TEE-Shots Newsletter

IRS extends 1031 deadlines due to a RARE special circumstance...

In a VERY rare move, the IRS granted deadline extensions to some taxpayers for their 1031 exchanges. The IRS granted the extensions due to the hardships caused by Hurricane Charley and Tropical Storm Bonnie.

IRS Modifies Reverse Exchange Ruling...

In the past month (July 2004), the IRS has issued a ruling (Rev. Proc. 2004-51) intended to clarify the rules about 'reverse' or 'parking' style property exchanges. The new ruling makes it clear that an exchanger cannot use a reverse exchange parking procedure to exchange into property the exchanger already owns.

What makes a Qualified Intermediary 'Qualified'...?

Trick question: it has two answers.

1. The I.R.S. answer: technically, nothing! In the IRS regulations, a "qualified" intermediary is anyone who is not "disqualified." You are disqualified if you have acted as the employee, attorney, banker, broker, or real estate agent for an exchanger within the past two years, or if you are related to the exchanger.

An entity (like a corporation) is disqualified if any disqualified person owns more than 10% of that entity.

I heard I can use §1031 for estate planning, but how?

Selling your old property and buying several new properties can be a very useful tool for estate planning. Here's how it can work: You can sell a large old property and buy three smaller properties -- one for each of your three children to 'manage.' The children can even be involved in making the decisions about which properties to buy. After your death, each of the three children would inherit the property they are managing.

I know what I want to buy, but I'm not sure where. Does that satisfy the IRS's Identification Rule?

Identification must be clear enough for your average IRS agent to go from your 45-Day Identification form to the property you have identified. Street addresses are fine. An identification of the main address of a 50 unit condominium tower without a unit number, however, does not do this. You must identify it as "Unit 203, Imperial Condominium Tower, 1027 Main Street, Smithtown, Texas."

What is the 200% Rule?

There are many peculiarities to Section 1031, and the 200% Rule is one of them. Basically, this rule means that the sum total of ALL the purchase prices for four or more replacement properties cannot exceed 200% of the selling price of the Old Property. Oddly, there is no limit to the sum of the purchase prices for three or less replacement properties.

"Exchanger Beware...!"

The Perils of Commingled
Exchange Accounts

Section 1031 of the IRC allows you to defer the capital gains tax upon the sale of qualified real estate and/or personal property used for business, but one of the requirements of doing an exchange is that the exchanger/investor must use a Qualified Intermediary or QI. So, how do you find a good QI...?

My intermediary holds my exchange funds in a commingled account.

Should I be worried about this?

Yes. A commingled account means that your intermediary is putting every client's exchange funds into one account.

While the intermediary holds the money, can I withdrawal the interest monthly?

The answer is NO. Section 1031 will not allow you to touch the money in between the sale of your old property and the purchase of your new, not even the interest. At the end of the exchange, you may have the interest sent to you in a separate check, or you may include it in proceeds that the intermediary transfers to the purchase of the new property. And yes, it is taxable to you, no matter how it comes to you.

Does my New Property need to be in the same State as the one I sold?

You may buy your new property anywhere in the United States. You do not have to buy your new property near where you sold the old. This could allow you to move your rental property with you when you move to another part of the country. You may also want to buy a rental property near where your elderly parents, or perhaps your grandchildren live.