How Revocable Living Trusts Impact a 1031 Exchange

A common question we get is how a client's Revocable Living Trust impacts their exchange. One of the major rules of a 1031 exchange is that you have to take title to your New Property in the same manner that you held title to your Old Property.

The question about Revocable Living Trusts generally arises where the client's Old Property was owned by their Living Trust, but the lender for their New Property will not make the loan to the trust. And occasionally we get a client who has sold their Old Property in their name, but for estate planning reasons would rather purchase their New Property in the name of a newly formed Living Trust.

The answer to their questions is that their Revocable Living Trust will have no impact on their exchange. To be clear, there are many different kinds of trusts, and each of them impacts a 1031 exchange differently, but a "Revocable Living Trust" will not affect what the client is trying to do.


Turning 1031 Exchange Property into Your Personal Residence

When you sell your personal residence (the house you live in), the IRS says $500,000 of the gain ($250,000 if you’re single) is tax free. There are some things that you have to do to qualify for this benefit, the most important of which is that you must live in the house for at least two of the last five years.

There is a different code section, Section 1031, that says if you sell a house that’s been a rental for at least the last year (or two years in some situations), you can roll the gain from the old house to the new house and defer the tax on the gain until you sell the new house.

Sometimes these two IRS rules overlap. For example, when you sell your residence, it has to have been your residence for two of the last five years. Two of the last five… so what was happening during the other three years? Well, if you’ve lived in the house for all five years there’s no problem – just sell the property and $500,000/$250,000 of gain is forgiven.


A Closer Look at How Financing Works in a Reverse 1031 Exchange

As Reverse 1031 Exchanges gain in popularity, the issue of financing becomes more and more critical.

Reverse Exchange loans are not saleable by the lender, so as a result, most reverse loans are made by “portfolio lenders” which are usually banks. Still, most banks don’t understand them, and so they shy away from them. 
First, let’s talk about how Reverse Exchanges work. A Reverse Exchange happens when you want, or need, to purchase your New Property before you’ve sold your Old Property. The IRS will not let you be in title to both the old property and the new property at the same time, so your exchange Qualified Intermediary steps in and buys (usually) your New Property and then holds it, or “parks” it until your Old Property is sold.

There are not many Qualified Intermediaries that have the technical know-how and trained personnel to do Reverse Exchanges, so before you start, make sure that they have the knowledge and experience to handle your exchange.


The Future of 1031 Exchanges In A Trump Congress

Although Donald Trump has been President for less than 50 days (as I write this), certain things about him and his agenda are becoming clear: he has a very clear vision about what he wants to accomplish, and he is very determined to push his changes through. 

Tax reform is high on his agenda, and because he has a Republican majority in both the House and the Senate, it’s likely there will be some form of tax legislation proposed later this year. Since I’m a retired CPA and I make my living in the Section 1031 tax arena, I’m very concerned about the possibility of changes to this Code Section and how these changes would impact my clients. 


1031 In a Nutshell

What is a 1031 Exchange?

People ask, “Why should I do a 1031 exchange?” I can answer this question in two words: "Financial Leveraging." By doing a 1031 exchange, the taxes you would have paid to the government are now working to earn you money.

A 1031 exchange allows a taxpayer to postpone their long-term capital gains tax when selling an investment property by exchanging both the basis and the gain into a new investment property. This gives an investor financial leverage. If you have a property used for investment or business and you plan on buying another property used for investment or business, then yes, you need to do a 1031 exchange.


California puts teeth in their 1031 exchange claw-back rule

Several years ago, the state of California adopted a claw-back rule for 1031 exchanges when the sale property is in the State of California and the replacemnet property is in a different state.

Like most states, California does not tax sales of real estate when the taxpayer does a 1031 exchange and rolls the gain over to a replacement property. Typically, when you sell a property in one state and buy in another state (doing a 1031 exchange), the selling state loses the tax revenue that would have resulted from the sale if it were not a 1031 exchange. 

Several years ago California broke with that tradition and revised their 1031 law to hold that when the taxpayer ultimately sells the property in the replacement state in a taxable transaction, the taxpayer must report the original gain to California and pay tax on it. For example, Sue sells a rental property in California and rolls a gain of $100,000 into a property in Denver, Colorado by doing a 1031 exchange. 


Bare Bones Basics of a 1031 exchange

1031 exchanges, at least as we know them today, have been around since 1991. Most people in the real estate industry have heard of them and seem to have a good working grasp of how they work, and what the requirements are. Occasionally we get calls from someone who has not heard of a 1031 exchange, or has no clue what the rules are. So now would be a good time to do a refresher course, if you will, on the basic rules of an exchange.

Rule #1 – Both the Old Property and the New Property must be held for investment or used in a trade or business. Many people think that if you sold a purple duplex, you must buy a purple duplex. This is not the case – you can buy any other kind of investment real estate: you could buy an apartment building, an office building, a warehouse or bare land.


1031 Exchange Deadline Relief Due to Hurricane Ian

1031 Exchange Deadline Relief Due to Hurricane Ian. Photo 257964677 / Hurricane Ian © Felix Mizioznikov |

The IRS has granted special relief for taxpayers whose exchange was impacted by Hurricane Ian. If you are doing a 1031 exchange anywhere in the State of Florida on property that you sold, bought or are buying, or you live in the State of Florida, the IRS has automatically extended your 1031 deadlines. After the closing of the sale of your old property, IRS law requires that within 45 days you give the agent handling your exchange a list of properties you might buy to complete your exchange, and then requires that you complete the purchase of at least one of those properties within 180 days. The Disaster Relief extends these deadlines.


How to Purchase Multiple Properties in a 1031 Exchange

Most investors sell one property and simply replace it with another one. Occasionally, however, an investor wants to buy a number of new properties to complete their exchange. This can make the exchange complicated.

The identification rules of a 1031 exchange provide that you can identify three properties without any limitations. In other words, you could sell your Old Property for $100,000 and identify three new properties for $10,000,000 each, for a total of $30,000,000. This is OK.

If you identify more than three properties, however, the IRS rules change. In this case, the rules require that the total combined purchase price of everything on your list can not exceed twice the selling price of your Old Property. So now, continuing our example, if you identify four or more properties, the total combined purchase price of all of the properties on your list can not exceed $200,000 (i.e., $100,000 times 2).


Multi-Ownership issues in 1031 exchanges?

You and your co-partners, Fred and Sue, have decided to sell the small apartment building that you boght a few years ago. You got it for a steal and you've got a nice profit in it. It's not been on the maket long and you now have a full price offer.
You've always assumed that when you sold this property the three of you would roll into the purchase of another property, but Fred just told you that he wants to take his share and buy a new pickup. Yikes – and now Sue isn’t she so sure that she wants to buy another property. You don’t want to cash out because you’re pretty sure that Uncle Sam will take all your gain in taxes. Maybe selling the building wasn’t such a great idea.