1031 News This Week


What Does The IRS Look For When They Audit a 1031 Exchange?

We get this question all the time, "What will the IRS look for if they audit my exchange?" A 1031 Exchange is reported on form 8824, "Like Kind Exchanges," and attached to the taxpayer's tax return. Section 1031 of the IRC actually has two parts, real estate and personal property exchanges. Regarding real estate, a 1031 exchange joins together the sale of Old Property with the purchase of New for the purpose of deferring taxes. In today's appreciating real estate market, the deferred tax savings can be significant, so rest assured the IRS will examine the whole transaction in an audit, not just numbers and dates.


New IRS Ruling Impacts Arizona Real Estate and 1031 Exchanges

The IRS Recently Issued a ruling that is bound to impact Arizona real estate and 1031 exchanges. Revenue Procedure 2002-69 says that a husband and wife, who own all of the shares of a limited liability company (usually called an "LLC") in a community property state (ie: Arizona), will be able to disregard the separate nature of the LLC and report all of the income and expenses in their personal return.

Until now, the IRS has refused to rule on whether a husband and wife who own all of the shares of an LLC constitute a "single member" for purposes of the "disregarded entity" rules for filing a return. If an LLC has only one member, the disregarded entity rules state that the LLC does not have to file a tax return, but may instead report all of its income and expenses in the tax return of the sole member.


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.


IRS Issues ANOTHER Ruling on Using Exchange Funds to Build on Property You Already Own

This article remains posted for it's historic context only -- some info herein is outdated.

Recently I wrote an article analyzing a private letter ruling (PLR 200251008), released at the end of last year (Using 1031 Funds to Build on Property You Already Own, Colorado Real Estate Journal, July 16, 2003). This decision allowed a taxpayer to use exchange proceeds from the sale of one property to build improvements on a piece of land that they already owned.

This ruling came as a shock to the exchange industry because it completely departed from a major 1951 tax court case (Bloomington Coca-Cola v. Commissioner) that disallowed such a scheme. Now, within a few months of the first ruling, the IRS has released a second ruling (PLR 200329021) that again allows a taxpayer to use exchange proceeds to build on their own land.


What You Need to Know to Teach a One Hour 1031 Exchange Class

The 1031 Exchange area is so broad that you could spend days teaching the details of the topic. Most of you, however, want to simply introduce the topic to your students, and you should be able to do that adequately in about an hour. This article gives you an outline and the basic concepts that will let you do just that.


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).


Using 1031 Funds to Build on Property You Already Own

One of the long standing beliefs of a 1031 exchange is that you can not use exchange proceeds from the sale of your Old Property to build a building on land that you already own.

However, the IRS has just issued Private Letter Ruling 200251008 which blows that belief out of the water. Better than that is the rumor, as I write this article, that there is another ruling that will soon be issued that amplifies this ruling and its conclusion.

Using this Ruling as guidance, here is how you can now structure a transaction so you can do exactly what you want: use exchange proceeds from the sale of another property to build on land you already own.


Should You Take Advantage of the New Capital Gain Rates, or Do a 1031 Exchange?

Now that tax rates on capital gains have dropped to 15% (from 20%), a lot of our clients are wondering whether they should just pay the tax or do a tax-deferred exchange when they sell their property. If you do not want to buy another property, or if you are selling bare land, then perhaps paying the tax may be the route for you. On the other hand, if you are going to buy another property, or if you’ve depreciated your old property, it probably makes more sense to do an exchange.


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.


IRS Ruling Gives Guidance on Contract Notes for a 1031

In today’s economic environment, an increasingly common question we get is how to structure a 1031 exchange for the seller of a property when the buyer wants the seller to carry back a contract in connection with the sale. We started advising our clients on this very issue over five years ago—this year the IRS said we were right!

Say you are selling your property, which is free and clear, for $200,000. The buyer offers to pay $50,000 at closing and wants you to carry a contract for the balance of $150,000. You have a $75,000 gain on this transaction and would prefer to do a 1031 exchange and want to know the procedures.


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