyer are taxable to the Seller even if deducted from the sale proceeds. Deducting rent/security deposits from the sale proceeds may taint the entire EXCHANGE as the IRS will consider the deduction "control of and access to" the 1031 funds. 08/02/2011
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TENANCY IN COMMON AGREEMENT: A property held as tenants in common generally affords each owner the option of disposing of their ownership interest through a 1031 EXCHANGE or taxable sale. Ownership as co-tenants by itself does not guaranty the owners will not be treated as a partnership. A Section 761(a) election and a Tenancy In Common Agreement will help to avoid partnership status. 07/28/2011
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CONTINUITY OF OWNERSHIP: In a 1031 EXCHANGE, continuity of ownership is important throughout the transaction as well as the qualifying periods before and after the transaction. Changes in ownership or the split-up, spin-off or dissolution of an entity before, during or after the transaction require advanced planning and treatment for a successful 1031. 07/26/2011
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REPORT AN EXCHANGE OR A SALE: A taxpayer who completes a 1031 EXCHANGE but decides at tax time to report the sale and pay taxes can do so without regard to the exchange. However, the reverse is NOT true. A taxpayer who completes a sale and later wishes to report the transaction as a 1031 EXCHANGE will fail on the basis of "constructive receipt" if the transaction lacked the appropriate limitations prescribed in the regulation. 07/21/2011
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BUILD-TO-SUIT 45 DAY IDENTIFICATION: In a Build-To-Suit 1031 EXCHANGE, the 45 Day identification of the replacement property being improved must include construction plans and the percentage of completion at the time of transfer to the taxpayer. The IRS will disallow the identification if the property identified with improvements is materially different from the property received. 07/19/2011
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MULTIPLE SINGLE MEMBER LLC's: Multiple single member disregarded entity LLC's, holding title to a property as tenants in common to avoid being classified as a partnership, afford liability protection and is a viable alternative to holding title individually in a 1031 EXCHANGE (state laws may differ). 07/15/2011
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PERSONAL/BUSINESS USE PROPERTY: When selling a multi-unit property with both personal and business use, the taxpayer's previous year's tax returns will establish the relationship between personal and business use and the tax law applicable to each use. 07/12/2011
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TAX TREATMENT OF INVESTMENT PROPERTY: Property held for investment more than 1 year receives capital gains treatment upon sale. Property held 1 year or less is subject to ordinary income tax upon sale. Property held primarily for sale to customers in the ordinary course of business is considered "inventory" and is subject to ordinary income taxes upon sale regardless of the length of time held. 07/07/2011
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HUSBAND & WIFE CO-OWNED PROPERTY: Husband and wife co-owned investment property, disposed in a 1031 EXCHANGE, must acquire replacement property in both names in equal shares, regardless of whether the individuals file a joint or separate tax return and/or are located in a community property state. Failure to include a spouse on the deed will result in 50% of the gain being taxed. 06/30/2011
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WHEN TO REPORT BOOT: "Boot" (cash & other property) in a 1031 EXCHANGE of a NJ property, received at the relinquished sale is reported as taxable gain on the Bulk Sales Form and Non-Resident Form, if applicable, and the respective income tax returns at year-end. "Boot" received after the replacement property is acquired is reported on the taxpayer's state and federal income tax returns in the year the exchange began. 06/23/2011
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CONSTRUCTIVE RECEIPT COURT CASE: In a recent case, Morton v. US, funds were accidentally transferred by the escrow agent to the taxpayer instead of the QI in a 1031 EXCHANGE. The IRS claimed the funds were tainted and disallowed the exchange. The tax court ruled in favor of the taxpayer as the funds were returned immediately and the court held that the taxpayer should not be responsible for the mistakes of others. 06/21/2011
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TAXPAYER AS CONTRACTOR IN BUILD TO SUIT: In a deferred "build-to-suit" 1031 EXCHANGE, the taxpayer or related party may act as contractor but should avoid payments from the 1031 funds during the construction phase as this may create "constructive receipt" issues. The taxpayer may receive payments from a 3rd party lender or the QI can pay the non-related vendors directly. 06/15/2011
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APPRECIATION VS GROWTH POTENTIAL: An Investor who exchanges 2 properties for one in a 1031 EXCHANGE is generally seeking location and higher appreciation potential. An Investor who exchanges one property for 2 in a 1031 EXCHANGE is generally seeking an income stream. In both scenarios, the Investor utilizes the deferred tax dollars to help achieve their financial goal. 06/09/2011
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TRANSFER OF PROPERTY BEFORE AND AFTER DEATH: Property transferred to another taxpayer for less than FMV prior to death may have gift tax implications for the Donor and gain implications upon sale for the Donee. Transferring property, including 1031 exchange property, after death affords the heir a stepped-up basis and eliminates gain accumulated prior to inheritance. 06/07/2011
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DEBT ON PROPERTY CONVERSION: A property converted from a Duplex to 2 individual condos often has debt secured by the entire property. If only one property is being sold in a 1031 EXCHANGE, the debt has to be allocated to each condo to avoid a disproportionate rolling of debt and equity to the replacement property. 06/02/2011
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PROPERTY OWNED BY TAXPAYER: Property owned by a Taxpayer in the 180 days prior to a 1031 EXCHANGE, or the improvements constructed thereon, do not meet the requirements of Section 1031 for replacement property. 05/31/2011
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PROPERTY ADDRESS CORRECTION: Occasionally, in a 1031 EXCHANGE, an address on an AOS differs from the 45 Day Identification due to human error, re-assignments in new construction, or municipality changes. If the buyer/taxpayer is beyond the 45 Day Identification period, changes are NOT permitted and the IRS WILL require justification and documentation for any corrections. The taxpayer risks a failed exchange. 05/19/2011
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1031 CONTRACT COOPERATION CLAUSE: 1031 Language for Seller: Parties acknowledge that Seller intends to perform an IRC Section 1031 Tax Deferred Exchange and will be assigning the contract rights to 1031 EXCHANGE SPECIALISTS, INC., a Qualified Intermediary. Buyer agrees to sign any and all documents necessary to assist Seller in completing this tax free exchange, with the understanding that there will be no additional cost or liability to Buyer. 05/17/2011
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NJ NON-RESIDENT TAX OVERPAYMENT: Non-Residents of NJ are subject to a 2% non-resident withholding tax on the sale of real property even if there is no gain on the property. The taxpayer has the option of writing to NJ 30 days prior to settlement asking for an exemption or pay the tax and file a claim for refund immediately on Form A-3128 or when they file their NJ Non-Resident tax return by April of the following year. 05/12/2011
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A 1031 EXCHANGE IS FEDERAL LAW: 1031 Exchange is a federal law available in all 50
states, the District of Columbia and some U.S. territories outside the United
States. Most state laws have a provision to follow the federal tax law, with
some exceptions. 05/10/2011
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CALCULATING TARGET REPLACEMENT VALUE: The target value of property in a 1031 EXCHANGE is the sales/purchase price adjusted for allowable selling/acquisition expenses, such as, fees for 1031 facilitator, legal, recording, title agency settlement, Notary, abstract, real estate commission, surveys, transfer taxes, title insurance, repairs, utility hook-ups, capital contributions, and Seller assist. 05/05/2011
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LEASE IN LIEU OF FEE SIMPLE INTEREST: When a fee simple interest in a property, whether partial or whole, creates conflicts with lenders or co-owners, a lease with a remaining life of 30 years or more with options may be an alternative to satisfy the "like-kind" requirement of a 1031 EXCHANGE. 05/04/2011
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SELLER FINANCING: When Seller financing of an investment property sale is less than the gain on the property, the excess gain can be deferred with a 1031 EXCHANGE. 04/26/2011
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COMBINING MULTIPLE PROPERTIES: Multiple properties owned by different single member disregarded LLC's can be combined into the same 1031 EXCHANGE providing the sole member is the same taxpayer in each LLC. 04/21/2011
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MEETING RENTAL PROPERTY DEMANDS: Economists report a high demand for rentals as a result of tighter lending, inflation rates higher than savings rates making it difficult to accumulate down payments, displacements due to foreclosures & shortsales, & relocations due to job change. Will this demand drive up the price of rentals and rental property purchases? A 1031 investor can meet these demands by purchasing rental properties with tax free funds. 04/07/2011
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INHERITED PROPERTY GAIN: A taxpayer's basis in inherited property is valued at time of death. Any gain from appreciation and depreciation from the time of death to the date of sale can be deferred in a 1031 EXCHANGE if the property is investment or business use. 04/05/2011
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MODULAR AND MOBILE HOMES: The placement of a Modular or Mobile Home on property you already own is considered "personalty" in a 1031 EXCHANGE and would qualify as a personal property exchange but would not qualify as "like-kind" in a real property exchange. A Modular or Mobile Home sold or acquired with a fee simple interest or 30+ year lease in the underlying ground would qualify as "like-kind" real property in a 1031 EXCHANGE. 03/31/2011
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BULK SALES TAX MONEY HELD IN ESCROW: Proceeds from the sale of real estate held in escrow while NJ reviews a potential BULK SALES tax liability may also be subject to Federal taxes if the Seller is completing a 1031 EXCHANGE and the monies are not released prior to the acquisition of the replacement property. 03/22/2011
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AVOID TAXES WHEN SELLING YOUR VACATION HOME: Considering selling your vacation home? Some advanced planning can save thousands of tax dollars. Renting your property to an unrelated person for 14 days per year for 2 years leading up to the sale of the property may afford you 1031 treatment. Another option would be to move into the property for 2 years as a primary home and afford yourself the primary home exclusion. Both options are better than paying taxes! 03/17/2011
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QUALIFYING 1031 PROPERTY FOR PRIMARY HOME EXCLUSION: A 1031 EXCHANGE property converted from investment use to a principal residence requires 5 years of ownership and 2 years of personal use from the date of acquisition in order to qualify for the primary home exclusion.
