Articles

Thu
16
Jun

Turning 1031 Exchange Property into Your Personal Residence

Submitted by Gary Gorman on Thu, 06/16/2016 - 17:28

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.

Mon
23
Jun

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

Submitted by Gary Gorman on Mon, 06/23/2003 - 01:00

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.

Mon
15
May

The Future of 1031 Exchanges In A Trump Congress

Submitted by Gary Gorman on Mon, 05/15/2017 - 13:27

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. 

Thu
16
Jul

California puts teeth in their 1031 exchange claw-back rule

Submitted by Gary Gorman on Thu, 07/16/2015 - 01:00

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. 

Tue
16
Sep

1031 In a Nutshell

Submitted by Kim Bicket on Tue, 09/16/2014 - 15:21

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.

Tue
16
Sep

Bare Bones Basics of a 1031 exchange

Submitted by Gary Gorman on Tue, 09/16/2014 - 16:04

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.

Tue
02
Sep

How to Purchase Multiple Properties in a 1031 Exchange

Submitted by Gary Gorman on Tue, 09/02/2003 - 01:00

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).

Wed
17
Jun

Multi-Ownership issues in 1031 exchanges?

Submitted by Gary Gorman on Wed, 06/17/2015 - 01:00

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.

Wed
28
Nov

“Drop-and-swap” Problems with 1031 Exchanges

Submitted by Gary Gorman on Wed, 11/28/2007 - 01:00

Structuring transfers of property for partnerships or limited liability companies without running afoul of the 1031 exchange rules can present problems. It's a common problem because you seldom can get all of the owners of a property to agree on the same course of action.

For example, Fred, George and Howie are equal partners in the FGH Partnership, which owns an office building they are under contract to sell. George and Howie want to sell the property, take their share of the proceeds and pay the tax. Fred, on the other hand, wants to do a 1031 exchange into a small apartment building he's found.

Thu
01
May

Clearing Up Confusion about Debt in a 1031 Exchange

Submitted by Gary Gorman on Thu, 05/01/2003 - 01:00

Saving tax money can be a complicated process. Although confusing, understanding IRS Code Section 1031 is worth it! 1031 exchanges can provide significant savings on capital gain taxes.

An exchange connects the sale of an old property and the purchase of a new property to postpone taxes. Exchanges are great for investors who are selling investment property that has increased in value or has been depreciated for tax purposes.

Unfortunately, legal and tax experts are oftentimes confused about these IRS rules. Much of the confusion comes from the relief (payoff) and replacement of mortgage debt on exchange properties.

The common misunderstanding about debt is that the investor must replace 100% of the debt held in the old property by taking on an equal amount of debt against the new property. This is incorrect. The solution lies in a thorough understanding of two tax themes addressed in The Code – taxable cash and taxable debt relief. 

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