Articles

Fri
05
Jun

SOLD! Tax Strategies for Selling Vacation Property

Due to economic factors or life changes, investors who have held vacation rental property for many years can face significant tax liabilities when they sell it. Federal long term capital gain tax rates can be anywhere from 15 to 20%. The unearned income tax rate is 3.8%, and a depreciation recapture at 25% could be incurred. Additionally, state tax rates will also apply. Adding it all up, a potential tax liability upwards of around 39% can come as a rude surprise for most investors. 

So what other options do investors have to limit or defer their tax liability? One option is to convert the use of the property into your primary residence. Another is to do a 1031 Exchange.

Fri
10
Apr

§1031 & Corona Virus Update

Happy Good Friday 1031 Clients and Friends! I hope this email finds you well.

Good news: the IRS has granted extensions for 1031 Investors who have like-kind exchange deadlines between April 1, 2020 and July 15, 2020. The IRS issued new guidance on April 9, 2020 that granted all taxpayers, including “trusts, estates, corporations and other non-corporate tax filers” a filing extension until July 15. Notice 2020-23: https://www.irs.gov/pub/irs-drop/n-20-23.pdf is an update to Notice 2020-18.  The new Notice 2020-23 doesn't address like-kind exchanges specifically, but tax experts agreed they are covered under the broadening of the extension. This give investors with a 45-Day identification deadline or a 180-Day Exchange Purchase deadline between April 1, 2020 and July 15, 2020 an automatic extension to July 15, 2020.

Mon
06
Apr

Allowable and Unallowable 1031 Exchange Closing Costs

There are always issues with closing costs associated with 1031 exchanges. All exchangers want to have their closing costs paid with 1031 proceeds without creating a taxable event. Some closing costs paid by exchange proceeds are allowable by the I.R.S., while others are taxable. The I.R.S. Revenue Ruling 72-456 specifies, for example, that if exchange funds are used to pay a broker’s commissions, it does not ruin a 1031 exchange. 

Here’s a list of specific exchange expenses that are allowed by most tax advisors:

Wed
01
Apr

Working Through the Crisis

The 1031 Exchange Experts, LLC & COVID-19

Working Through the Crisis

We must face a harsh fact: it’s a scary time.

We’ve recently fielded lots of calls with concerns about the economic situation caused by this worldwide pandemic. We hear them, and we feel them.

Fear is normal in times like these, and to be realistic, the unexpected is still ahead. That can be paralyzing. But we should take heart: EVERY challenge America has ever faced was unexpected, unwritten, and unique to world history. And we have overcome.

Fri
02
Aug

How to Rescue a Multiple-Property Exchange

Sometimes an investor exchanging multiple Old Properties into a single New one can have timing issues if one of the sales falls through. For example: say an investor begins the 1031 exchange process by selling two Old Properties, but one of the sales falls through due to an inspection or mortgage loan issue. If this failure happens right before the New Property purchase date, it can cause major dilemmas.

But there’s a solution! To gain an extra 180 days to complete the sale of the Old Property you can set up a Reverse Exchange within a simple deferred exchange transaction, thus saving your exchange!

Mon
01
Jul

Dealer-Developer Issues Can Jeopardize Your 1031 Exchange

If you do a number of 1031 exchanges every year, you should be aware of the Dealer/Developer issues. To qualify for a 1031 exchange, a taxpayer must be able to prove their “intent” at the time of purchase was to hold the property for investment.

According to the I.R.S., real estate held as “stock in trade or other property primarily for sale” is excluded from the tax benefits of Section 1031. Listed here are some factors the IRS uses to determine if there was intent to hold property for investment:

• Length of Ownership The nature and purpose for buying the property.

• Consistent with Investment Activity Has the tax-payer’s investment income and expenses on tax returns been consistent with investment activity? (It’s a good idea to NOT file a Schedule C for the 1031 property, or classify it as “inventory” or “held for development.”)

Mon
10
Jun

1031 EXCHANGES vs. Qualified Opportunity Zone Investments

The Tax Reform Act of 2017 created “Qualified Opportunity Zones” to promote investments in low income communities across the United States. The Qualified Opportunity Fund, or, “QOF,” was created to give investors capital gains tax reduction or elimination to encourage economic growth in specific areas. There are two similarities between QOFs and 1031 Exchanges: 1. they’re both tax-gain deferral strategies (and sometimes even tax elimination!), and 2. the investments must be made within 180 days from the sale of the Old Property. There’s where the similarities end. If a taxpayer decides to invest in a QOF after starting a 1031 Exchange with a Qualified Intermediary, the access to the 1031 proceeds is limited until one of two things happen: 1. If no replacement 1031 property is identified by the investor by the forty-fifth day of the exchange, the funds can be released on the forty-sixth day of the exchange. OR 2.

Mon
06
Aug

Can You 1031 Exchange A Fix and Flip Property?

Once again, it seems that many real estate investors are buying distressed properties, fixing them up, and putting them back on the market right away. And then they call us and want to do a 1031 exchange and roll the gain over into the next property. But can they?

To qualify for a 1031 exchange, (which rolls the gain from the sale of the Old property to the New), both properties have to be held as an investment or used in a trade or business. Held for investment means holding the property for future appreciation. Used in a trade or business means income producing, such as used in a business or used as a rental property. Typically with a fix and flip, you’ve never rented the property, so it’s not income producing. So the critical question then becomes: “did you hold it for investment?”

Tue
03
Jul

Have Your Cake and Eat It Too: Converting 1031 Property into Your Personal Residence

Suppose several years ago you did a 1031 exchange and bought a charming rental property in a nice urban area as your replacement property. Now you’re planning retirement and are considering downsizing, making your rental property your residence. Will the IRS let you? If so, are there strings attached?

...Now you’re considering downsizing. Will the IRS let you? If so, are there strings attached...?

Section 1031 allows you, subject to certain rules, to sell an investment property and roll the gain over to a replacement investment property. The new property must be an investment property, so no – you couldn’t sell your rental and buy a different house that would be more comfortable for you to immediately move into.

Sun
01
Apr

A 1031 Exchange Could Save You a Ton of Tax!

I'm constantly amazed at how many millions, probably billions, of dollars are paid in taxes each year by people who could avoid all of the tax on the sale of their property by taking a few simple steps. Section 1031 is such a beneficial part of the Internal Revenue Code that it’s a shame most tax and legal professionals don’t know about it. And many of those who are aware of it don’t really understand it.

Section 1031 is a code section—its law, not some theory or gimmick. It allows you to roll the gain from the sale of your “old” investment property into the purchase of your "new" investment property. In other words, you defer the gain until some point in the future when you are ready to pay the tax. And yes, there are ways that will result in you having to never pay the tax.

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