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WHERE TO FIND YOUR DEFERRED GAIN: I received a number of calls from former clients who completed a 1031 EXCHANGE in a prior year and are now selling at a loss. I advise the clients to look at Form 8824 filed with their taxes in the year they completed the exchange to determine if the current loss is less than, equal to, or greater than the 1031 deferred gain. If the loss is less than the deferred gain, a new 1031 exchange should be considered. 03/10/2011
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PARTNER, SHAREHOLDER AND MEMBER CHANGES: Generally, in a 1031 EXCHANGE, the tax reporting entity is recognized as the qualifier of the property. Therefore, a change in the partners of a partnership, the members of an LLC, or the shareholders of a corporation will not impact the 1031 unless the entity is terminated as a result of the change. Exceptions exist. 03/08/2011
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SUB-CHAPTER S ELECTION: Making a Sub Chapter S election for a corporation does not affect the "Same Taxpayer" requirement of a 1031 EXCHANGE. 03/03/2011
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CARRYOVER OF TAX ATTRIBUTES: The carryover of tax attributes during a corporate reorganization, formation, liquidation, merger or division, whether during, prior to or after a 1031 EXCHANGE, is the basis for a successful exchange under the "same taxpayer" requirement of a 1031. 02/28/2011
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MAXIMIZING RETURN THROUGH A 1031 EXCHANGE: The ideal 1031 EXCHANGE client utilizes the tax free proceeds to leverage into multiple diversified properties, some with high income returns and others with growth potential. With interest rates at an all time low and a 30% down payment, an investor can generate income streams and build wealth through multiple diversified purchases. 02/24/2011
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2 MEMBER LLC TAXED AS SINGLE MEMBER LLC: In a Private Letter Ruling, the IRS ruled that a 2 member LLC was not taxed as a Partnership and qualified as a single member disregarded entity because the only purpose of one of the members was to prevent bankruptcy. The limited member could not share in the profits or losses and management rights were limited to the bankruptcy issue. 02/15/2011
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BASIS ALLOCATION INVOLVING MULTIPLE UNITS: When a property is divided and sold separately, the basis in the property is generally allocated to each of the units in relation to their fair market value, thus avoiding the potential for a gain on some and losses on others. Hence, a taxpayer completing a 1031 EXCHANGE on one property cannot inequitably defer all of the gain and recognize all of the losses. 02/11/2011
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PROPERTY USAGE AND INTENT: There is no minimum holding period for a property before or after a 1031 EXCHANGE. For shorter holding periods, the property usage and intent of the taxpayer play a more significant role in qualifying a property for a 1031 EXCHANGE. 02/09/2011
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EXCHANGE MUSICAL WORK OR A COPYRIGHT: An election is now available to taxpayers selling or exchanging a musical work or a copyright in a musical work affording them capital gains treatment as opposed to ordinary income tax rates. 02/07/2011
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FURNISHINGS SOLD WITH REAL ESTATE: Often investment properties are sold with an inventory of furnishings. Placing a value on the furnishings affords the Buyer additional depreciation deductions but also may penalize the Seller by way of ordinary income tax and may impact a Seller's 1031 EXCHANGE. If the furnishings have no value, include them in the sale as an accommodation to the real estate for $1. 02/02/2011
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EXCHANGES FOR TENANT-IN-COMMON CO-OWNERS: A tenant-in-common co-owner of an investment property can enter into a 1031 EXCHANGE for their respective ownership interest without impacting the other co-owner(s) or their exchange. 01/31/2011
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PROPERTY HELD FOR INVESTMENT: A property with a dwelling that is not rented, not used for personal enjoyment, not abandoned for the purpose of sale, and held with anticipation of appreciation, may defer gain upon sale under the 1031 EXCHANGE definition of "Held for Investment". 01/28/2011
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FORECLOSURE GAIN FROM DEBT RELIEF: Debt relief from the foreclosure of investment property can trigger a taxable gain. The amount of gain depends on whether the debt relief is on recourse or non-recourse debt. A taxpayer can 1031 the gain into another property, but is best served by a deed in lieu of foreclosure as that provides an assignable written agreement to satisfy the 1031 safe harbor. 01/25/2011
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FORECLOSING ON INSTALLMENT NOTE: A gain may be triggered when a Seller forecloses on a property previously sold in an Installment Sale. The gain can be avoided if the original sale was converted to a 1031 EXCHANGE, the gain falls under the primary home exclusion rules, or offsets are available by way of selling/acquisition expenses or losses. 01/24/2011
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SINGLE MEMBER LLC DISREGARDED ENTITY: A taxpayer completing a 1031 EXCHANGE who sells property owned by a single member disregarded entity LLC can purchase replacement property in another single member disregarded LLC as long as the sole member remains the same. 01/17/2011
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COMBINE PRIMARY HOME & 1031 TIME PERIODS: When combining a primary home exclusion and a 1031 EXCHANGE, the 24 months immediately prior to sale and after acquisition should be investment/business use, as this period is critical to the success of the 1031. The primary home exclusion can be qualified in 2 of the 3 years prior to and after the 1031 qualification period. 01/14/2011
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INSTALLMENT SALE NOTE: Installment sale rules require the Seller receive a note from the acquirer of the property. An installment sale converted to a 1031 EXCHANGE afford the Seller installment sale reporting when a note is received from the Qualified Intermediary. 01/12/2011
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RELATED PERSONS-EXCEPTION TO THE 2 YEAR RULE: Exceptions to the two-year holding rule when selling to a related party in a 1031 EXCHANGE include death, involuntary conversions, or establishing the sale was not for the principal purpose of tax avoidance, such as in basis shifting. 01/10/2011
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PROTECTING TAXPAYER'S AND LENDERS INTEREST: In a REVERSE 1031 EXCHANGE, the Exchange Accommodation Titleholder (EAT) purchases the "parked" property with funds from the taxpayer, a third party lender, and/or the assumption of existing debt. Notes, mortgages and guarantees are executed to protect the taxpayer's and third party lender's interest. 01/07/2011
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INTEREST INCOME ON EXCHANGE FUNDS: Interest earned on 1031 EXCHANGE funds is taxable to the Exchangor even if reinvested in the replacement property. The Exchangor will receive a 1099-INT from the Qualified Intermediary at the end of the calendar year to include on their tax return. 12/20/2010
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NON-RESIDENT GREATER BORROWING ABILITY: Non-resident state withholding tax imposed on the sale of a property may impact a person's ability to finance and/or purchase a replacement property of their choice. A 1031 EXCHANGE provides an exemption to the non-resident tax and affords the taxpayer greater borrowing/purchasing ability on a replacement property. 12/17/2010
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INVESTOR LOAN ALTERNATIVE: An alternative to the higher investor mortgage rates often associated with purchasing a property in a 1031 EXCHANGE would be to secure an equity line or loan against a primary home utilizing "interest only" and "below market" loans until refinancing the investment property is economically feasible. 12/13/2010
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45 DAY IDENTIFICATION DELIVERY METHODS: Acceptable methods of delivery of a 45 Day Identification in a 1031 EXCHANGE include hand delivery, mail, fax "or some other form of delivery", including e-mail if the e-mail is signed by the taxpayer. The receiving party should retain evidence to support the timely receipt to avoid tax fraud penalties and criminal charges. 12/10/2010
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PROPERTIES WITH VARYING DEPRECIABLE LIFE: Property, whether real or personal, may have different lives for depreciation purposes and still be "like-kind" or "like-class" for 1031 EXCHANGE purposes. For example, a commercial building with a depreciable life of 39 years can be exchanged for a residential building with a depreciable life of 27.5 years, which can also be exchanged for vacant land with no depreciable life. 12/08/2010
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TAXPAYER AS LENDER: When a Buyer cannot secure financing timely or at all, a Seller in a 1031 EXCHANGE can, under certain circumstances, act as the Lender and fund the 1031 account without jeopardizing the integrity of the exchange. 12/06/2010
