1031 News This Week


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.


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.


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.  


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.




For 1031 Exchanges

What’s going to happen to 1031 exchanges in 2010?
It seems like every client I talk to wants to know the answer to that question. With some people there’s a growing sense of panic over what that answer might be. They’re eagerly trying to sell their property in what’s clearly a buyer’s market at a time when tax rates are low but are bound to go up. Their worst fear is that their sale will close next year, but at this year’s low price, and after higher tax rates kick in, and after a repeal of Section 1031. In other words, they worry that their smallest possible profits will be eaten up by the largest possible taxes.


IRS Allows Exchange of Leasehold Interests in a 1031

There are different kinds of things that can be exchanged in a 1031 exchange without the payment of tax. Real estate (typically land and buildings) can be easily exchanged for almost any other type of real estate. However, ‘movable things’ like planes, boats, construction equipment, etc. (called personal property by the IRS), have exchange rules that are much more rigid and narrow. For example, an airplane hangar can be exchanged for a fish market or a ski-condo, but the airplane itself can only be exchanged for another airplane.


Using Section 1031 to Buy a House You Want to Live In

The subject of questions I get from clients seems to go in cycles – I won’t get any questions about a particular subject for a long time, and then all of a sudden I’ll get a lot of questions about that subject—and from different parts of the country. Such is the case with the subject of this article: “can you buy a residence as your 1031 replacement property and then move into it?”

Section 1031 rolls the taxable gain from the sale of your old investment property over to your new. The key word here is, “investment.” If you sell bare land and buy a rental house, Section 1031 rolls the gain on the land over to the house.


Speed Bumps: Selling Multiple Properties in a 1031 Exchange

Can you sell multiple properties in a 1031 exchange and roll all the gain into one larger property? A normal 1031 exchange has certain rules, and selling multiple properties doesn’t change those rules. But it certainly presents speed bumps that you’ll need to overcome. Nothing difficult, but things you will need to think about and that will take patience and discipline at the beginning of your transaction.

The first speed bump involves the money. Section 1031 requires that you 1) buy equal or up and 2) that you reinvest all the cash. Equal or up when you’re selling multiple properties means that the New Property’s purchase price must equal or exceed the sales price of all the Old Properties put together. Let’s say you want to sell four single-family rental homes and buy a 10-unit apartment building. If you’re selling each house for $250,000, the apartment building must cost at least $1,000,000 if you want to pay no capital gains tax.


Bankruptcy Court Ruling: 1031 Sub-Accounts Available to Creditors

In a ruling handed down on April 15, 2009, the Court in the LandAmerica Exchange Services (or “LES”) case ruled that exchange proceeds held in sub-accounts were assets available to all creditors.

LES was the 1031 exchange arm of LandAmerica Title Company – one of the largest title companies in the country. LES had about $300 million in a commingled, or “pooled,” account which held the exchange funds for about 400 clients. They also had about $100 million in separate sub-accounts for about 50 clients.

The entire pooled account was invested in auction rate securities until February, 2008 when that market froze, making the account illiquid, which made LES unable to complete 1031 exchanges for clients whose money was locked in that account. This ultimately brought down the entire company (not just LES, but the title company as well).

...They used to say, “we’re too big to fail”–we’ve come to learn no company can say that...


50% Partnership Interest Purchase: ‘OK’ says IRS in a Reverse Exchange

One of the provisions of Section 1031 is a prohibition against buying a partnership interest as the replacement property in a 1031 exchange. This provision assumes that you’re buying the actual partnership “shares” as your replacement property. This makes sense if you think about it since partnership interests are not real estate, (they’re an intangible – like stocks or bonds), even if the partnership-owned asset IS real estate.

As with most things in IRS-land there are exceptions, and the IRS has just carved out such an exception with a private letter ruling issued last month. In PLR 200909008 the IRS ruled that the taxpayer could acquire a 50% partnership interest in a reverse exchange and then subsequently take over that interest to complete their exchange.

...As with most things in IRS-land there are exceptions, like this one issued last month...


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