1031 News This Week

Wed
06
Jun

Recent Tax Court Case Affirms 1031 Exchange Intent

A recent 2012 Tax Court case, which allowed a coupleto move into their 1031 replacement property eight months after the purchase, will once again excite those investors who focus on intent, rather than a minimum holding period to qualify for a 1031 exchange.

Section 1031 says that to be eligible to do an exchange, you have to have intent to hold the property as an investment, and if your intent is to hold the property for resale, you're not eligible to do an exchange. The problem with all this is that Section 1031 does not define the terms intent, investment or resale.

A large body of investors and investment advisors hold that if your intent is to hold the property for a profit, then you qualify for a 1031 exchange regardless of the holding period. Over the years we've dealt with attorneys and CPAs who insist that if you have a profit intent, you should be able to exchange a property that you've owned for as little as a day or two.

Wed
02
May

Good Record Keeping is Critical if You Have Boot in a 1031 Exchange Transaction

Since this is tax season, it's a good time to remind you that if you have taken boot in a 1031 exchange transaction, it's absolutely critical you keep detailed records with your replacement property records.

"Boot" is what the IRS and the tax community calls the taxable part of an exchange. Boot typically arises when you buy down or take cash out of the exchange. The reason that records are so critical in this situation is that when you have boot, depreciation recapture is the first thing taxed, which reduces the future amount you have to recapture. Unless you keep track of the fact that you've already recaptured this amount in your records, and carry this notation forward from year to year until you sell your property, you could easily end up paying this tax again.

Wed
17
Aug

Current Related Party Rules for 1031 Exchanges

Section 1031 law does not allow you to sell a property to, or buy a property from, a related party if your motive is tax avoidance. But the basic rule is so vague and ambiguous that it leads to a lot of calls from clients and inquiring potential clients wondering what they can or cannot do when the parties are related. 

First, let's define what a related party is; who is "related" to you?

The code defines a related party as someone that is closely related to you by blood: your parents, grandparents, kids and grand kids. It also includes your brothers and sisters, and of course, your spouse. Nieces, nephews, aunts and uncles, to name a few are, for our purposes, not related to you. 

Wed
06
Jul

Using 1031 Exchanges as Part of Your Estate Plan

Very few people think of 1031 exchanges as anything other than a vehicle to defer taxes from the sale of a current property to a future property. However, Section 1031 can be a very powerful estate-planning tool that allows you to transfer a substantial part of your estate to your heirs tax-free. This article shows you just one way of doing this.

Let's say Fred and Sue are selling a small rental property for $500,000. They plan on buying a much larger rental property for $1 million and they begin transferring some of their wealth by having their adult children participate with them in the purchase. 

If you want to avoid paying tax when you do a 1031 exchange, you must buy a new property at least equal in price to that of the old property sold. The key concept here is that Fred and Sue buy only half of the new property while their kids buy the other half. So after their exchange, what they've done looks like this: 

Wed
01
Jun

Another Nail in the 1031 Fix-and-Flip Coffin

Whether a person can do an exchange on a fix-and-flip property (one that's been bought, fixed up, and put back up for sale) is a controversy that comes up from time to time--driven of course by taxpayers who have large profits on property they've owned for a very short period of time. We last saw a lot of interest in them when the real estate market was at the peak of the bubble. We're seeing it again as folks buy foreclosure properties, fix them up and put them back on the market.

Wed
01
Dec

Consult Your Crystal Ball and Read Your Tea Leaves

 

Tax Planning for Real Estate Sales at the End of 2010

I write this just before Congress returns for a short lame-duck session before adjourning for the Christmas holidays. That’s not much time to address all of the issues that were postponed in the frenzy leading up to the elections. The purpose of this article is to try and give you some guidance on what to expect and how best to plan for your year-end real estate transactions.

First some background: the Bush tax cuts expire at midnight on December 31. If the cuts aren't extended, the capital gain rate will automatically increase from 15% to 20% on January 1st. Tax brackets, especially the top brackets, will also be increased. For the tax brackets and the capital gain rates to stay the same, Congress will have to take some action.

Wed
18
Aug

How Basis and Gain Work in a 1031 Exchange

Probably the hardest concept for clients to grasp is why, if they get money back in a 1031 exchange, it's taxable. They don't understand why they have to pay tax on what they see as their own money–money that they've already paid tax on.

To explain this, let me use an actual client situation: Fred bought a foreclosure property from the bank last year for $90,000. Since it was a foreclosure, things were moving fast, so Fred used cash from his savings account to purchase the property.

Wed
04
Aug

Using 'Disregarded Entities' in a 1031 Exchange

One of the basic rules for holding title to property in a 1031 exchange is: "how you hold title to your old property is how you have to take title to your new property." This means that the title to the new property has to be taken by the same tax return that held title to the old property. For example, if Sue owns her old property in her personal name, she cannot have her corporation take title to her new property: the tax return that owns the old property (Sue's) is a different entity from the tax return that will take title to her new property (her corporation's). This exchange will fail.

Wed
07
Jul

A Reverse Exchange Primer

For the first time in a couple of years, we’re starting to get more calls about reverse exchanges.  To me, this is a positive indicator that things are slowly starting to get better in the real estate industry. It means that buyers are actually confident enough that we’ve hit bottom, and they’re willing to go on the hook to purchase new property when they still haven’t sold their old property.

Since it’s a hot topic again, and since there are several different types of reverse exchanges, now is a good time to do a quick primer on what reverse exchanges are, how they work and what options are available to you, the investor.  

Wed
10
Feb

Have Your Cake and Eat It Too

 

Sell the property, defer the tax and keep some tax-free cash

1031 exchanges are wonderful things with lots of nuances most people don’t know about. One of those is the fact that you don’t have to do an exchange on the entire sale. Let me show you how to take that little nuance and use it to get some cash out of your sale without paying tax.

Let’s start with the assumption that you’re selling your rental duplex for $500,000. You have a substantial gain on this property and you want to buy another property with the proceeds. You intend to do a 1031 exchange so that you don’t have to pay tax on the gain, but you would really like to take some of that cash out to pay off one of your credit cards, or maybe even buy a car.

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