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REVOCATION OF 45 DAY IDENTIFICATION: A 45 Day Identification in a 1031 EXCHANGE may be revoked any time before midnight of the 45th day providing it is in writing, signed by the taxpayer(s) and delivered to the recipient of the original identification. Revising an Identification should also include a revocation of the previous Identification. 12/03/2010
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MORTGAGE BOOT VS NEW DEBT: In difficult economic times, taxpayers often want to reduce outstanding debt. Doing so in a 1031 EXCHANGE by not replacing debt on a new property may be a costlier decision than securing new debt as taxes may be as high as 35% versus debt costing only 4 to 5 percent. 12/01/2010
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FILE FOR AN EXTENSION WITH THE I.R.S. (TAX YEAR 2010): A 1031 EXCHANGE allows the earlier of 180 days or the due date of the taxpayer's tax return with extensions to complete the exchange. An exchange beginning after October 20, 2010, will only be afforded a full 180 days if an extension is filed for the 2010 tax return. The 2010 tax return due date for individuals has been moved to April 18, 2011. 11/29/2010
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POINTS PAID TO SECURE FINANCING: Points paid to secure a loan in a 1031 EXCHANGE is considered a non-exchange expense as the IRS deems points to be a cost of obtaining a loan and not a cost of acquiring a property. Points paid with 1031 EXCHANGE funds may result in taxable "boot". 11/19/2010
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NUMBER OF CO-OWNERS: One of the 15 Co-tenancy ruling guidelines in a 1031 EXCHANGE limits the number of co-owners to 35. A husband and wife are counted as one person. Exceeding 35 co-owners may result in the ownership being treated as a Partnership. 11/17/2010
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PRE-ACQUISITION CAPITALIZED COSTS: A 1031 EXCHANGE into vacant land of lesser value can utilize a "Build-To-Suit" Exchange, or where the differences are not substantial, utilize other pre-acquisition capitalized costs, such as, surveys, environmental studies, architectural plans, inspections, permits, legal & accounting fees, etc. to close the gap and minimize tax liability. 11/15/2010
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RELATED PARTY USE OF INVESTMENT PROPERTY: An investment property utilized by related parties, with or without monetary consideration, is tantamount to use by the owner and counts towards the allowable 14 days personal use under Section 1031. An exception exists whereby the related party utilizes the property as a principal residence and pays FMV rent. 11/06/2010
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INSTALLMENT SALE ELECTION: Installment sale reporting of gain may be available if cash is returned to a taxpayer in the 2nd year of a 1031 EXCHANGE that lapses 2 tax years and the gain is greater than the debt satisfied on the relinquished property. The taxpayer should evaluate which tax year, if not both, is more beneficial to them. 11/05/2010
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CO-OPERATIVE APARTMENTS (STOCK OWNERSHIP): Stocks, bonds and notes are not afforded 1031 deferment. However, a co-operative apartment in NY (stock ownership) is considered real estate under NY law, therefore, is "like-kind" to a fee simple deeded interest in real estate anywhere in the U.S. and afforded 1031 deferment under both NY and Federal laws. 11/03/2010
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SELLING MULTI-UNIT PROPERTIES: When selling a multi-unit property with both personal/vacation use and investment use, taxes can be avoided on the investment units by utilizing a 1031 EXCHANGE. 11/01/2010
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ALLOCATION OF GAIN BETWEEN VACATION & PRIMARY: Property converted from vacation/investment use to primary home use is subject to an allocation of gain upon sale to the 2 respective periods, thus affording the taxpayer the "primary home exclusion" against the primary home period, but a taxable gain for the vacation/investment period after December 31, 2008. 10/28/2010
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BUILD TO SUIT CONSTRUCTION & MANAGEMENT AGREEMENT: In a "Build-To-Suit" 1031 EXCHANGE, the Exchange Accommodation Titleholder, as "owner" of the property, enters into a construction contract with a Contractor for the improvements, and a Project Management Agreement with the taxpayer to oversee the construction as the Owner's agent. 10/26/2010
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CONDEMNATION: Section 1033 of the tax code, Condemnations, has similarities to a Section 1031 EXCHANGE, but is more flexible in that it avails the taxpayer access to the proceeds, has lengthier time frames, reduced reinvestment requirements, and permits related party acquisitions. 10/25/2010
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CHANGING WITH THE TIMES: In a market where approximately 25% of all real estate sales are foreclosures & short sales, the demand for future rentals will inevitably increase while displaced individuals repair their credit and accumulate down payments. A prudent investor will prepare for the increased demand by purchasing investment properties and subsequently utilize a 1031 EXCHANGE to save taxes. 10/21/2010
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SHORT SALE GAIN CAUSED BY REFINANCING: A taxpayer who refinanced a property with a low tax basis and is now selling in a SHORT SALE will not have the cash to pay the federal & state taxes on the gain (sales price minus tax basis), or any state non-resident withholding taxes. A 1031 EXCHANGE can defer the taxes on the gain and eliminate the non-resident withholding tax. 10/20/2010
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ALLOWABLE ARRANGEMENTS: In a "Reverse" & "Build-to-Suit" EXCHANGE, the taxpayer can guarantee debt & obligations, loan & advance funds, lease & manage the property & improvements, and act as a contractor while the property is owned by an Exchange Accommodation Titleholder. 10/18/2010
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DEPRECIATION EXPENSE DEDUCTION: Often rental property owners forego taking a depreciation expense deduction. This deduction may offset ordinary income, with limitations, at a tax rate as high as 35%, and upon sale, is recaptured at a tax rate of 25%. Are you missing a tax benefit? 10/15/2010
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SELLING MULTIPLE PROPERTIES: When selling multiple properties and buying a single property in a 1031 EXCHANGE, the counting of the 45 and 180 day time requirements begins with the 1st closing. It is best to sell all properties before purchasing the replacement property, but a combination forward and reverse exchange is also an option. 10/14/2010
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SHORT SALES AND FORECLOSURES: Short Sales and Foreclosures have created purchasing opportunities for individuals completing a 1031 EXCHANGE. These properties are generally in need of repair. If your goal is to build wealth, purchase as many properties as possible with the 1031 funds and use equity lines to make repairs. 10/13/2010
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REPLACING MORTGAGE DEBT: The satisfaction of mortgage debt upon the sale of a property in a 1031 EXCHANGE is a taxable benefit to the seller unless replaced with new debt or new cash on the replacement property. 10/11/2010
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IMPROVING UNDEVELOPED LAND: If the owner of undeveloped land makes improvements and subdivides before selling, can they still take advantage of a 1031 EXCHANGE? The intent in which the property was acquired & held, the nature & value of improvements, the quantity of transactions & nature of the taxpayer's business, and the marketing efforts of the property will impact 1031 deferment. 10/08/2010
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RELATED PARTY DEBT PAYOFF: Will related party debt payoffs during a 1031 EXCHANGE be allowed? If the debt is for the acquisition and/or improvement of the property, the terms are FMV, the transaction is arms length, and the transaction is evidenced with an executed note & secured with a recorded mortgage, the IRS should allow the payment & not disqualify the exchange on the basis of the taxpayer controlling or having access to the 1031 funds. 10/06/2010
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SELLING NEWLY BUILT PRIMARY HOME: In Gates v. Commissioner, Gates wanted to expand their existing home but decided to tear it down. They owned and used the existing property for more than 2 years. Gates built a new home on the same property but never moved into it. They were denied the primary home exclusion upon sale a year later. 10/04/2010
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RELEASE OF EXCESS 1031 FUNDS: A taxpayer not wishing to reinvest all of the 1031 EXCHANGE proceeds into a replacement property can receive the excess funds at the closing of the relinquished property if specifically excluded from the exchange, or at the end of the exchange period. The excess funds may be taxable to the taxpayer. 10/01/2010
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GAIN OR LOSS ON PARKED PROPERTY: Revenue Procedure 2000-37 regarding "Reverse" 1031 Exchanges provides guidance for reporting a gain or loss on the sale of a "parked" relinquished property by an Exchange Accommodation Titleholder. 09/27/2010
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BUSINESS SWAP: In a "Business Swap", the IRS ruled that the assets of a business may not be combined and exchanged in a 1031 as a "single" asset, but must be analyzed on an asset-by-asset basis, like-groups, or like-classes. 09/23/2010
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REPLACEMENT PROPERTY LOAN APPLICATION: When applying for a loan to purchase a replacement property in a 1031 EXCHANGE, the taxpayer should: (1) Apply for the loan as an "investment" as the IRS can use the loan application to determine "intent", and (2) Minimize loan acquisition costs as they should not be paid with 1031 funds. 09/22/2010
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HUSBAND & WIFE LLC: Husband and wife sole members of a Limited Liability Company (LLC) in a community property state can elect to be disregarded for federal taxes and treated as a sole proprietorship, avoiding Partnership taxation. Sole member LLC's have advantages in a 1031 EXCHANGE. 09/20/2010
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WATER RIGHTS: Perpetual water rights, regardless of the quantity of water, have been ruled by the IRS to be "like-kind" to a fee interest in real estate and, therefore, afforded 1031 EXCHANGE treatment. 09/16/2010
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HIDDEN GAINS TO CONSIDER: There may be HIDDEN GAINS in the property you are selling!! Selling an investment property for LESS than the original purchase price can still result in a TAXABLE GAIN. The taxes on that gain may increase with the expiration of the Bush-era tax cuts. Tax rate increases, previous gains, depreciation recapture, AMT and... state & local taxes can be deferred with a 1031 EXCHANGE. 09/15/2010
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INEQUITABLE VALUES IN A 2 PARTY SWAP: In a 2-party 1031 EXCHANGE where the properties being swapped are not of equal value, the difference, often received in cash, can be received by a Qualified Intermediary and utilized for the purchase of a second property thus avoiding taxable "boot". 09/14/2010
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OPTIONS: Is an "Option" personal property and only exchangeable for another Option in a 1031 EXCHANGE, or is it real property and exchangeable for a fee simple interest? Authoritative sources are not definitive, therefore, it may be preferable to exercise the option into real property, then complete the exchange. The TP may have better success arguing "intent" and "held for investment" rather than "like-kind" challenges. 09/13/2010
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CHOSE IN ACTION: A "Chose in Action" as a general rule is not considered property and, therefore, excluded from 1031 EXCHANGE treatment. However, since a Chose in Action is often difficult to define, courts have deferred to the definition of "Choice in Action" under state law to determine if they are "like-kind" property. 09/09/2010
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THE 3 PROPERTY RULE: In a 1031 EXCHANGE, the most commonly used 45 Day identification rule is "The 3 Property Rule", whereby, the taxpayer may designate up to 3 properties without restriction as to value or any requirement to acquire more than one of those designated. 09/08/2010
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DEBT SECURED ON OTHER PROPERTY: Occasionally, a taxpayer will purchase investment property with debt secured by other property, or perhaps an umbrella mortgage. When selling an investment property in a 1031 EXCHANGE, can the 1031 proceeds be used to partially or totally satisfy debt secured by other properties? The answer is "sometimes yes". Call us. 09/02/2010
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BENEFITS TO REPORTING RENTAL INCOME: Penny-wise, pound foolish! Taxpayers not reporting their rental income may be missing out on deducting certain expenses on their property, possible loss offsets against ordinary income, future loss carry-forwards, and a "free pass" on a 1031 EXCHANGE. 09/01/2010
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TENANCY IN COMMON: In 2002, the IRS issued Revenue Procedure 2002-22 containing 15 guidelines for Tenancy in Common ownership of property in a 1031 EXCHANGE. The 15 guidelines help to distinguish a co-tenancy versus a partnership ownership. 08/31/2010
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THE 200% RULE: In a 1031 Exchange, "The 200% Rule" for identifying replacement properties applies when the taxpayer wishes to identify more than 3 properties. Unlike "The 95% Rule" which requires a minimum acquisition value, this rule has no minimum acquisition value by allowing the taxpayer to designate any number of replacement properties as long as their aggregate FMV does not exceed twice that of the relinquished property. 08/30/2010
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THE 95% RULE: One of the replacement property identification rules in a 1031 EXCHANGE is "The 95% Rule" whereby, if the number of properties identified exceeds 3 and the aggregate FMV exceeds 200% of the relinquished property value, the taxpayer may designate any number of properties of any value as long as they acquire 95% of all properties designated. 08/27/2010
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RELATED PERSONS: Certain rules regarding "related persons" exist in a 1031 Exchange. "Related person" includes, but is not limited to, lineal family members, spouse, siblings, individuals and entities where more than a 50% ownership exists, certain fiduciaries, and others. 08/26/2010
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DELIVERY OF 45 DAY REPLACEMENT PROPERTY ID: In a 1031 EXCHANGE, a signed Replacement Property Identification is valid if made, by the 45th day following the relinquished property closing, to the transferor of the replacement property or any other qualified person involved in the exchange, such as, a Qualified Intermediary, title company or escrow agent. 08/24/2010
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CONTRACT PURCHASER AND CONTRACT SELLER: "Contract Purchaser" and "Contract Seller" may take advantage of a 1031 EXCHANGE at the time the benefits and burdens of ownership or economic bundle of rights shift to the other party, without regard to a title or deed transfer. 08/23/2010
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UNHARVESTED CROPS: In a 1031 Exchange of farmland, unharvested crops may be included in the exchange as property used in a trade or business, and not as inventory subject to ordinary income taxes, providing state law considers unharvested crops as real property. 08/19/2010
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NON-COMPETE COVENANT: A non-compete covenant is not "like-kind" to other intangibles and, therefore, cannot be exchanged under the rules of a 1031 EXCHANGE. The monies received for a non-compete covenant are generally taxed as ordinary income. 08/18/2010
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NON-REFUNDABLE GOOD FAITH DEPOSIT: Monies received by a taxpayer or their agent, without limitations or restrictions, such as a non-refundable good faith deposit, are considered actual or constructive receipt and, therefore, are excluded from 1031 Exchange treatment. 08/16/2010
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TAX EXEMPT ORGANIZATIONS & CHARITIES: A taxpayer can exchange a higher value property for a lower value property with a tax-exempt organization or charity in a 1031 EXCHANGE and treat the difference in values as a charitable donation. 08/12/2010
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VEHICLE TRADE-INS: When a taxpayer trades-in a vehicle used in business for more than their depreciated basis, the gain is deferred into the new vehicle as a 1031 EXCHANGE. If the taxpayer were to sell the vehicle outright, a Qualified Intermediary, such as 1031 Exchange Specialists Inc, would be needed to perfect the 1031 EXCHANGE. 08/10/2010
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MILITARY SERVICE IN A COMBAT ZONE: The 45 and 180 day time requirements of a 1031 EXCHANGE are postponed for military personnel in a combat zone. Taxpayers with open 1031 EXCHANGES are granted an additional 180 days beyond the end of the military service in the combat zone, plus the unused days from the original 180 day period. 08/09/2010
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PROPERTY UNDER CONSTRUCTION: In
a 1031 EXCHANGE, the IRS does not require property under construction
to be completed, but will only allow credit for the value of installed
items at the time of acquisition. When identifying property to be
completed, it is important to estimate the percentage of completion as
the IRS will disallow the identification. 08/04/2010
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T.I.C. REQUIREMENTS FOR PARTITION: In
a 1031 EXCHANGE, to avoid some of the pitfalls of owning a property in
a partnership, a tenant-in-common interest must permit each co-owner
the right to encumber, partition and transfer their respective interest
without the approval of others. Lenders generally take exception to
this requirement. 08/03/2010
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AIRPORT TAKE-OFF AND LANDING RIGHTS: A taxpayer selling airport take-off and landing rights or "slots" can utilize a 1031 EXCHANGE to avoid capital gains taxes, without regard to the time or the location of the "slot". 08/02/2010
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CONVERSION AND IMPROVEMENT: Will the conversion and improvement of a motel into condominiums for resale or the subdivision and improvement of raw land into individual lots for resale give rise to dealer status and disallow deferment of taxes with a 1031 EXCHANGE? The answer is based on numerous factors developed by the courts and applied case by case. 07/28/2010
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EXCHANGING SPORTS CONTRACTS: The trade of major league sports contracts can be completed without paying taxes in a 1031 EXCHANGE. However, it has been ruled that future draft picks are not "like-kind" to existing player contracts. 07/27/2010
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DEATH OF A TAXPAYER DURING AN EXCHANGE: A taxpayer's estate or trustee may complete a 1031 EXCHANGE, defer taxes and receive a stepped-up basis in replacement property when a taxpayer dies during the exchange period. 07/26/2010
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MIXED USE PROPERTY: When selling a property that had personal use and business use, different tax laws apply depending on whether the usage was concurrent or consecutive, and whether the structure is dividable or single. Often a primary home exclusion can be combined with a 1031 EXCHANGE to maximize tax savings. 07/22/2010
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CONVERTING PROPERTY USE: Property converted from primary use to vacation/investment use is not subject to an allocation of gain, unlike when converted from investment/vacation to primary use. The taxpayer has 3 years from the date of conversion to sell and take advantage of the primary home exclusion and possibly combine it with a 1031 EXCHANGE. 07/21/2010
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OPTIONS FOR IDENTIFYING REPLACEMENT PROPERTY: When identifying replacement property in a 1031 EXCHANGE, 3 options are available: the 3 property rule; the 200% rule; and the 95% rule. The 1st places a restriction on the # of properties identified without regard to value; the 2nd places a restriction on aggregate values of the properties identified without regard to quantity; and the 3rd requires a minimum acquisition where quantities and values are exceeded in the 1st 2 rules. 07/20/2010
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MEDICARE CONTRIBUTION TAX: Beginning in 2013, individuals will be subject to an additional 3.8% Medicare Contribution Tax on certain investment income if their taxable income, including capital gains, is over $200,000 (single) or $250,000 (married). This additional tax can be deferred with a 1031 EXCHANGE on investment property gains. 07/19/2010
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REPLACEMENT PROPERTY IDENTIFICATION: A taxpayer can substitute any or all of the 3 identified properties in a 1031 EXCHANGE before midnight on the 45th day, but cannot make any substitutions afterwards. The taxpayer can either purchase one of more of the 3 identified properties by the 180th day or not complete the exchange and pay the taxes without penalty. 07/16/2010
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CONSERVATION EASEMENTS: Conservation Easements and Forestry Preserves, popular especially in NJ, place a restriction on the owner's deed and the proceeds received are generally fully taxable unless the owner utilizes a 1031 EXCHANGE to acquire another property, as the deed restriction is "like-kind" to the transfer of a fee simple interest for 1031 purposes. 07/14/2010
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IMPROVEMENTS COMPLETED PRIOR TO ACQUISITION: When purchasing a property of lesser value in a 1031 EXCHANGE, improvements completed prior to the passing of title can be included in the exchange value to minimize taxes. Often this is accomplished by the taxpayer when leasing a property prior to acquisition or through a "Build-to-Suit" exchange. 07/13/2010
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FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT: The Foreign Investment in Real Property Tax Act (FIRPTA) treats a Qualified Intermediary in a 1031 EXCHANGE as the transferee and requires different withholding rules for simultaneous exchanges and deferred exchanges. 07/12/2010
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VIRGINIA EXCHANGE FACILITATORS ACT: Effective July 1, 2010 Virginia has joined 5 other states by enacting legislation to protect taxpayers from losses while doing business with a 1031 Exchange Facilitator. 07/08/2010
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EQUAL DEBT & EQUITY: In order to defer taxes in a 1031 EXCHANGE, a replacement property should be purchased with equal debt and equity to the relinquished property. The IRS allows the replacement of debt with additional taxpayer cash, but does not allow the replacement of equity with additional debt. 07/07/2010
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REPORTING YOUR EXCHANGE TO THE IRS ON FORM 8824: 1031 Like-Kind Exchanges are reported to the IRS on informational Form 8824 and attached to the taxpayer's tax return in the year the exchange begins. Form 8824 calculates a basis of the new property by carrying forward the gain from the old property and determines if any gain is taxable in the current year. 07/06/2010
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TAXPAYER INTENT IN A 1031 EXCHANGE: A 2010 tax court decision in Goolsby v. IRS disallowed a 2003 1031 EXCHANGE when the IRS proved the taxpayer did not intend to hold the property as investment. The taxpayer moved into the property 2 months after acquisition and did not make a valid attempt to rent the property during the vacancy period. 06/30/2010
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LIVESTOCK HELD FOR BREEDING: Livestock held for breeding purposes, and not primarily for sale, may be exchanged tax-free in a 1031 EXCHANGE. However, livestock of different sexes is not "like-kind" for 1031 purposes. 6/29/2010
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COLLECTIBLES: Collectibles, such as art, antiques, gems, stamps, coins, gold, wine, may be exchanged tax-free in a 1031 EXCHANGE if held for investment and not personal use. Otherwise, the taxpayer may be subject to a federal capital gains rate of 28% on the sale of Collectibles. 06/28/2010
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CAPITAL GAINS CALCULATIONS: Sellers often assume the cash received at settlement is the taxable gain on the property. When selling an investment property, the gain is calculated by adding capital improvements to the acquisition cost of the property, then deducting depreciation expense taken over the years, then subtract that number (tax basis) from the sales price of the property after allowable selling expenses to equal the taxable gain. 06/24/2010
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SAME TAXPAYER REQUIREMENT - SPOUSE: Investment property held individually by a spouse in a non-community property State must maintain its separate ownership upon acquisition of replacement property in a 1031 EXCHANGE. The non-exchanging spouse may take ownership of any interest in excess of the exchanging property's interest. 06/23/2010
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BULK SALES TAX NOTICE: In June 2007, a law was signed in NJ expanding the Bulk Sales tax notice requirement. In July 2008, NJ Division of Taxation clarified the statute to include "realty if the primary use of the realty is to support a business on its premises." The notice must be filed at least 10 days prior to a sale. 06/22/2010
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TREATMENT OF INTEREST: In a 1031 EXCHANGE, interest earned on exchange funds of $2 million or less and held for 6 months or less is not subject to special allocation rules. 06/21/2010
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PERSONAL PROPERTY: In a 1031 EXCHANGE, tangible, depreciable, intangible and non-depreciable personal property are subject to more restrictive regulations comparing the nature and character of the property and underlying property and not solely the "like-kind" or "like-class" of the property. For example, a liquor license to serve alcohol is not "like-kind" to a liquor license to sell alcohol retail. 06/17/2010
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TRANSFERABLE DEVELOPMENT RIGHTS: In a 1031 EXCHANGE, transferable development rights may be "like-kind" to a fee interest in real estate even if the rights are used to develop property already owned by the taxpayer. The IRS views the rights as tantamount to acquiring an additional interest in property. 06/16/2010
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TAX SAVINGS BEGIN AFTER TAX BASIS: In a 1031 EXCHANGE, the taxpayer begins to save tax dollars when they purchase a property of greater value than the depreciated tax basis of the old property. The maximum tax savings is achieved when the taxpayer purchases a property of equal or greater value to the net sales price (gross sales price less selling expenses) of the old property.
06/15/2010
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SELLING TO A RELATED PARTY: When selling property to a related party in a 1031 EXCHANGE, the related party is required to hold the property for 2 years and the taxpayer is required to hold the replacement property for 2 years. Some exceptions exist. 06/14/2010
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DISQUALIFIED PERSON: A "disqualified person" cannot act as a Qualified Intermediary in a 1031 EXCHANGE. Disqualified persons include employee, attorney, accountant, investment banker, or Realtor acting in an agency capacity within 2 years of the exchange transaction, and family members and other related parties with common interests of more than 50%. 06/11/2010
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TAX REPORTING & DEED INCONSISTENCIES: Often, a property owner will transfer a property to another legal entity, such as a LLC, Partnership, Trust, or Corporation, for tax purposes but fail to make the necessary changes to the deed. When the property is sold, the 1099-S will be issued under the deeded ownership, causing an inconsistency with the tax reporting. This can be fatal to a 1031 EXCHANGE. 06/10/2010
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LEASE-PURCHASE AGREEMENT: When structuring a Lease-Purchase Agreement for a client involved in a 1031 EXCHANGE, it is important to ensure the benefits and burdens of ownership do not transfer with the lease, as that will trigger the start date of the exchange. 06/08/2010
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EXTENSIONS FOR DECLARED DISASTER AREAS: Extensions to time sensitive acts, such as the 45 day identification and 180 day deadlines of a 1031 EXCHANGE, are granted to "affected taxpayers" in a "Presidentially declared disaster" area. This includes, but is not limited to, hurricanes, tornados, earthquakes, floods, mudslides, etc. 06/04/2010
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IDENTIFYING PROPERTY TO BE PRODUCED: When identifying by the 45th day of a 1031 EXCHANGE a property to be produced, be certain to identify the percentage of completion to be received by the 180th day. If the property received is at a substantially different completion stage than the property identified, the IRS will disallow the identification. One suggestion is to identify the property at 3 stages of completion. 06/03/2010
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REPLACEMENT PROPERTY OWNED BY TAXPAYER: Property currently owned by a taxpayer or previously owned by the taxpayer within 180 days of commencing a 1031 EXCHANGE, does not qualify as "like-kind" replacement property. 06/02/2010
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EARLY RELEASE OF FUNDS: IRS regulations prohibit the release of unused funds to the taxpayer in a 1031 EXCHANGE prior to the end of the Exchange period. Private Letter Rulings have allowed certain exceptions between the 45th and 180th days depending on the identification of property and the amendment of the Exchange Agreement. 06/01/2010
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OIL, GAS & MINERAL INTERESTS: Oil, gas and mineral interests are considered real property interests for federal tax purposes and therefore, are exchangeable with a fee simple interest in real estate in a 1031 EXCHANGE. 05/27/2010
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REITS AND UPREITS: The acquisition or disposition of an interest in a real estate investment trust (REIT) does not qualify as "like-kind" property in a 1031 EXCHANGE. The use of an umbrella partnership real estate investment trust (UPREIT) may circumvent this restriction. 05/26/2010
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RESCINDING A TAXABLE SALE: A taxable sale may be rescinded to afford the taxpayer the benefits of a 1031 EXCHANGE if 3 conditions are met: 1. Parties return to status quo ante before the sale; 2. Rescission occurs in same tax year as sale; and 3. Parties have no obligations to each other at the time of rescission. 05/25/2010
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OFFSETTING TAXABLE BOOT: A taxpayer may be able to offset taxable "boot" resulting from "cashing out" or a partial 1031 EXCHANGE with deferred passive losses (e.g. stock losses) to avoid taxation. 05/24/2010
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COMBINED REVERSE AND FORWARD EXCHANGE: If a taxpayer was purchasing 2 properties in a combined forward/reverse 1031 EXCHANGE, they would have up to 360 days to complete the exchange as opposed to the standard 180 days. 05/21/2010
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PARK THE RELINQUISH OR REPLACEMENT PROPERTY: In a Reverse 1031 EXCHANGE, the EAT can "park" the relinquish or replacement property. Parking the relinquished property may result in a gain or loss if the property sells at a value different from the amount paid by the EAT. Parking the replacement property may cause difficulties in obtaining financing. Both option...s may have double transfer taxes. We can suggest less costly alternatives. 05/20/2010
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GIFTING REPLACEMENT PROPERTY: Gifting replacement property acquired in a 1031 EXCHANGE to others may disqualify the exchange if the intentions of the Donor are made known prior to or at the time of the exchange. Gift intentions made known after the acquisition of replacement property result in more successful exchanges. 05/19/2010
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COMBINING HOLDING PERIODS: A property acquired in a 1031 EXCHANGE acquires the holding period of the property given up. Therefore, if the new (replacement) property is disposed of in 1 year or less, it may still receive long term capital gains treatment and rates providing the combination of the old (relinquished) and new (replacement) property's holding periods are more than 1 year. 05/18/2010
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BASIS ALLOCATION FOR LAND & IMPROVEMENTS: The allocation of land and improvements for property acquired in a 1031 EXCHANGE is determined by their relative fair market values, with no relevance to the allocation used in the property given up. Greater depreciation deductions can be afforded a Taxpayer where the ratio of improvements to land value is greater on a replacement property. 05/17/2010
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TAX REPORTING OF INVESTMENT PROPERTY: The inclusion/exclusion of Schedule E and the allocation of personal/rental days on a tax return will establish the parameters for tax treatment and the availability of a 1031 EXCHANGE when selling an investment property with a dwelling. 05/13/2010
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ADDITIONAL 1031 EXCHANGE BENEFITS: In addition to saving taxes with a 1031 EXCHANGE, other benefits include consolidation, relocation and diversification of investments, increased appreciation and leverage, improved cash flow from higher rentals and lower debt, and higher depreciation deductions by exchanging low-basis property for high-basis property. 05/12/2010
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CONTRACT ADDENDUM: An Agreement of Sale/Purchase involving a 1031 EXCHANGE should contain language or an Addendum to show the intent to do an exchange, permit an assignment of the contract, and advise the other party that the exchange will not cause them delays, expense or liability. 05/11/2010
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LEGAL TRANSFER OF PROPERTY OWNERSHIP: The legal transfer of property ownership generally occurs with the transfer of title. However, for Federal tax purposes in a 1031 EXCHANGE, the transfer of ownership occurs when the "benefits and burdens" of the property transfer to the other party. The IRS has 8 tests to determine when the transfer of ownership takes place. 05/10/2010
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CARRYOVER BASIS: In a 1031 EXCHANGE, the basis of the old (relinquished) property rolls to the new (replacement) property first and the gain rolls second. Therefore, if the replacement property is of lesser value than the relinquished property, the difference is fully taxable up to the amount of gain that rolled forward from the relinquished property. 05/06/2010
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FOREIGN PROPERTY: Real property located within the United States is not "like-kind" to real property located outside the United States for purposes of a 1031 EXCHANGE. Some exceptions exist for U.S. territories located outside the continental U.S. 05/05/2010
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LAWS GOVERNING QUALIFIED INTERMEDIARIES: A Qualified Intermediary in a 1031 EXCHANGE can generally conduct business throughout the U.S. and some territories outside the continental U.S. Certain states (CA, NV, WA, CO & ID) have enacted laws governing QI's considered "doing business" in the state. 05/04/2010
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NOTICE OF ASSIGNMENT: A Notice of Assignment is an integral component of a 1031 EXCHANGE whereby the other party to the transaction is given written notification that the rights, not the obligations, of a Purchase and Sale Agreement has been assigned to a Qualified Intermediary. 05/03/2010
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ESCROW HELD AT CLOSING: Funds held in escrow at settlement for an open lien may be taxable in a 1031 EXCHANGE if released after the acquisition of replacement property. One option to avoid taxability is to have the taxpayer fund the escrow with personal monies. 04/30/2010
CAPITAL GAINS TAX RATES: The gain on investment property generally includes gain from depreciation recapture and gain from appreciation. Under current tax laws, depreciation recapture is taxed at a 25% rate and appreciation is taxed at a 15% rate for property held for more that one year. These rates are due to change at the end of 2010. Remember to add your local and state taxes to the aforementioned rates. A 1031 EXCHANGE is an option to avoid all of these taxes. 04/29/2010
CASH AND MORTGAGE BOOT: Failure to reinvest all of the cash proceeds in a 1031 EXCHANGE results in taxable cash "boot". Failure to replace debt in a 1031 EXCHANGE may result in taxable mortgage "boot" unless substituted with additional personal funds. 04/28/2010
PASSING 1031 PROPERTY TO YOUR HEIRS: Gain deferred in a 1031 EXCHANGE into a property held until the Taxpayer's death passes to the heirs at a stepped-up basis, thus potentially eliminating all deferred taxes too. 04/26/2010
DEALER PROPERTY: There are 9 factors considered when determining whether a property is "held for investment" or is "dealer" property, hence, the applicability or inapplicability of a 1031 EXCHANGE and capital gains or ordinary income taxes. 04/22/2010
ITEMS TO CONSIDER WHEN SELLING YOUR BUSINESS: When negotiating a contract of sale for a motel, hotel, B&B, restaurant, liquor store, etc., be aware that the real estate, furniture & fixtures, goodwill, customer lists, inventory, licenses, etc. all have different tax consequences affecting the Buyer & Seller, especially if structuring a 1031 EXCHANGE. 04/21/2010
COMBINING FORWARD AND REVERSE EXCHANGES: When selling multiple properties and buying a single property in a 1031 EXCHANGE, the counting of the 45 and 180 day time requirements begins with the 1st closing. It is best to sell all properties before purchasing the replacement property, but a combination forward and reverse exchange is also an option. 04/20/2010
DEPRECIATION METHODS: Property acquired in a 1031 EXCHANGE can be depreciated under 2 different methodologies. A continuation of depreciation on the old basis and the application of the current depreciation method on the incremental new basis, Or, the combination of old and new basis depreciated under the current depreciation method. 04/19/2010
PROPERTY INCIDENTAL TO EXCHANGE: Non-Like-Kind property customarily transferred with Like-kind property in a 1031 EXCHANGE does not have to be IDENTIFIED separately if the FMV does not exceed 15% of the larger item. e.g. furniture sold with an investment property. 04/16/2010
TRANSFERING 1031 FUNDS FROM RELINQUISH CLOSING ENTITY DIRECTLY TO REPLACEMENT CLOSING ENTITY: When the timing of closings is not practical for the flow of funds through a Qualified Intermediary in a 1031 EXCHANGE, the QI can expressly direct the relinquished property closing entity to transfer funds to the replacement property closing entity, without tainting the exchange. 04/15/2010
REFINANCING 1031 PROPERTY: Refinancing a property PRIOR TO a 1031 EXCHANGE may be viewed as "cashing out" by the IRS and taxed. Refinancing a property AFTER a 1031 EXCHANGE is completed is generally more acceptable, especially if the proceeds are reinvested into the property. 04/14/2010
PARTNERSHIP SPIN-OFF: A Partnership/LLC owning several properties can spin-off one or more properties at FMV to a liquidating partner and complete a 1031 EXCHANGE to avoid paying taxes. 04/13/2010
VACATION/INVESTMENT HOME CONVERSION: Property converted from Vacation/Investment use to Primary Home after December 31, 2008 will require the allocation of gain to "Non-qualified" and "Qualified" periods, whereby the primary home exclusion of $250/500K can only be applied to the "Qualified" period. Read more about this topic on our "Mixed Use Property" page. 04/12/2010
REVERSE 1031 EXCHANGE OPTION: A Reverse 1031 EXCHANGE is a viable option when purchasing before selling, however, less complex and costly alternatives should be explored first with your Qualified Intermediary. More details on our "Reverse Exchange" page. 04/09/2010
TRANSFERRING OWNERSHIP TO A RELATED PARTY: The tax implications of passing title on an investment property to a related party vary depending on the vehicle utilized...i.e. 1031 Exchange; Installment Sale; Gift; Inheritance; Life Estate; Sale; or a combination of all of the above. Review each option carefully. 04/08/2010
COMBINING PRIMARY HOME EXCLUSION & 1031 EXCHANGE: If a Seller lives in a property for 2 years and then rents the property for 2 additional years, they can combine the primary home exclusion of $250/500K with a 1031 EXCHANGE to maximize their tax savings. (See our "Mixed Use Property" page for details). 04/07/2010
REGULATIONS DO NOT REQUIRE A MINIMUM HOLDING PERIOD: The 1031 EXCHANGE regulations do not require a minimum holding period, however, they do require the property be held for investment or in the productive use of a trade or business, e.g. rental. 04/06/2010
GAIN ATTRIBUTABLE TO DEPRECIATION RECAPTURE: Properties selling for less than their acquisition price may still have a taxable gain attributable to depreciation recapture at both the federal and state level. A 1031 EXCHANGE can avoid the 25% federal recapture tax plus applicable state tax. 04/05/2010
TRANSFER OF MEMBERSHIP INTEREST: The transfer of a membership interest in a single member disregarded entity LLC may or may not be taxed at the state level depending on individual state law. 04/01/2010
DIRECT DEEDING: The IRS permits direct deeding between Seller and Buyer in a 1031 EXCHANGE to avoid duplicate state transfer taxes and other closing costs. 03/31/2010
IDENTIFYING DEBT ON INVESTMENT PROPERTY: Securing debt on investment property with the equity in a principal residence is not the best financial strategy, however, if identifiable, it can be satisfied upon sale of the investment property with 1031 EXCHANGE proceeds. 03/30/2010
MEMBERS OF LEGAL ENTITIES: The change of partners in a Partnership, members of a LLC, or the shareholders of a corporation before, during or after a 1031 EXCHANGE does not affect the 1031 EXCHANGE unless the change results in liquidation of the entity. 03/26/2010
TWO PARTY DIRECT SWAPS: Two party direct swaps of deeds in a 1031 EXCHANGE are doable but rare. The most common 1031 EXCHANGES are 3 party exchanges, whereby a property is sold and purchased to/from unrelated 3rd parties through a Qualified Intermediary. 03/24/2010
GOOD FAITH DEPOSITS: Good Faith Deposits paid by Buyers of replacement property in a 1031 EXCHANGE can be refunded without tax consequences up to the time of settlement and replaced with 1031 funds for the acquisition of property. 03/23/2010
IMPROVEMENTS TO REPLACEMENT PROPERTY: Improvements made to replacement property after acquisition add to the property's basis and are depreciable, but are NOT "Like-Kind" for the purpose of a 1031 EXCHANGE. 03/22/2010
STATE LAW DEFINITION OF REAL ESTATE: State law definition of real estate is accepted by federal law for the purpose of a 1031 "Like-Kind" EXCHANGE. For example, a stock ownership co-op in NY and NJ is "like-kind" to a fee simple interest in real estate. 03/19/2010
30 YEAR LEASE: A fee simple interest in real estate is "like-kind" in a 1031 EXCHANGE to a lease that has a remaining life of 30 years or more, including options. 03/18/2010
SINGLE MEMBER, LLC AS DISREGARDED ENTITY: A single member LLC is disregarded for federal tax purposes and therefore is an acceptable alternative for taking title in a 1031 EXCHANGE. 03/17/2010
SELLER TAKE-BACK NOTES: A Seller take-back note can be converted
from a taxable Installment Sale to a tax deferred 1031 EXCHANGE if
structured properly by a Qualified Intermediary. 03/16/2010
SELLING AT A LOSS: The sale of a property today at a loss may still have
a taxable gain if the property was part of a previous 1031 EXCHANGE.
A new 1031 EXCHANGE can continue to defer taxes on the old gain. 03/15/2010
RECEIVING CASH AT SETTLEMENT: A taxpayer can exclude funds
from a 1031 EXCHANGE and pay taxes on the amount excluded. The
excluded amount can be received at the beginning or the end of the
EXCHANGE depending on the timing and the proper structuring of the
EXCHANGE Docs. 03/12/2010
45 DAY IDENTIFICATION: The IRS does not require a Contract of Sale for the 45 Day Identification in a 1031 EXCHANGE, only written notification to the Qualified Intermediary. A prudent taxpayer would begin the contract process as substitutions are not permitted after the 45th day. 03/11/2010
BUILD TO SUIT EXCHANGE: A "Build To Suit" 1031 EXCHANGE is beneficial to the taxpayer when the cost of improvements are needed to bring the value of the replacement property closer to the value of the relinquished property. 03/10/2010
QUALIFYING YOUR PROPERTY FOR 1031 TREATMENT: A property that is not rented and not used more than 14 days per year for pleasure may fall under the definition of "held for investment" and qualify for a 1031 EXCHANGE. 03/09/2010
TAX RELIEF: Some tax relief for the unfortunate individuals who selected the wrong 1031 Company. Bigger does not mean safer....Get to know the professionals you recommend! 03/08/2010
PURCHASING FROM A RELATED PARTY: Generally, purchasing replacement property from a related party in a 1031 EXCHANGE is not permitted, however, recent cases have permitted such transactions where the facts and circumstances show there is no "basis" shifting or intentional avoidance of taxation. 03/05/2010
NONRESIDENT WITHHOLDING TAX EXEMPTION: States that impose a nonresident withholding tax on the sale of property generally allow an exemption to the tax if the Seller is in a 1031 EXCHANGE. However, they may require the application for the exemption be filed several weeks before closing. Know your state rules or call us. 03/04/2010
RENT AND SECURITY DEPOSIT ADJUSTMENTS: In a 1031 EXCHANGE, it is more beneficial to the Exchangor to have rent adjustments handled outside of the exchange so as to maximize the utilization of 1031 proceeds and avoid creating taxable "boot". 03/03/2010
EXCHANGE REAL ESTATE, PERSONAL PROPERTY, & INTANGIBLES: 1031 EXCHANGES are not just for real estate. Personal property and some intangibles, such as cars, planes, boats, copyrights, liquor licenses, horses, cattle are just some of the items that can avoid large taxable gains thru a 1031 EXCHANGE. 03/02/2010
FILE FOR AN EXTENSION WITH THE I.R.S.: If you started your 1031 Exchange between Oct. 16, 2009 and Dec. 31, 2009, and you need the full 180 days to complete your exchange, you will have to file an extension of your 2009 taxes, otherwise your exchange deadline becomes your tax return due date or 180 days, whichever comes first. 03/01/2010
PARTNERSHIP INTERESTS: Partnership interests are not exchangeable in a 1031 Exchange. There are, however, strategies for converting a partnership interest to a fee simple interest to complete a 1031 Exchange. 02/24/2010
TENANTS-IN-COMMON INTEREST: When a party in a 1031 Exchange wants to purchase replacement property with other parties, it is important for the exchanging party to have a tenants-in-common interest in the new property equal to or greater than the value of the property given up. 02/23/2010
QUALIFIED EXPENSES: Some expenses of disposition and acquisition of property qualify for payment under a 1031 Exchange. A knowledgeable Qualified Intermediary can guide you accordingly. Call us. 02/22/2010
BUYING MORE THAN ONE REPLACEMENT PROPERTY: When purchasing more than one replacement property in a 1031 Exchange, the taxpayer can allocate the 1031 funds to each property in a manner that maximizes their borrowing ability. 02/19/2010
PENNSYLVANIA RESIDENTS: A Pennsylvania resident selling a NJ property in a 1031 EXCHANGE can avoid Federal and NJ taxes, but will have to pay PA taxes on the gain. 02/18/2010
BUYING REPLACEMENT PROPERTY OF LESSOR VALUE: When a taxpayer purchases a replacement property in a 1031 EXCHANGE of lesser value or they do not reinvest all of the cash or debt, the difference is taxable as "boot", first at the depreciation recapture tax rate, then at the short or long term capital gains rate. 02/16/2010
SHORT SALE GAIN: A short sale without cash does not always equate to a short sale without profit. Consider the tax ramifications and the potential for a 1031 EXCHANGE to defer the tax liability. 02/12/2010
STRUCTURED, INSTALLMENT & PRIMARY HOME SALES: 1031 EXCHANGES can be combined with Structured Sales, Installment Sales and Primary Home Exclusions to afford the taxpayer the greatest tax savings. 02/11/2010
LEGAL ENTITY: When deciding on the best legal entity (LLC, Partnership, C-Corp, S-Corp, Sole Proprietor) for owning property, consider the tax ramifications of spilt-ups, split-offs, dissolution and the availability of a 1031 EXCHANGE. 02/10/2010
INHERITED MIXED USE TRIPLEX: An interesting one . Triplex inherited in 1980's by brother & sister. Sale is all gain. 1 unit = primary home. 2 units = rental. Brother & sister take primary home exclusion on 1/3 of gain. Brother does 1031 EXCHANGE on his half of 2 rental units and pays no taxes at all. Sister does not do 1031 EXCHANGE and... pays tax on her half of 2 rental units. 02/09/2010
INCLUDE A SCHEDULE E: Including a Schedule E for your vacation/rental home affords you greater writeoffs, loss carryforwards and an opportunity to take advantage of a 1031 EXCHANGE when selling, even if the rentals were to close friends. 02/08/2010
IDENTIFY ALTERNATE REPLACEMENT PROPERTIES: We always recommend the client identify 2 alternate properties by the 45th day in the event a problem occurs after the 45th day with the 1st property identified. 02/05/2010
45 & 180 DAY TIMELINE: From the date of settlement on the first property, the client has 45 days to identify exchange properties and 180 days to complete the exchange. 1031 Exchange Specialists, Inc, A Qualified Intermediary, can guide you through the process. 02/04/2010
14 DAY RENTAL EACH YEAR FOR A TWO YEAR PERIOD: With proper planning, a 14 day rental to friends in each year of a 2 year period can afford your clients a "no challenge" in a 1031 exchange and save them thousands in taxes. 02/03/2010
1031 CONTRACT LANGUAGE: The inclusion of 1031 language in the Agreement of Sale satisfies the "notice" requirement of a 1031 EXCHANGE. Let us know if you need sample language. 02/01/2010
1031 AS A COMPETITIVE EDGE: As a competitive edge, be certain to suggest a 1031 EXCHANGE to your Sellers when listing an investment property. 01/29/2010
BUILDING ON PROPERTY YOU ALREADY OWN: Building on property you already own is not "like-kind" to the exchange of real estate in a 1031 EXCHANGE. There are several cases that have succeeded and failed depending the planning and structuring of the transaction. 01/28/2010
ATTORNEY AS CLOSING AGENT: An Exchangor's attorney acting as a closing agent in a 1031 exchange may fall under the definition of a "disqualified person" and to avoid constructive receipt issues, should not run the 1031 funds through their attorney trust account. 01/27/2010
SELLING EXPENSES & ACQUISITION COSTS: 1031 EXCHANGE funds can be used to pay for selling expenses and acquisition costs of properties. Mortgage acquisition costs of the Exchangor are not permissible except if used as a Seller's assist for the buyer. 01/26/2010
VACATION HOMES & 1031 EXCHANGES: The Rev Proc (safe harbor) issued on March 10, 2008 regarding VACATION HOMES and 1031 EXCHANGES suggests 14 days of rental to an unrelated party and no more than 14 days of pleasure use (maintenance days do not count) for each year of a 24 month period. Falling short of the safe harbor DOES NOT result in an automatic failure. 01/25/2010
RETURN OF GOOD FAITH DEPOSIT: If a taxpayer gives a good faith deposit on a replacement property from funds other than those held by the Qualified Intermediary, the good faith deposit can be returned to the taxpayer tax-free at or before closing. 01/21/2010
TWO PERSON SWAP OF DEEDS: A client phoned, asking if a 2 person swap of deeds was okay in a 1031 EXCHANGE. The answer is "yes" providing the properties qualify as investment or business use. 01/19/2010
RECEIPT OF FUNDS FROM A FAILED 1031 EXCHANGE: Receiving funds from a failed 1031 EXCHANGE in 2010 that started in 2009 gives the taxpayer the option to report the gain in either year. 01/15/2010
FEE SIMPLE TRANSFER WITH GROUND LEASE ATTACHED: A client is identifying a property in a 1031 EXCHANGE that will be transferred by a fee simple interest but also has a ground lease attached from a drug chain. If the purchase price is allocated to both the land and the lease, each has to be evaluated to determine if they are "like-kind" to real estate. 01/14/2010
ONE OF TWO OWNERS PARTICIPATE IN A 1031 EXCHANGE: Yesterday's call from a brother and sister selling an investment property allows one to cash out while the other does a 1031 EXCHANGE and pays no taxes. 01/13/2010
RENTING YOUR INVESTMENT PROPERTY TO A RELATIVE: A client with a fully depreciated triplex and a large gain is exchanging into a beachfront condo that he will rent to his adult son as a primary residence and pay no taxes on the sale. 01/12/2010
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