1031 News This Week


Capitalize on the Current Real Estate Market with a Reverse Exchange

With a typical 1031 exchange, you can sell your investment property without paying taxes when you purchase another investment property of equal or greater value. But, there's a hitch - you must sell your old property before you buy your new property within a strict 180-day time frame - in order to qualify for a 1031 exchange.

What happens if you need or want to purchase the new property before selling the old property? For example, you run into a delay on the sale of your old property or you want to take advantage of a down market to invest in foreclosed properties while you're waiting for the market to ramp back up - but you're not ready to sell your current property's? This is where the reverse 1031 exchange comes in.

...Sophisticated investors are using reverse exchanges to make purchases now, when the market is slow and prices are low...


Cost Segregation Studies and 1031 Exchanges

Coming from my background as a CPA, and making my living in the real estate industry, I’m amazed that more of my clients don’t have cost segregation studies done on their properties. If you are one of the vast majority of property owners who’ve never heard of a cost seg study (as they are called), or don’t know what one is, you should take a look at this great tax benefit.


Using 1031 Exchanges to Shift Gains Between Tax Years

As we start to wind down towards the end of the year, now is a good time to point out that 1031 exchanges are a great vehicle to use in shifting gain between two tax years. For example, if Fred and Sue sell their purple duplex on December 1, 2008, their 45-day identification deadline for their exchange is January 14, 2009. Section 1031 of the Internal Revenue Code requires that they send a list of potential acquisition properties to their intermediary no later than, in this example, this date. Failure to do so will terminate their exchange, causing the gain from the sale of their purple duplex to be taxable.


How Owner Carry Notes Impact 1031 Exchanges

In this current climate of lender uncertainty, we’re getting a lot of questions about “owner carry” notes and how they impact a 1031 exchange. Whether you call it seller financing, contract for deed or purchase money mortgage, what we are talking about is the amount of financing the seller of a property is willing to help the buyer with.

Let’s say that you are selling your investment property for $100,000, and the buyer of your property is able to put up $80,000 in cash (whether from a loan, his own funds or both), but the buyer needs you to carry back the difference of $20,000. You want to do a Section 1031 exchange, but you’re uncertain how the $20,000 note would affect it.


Uncertain Times: Planning Your Real Estate Tax Alternatives

These are crazy, uncertain times. If you’re selling a property, do you know what to do? Do you sell it and pay the tax, or do you roll the dice on a 1031 exchange? Is this a once-in-a-lifetime opportunity to take your gain at a low tax rate (as low as we may see for awhile)? Or is paying the tax simply a waste of money? What if I told you there is a way to take the guesswork out of your decision?

As I write this, McCain and Obama are neck and neck in the race to see who will be the next President of the United States. The one who wins will probably be the one who is able to sway the greatest number of undecided voters to his side. Typically the undecided don’t make up their minds until the last minute, which means that this race looks like it could go down to the wire.


Short Sales and 1031 Exchanges

It seems that every time I turn around, I hear the term “short sales” in connection with real estate. I hear talk of them in the locker room at the gym; I read about them in the newspaper, and I see them on the Six O’clock News. Since short sales are the big topic of conversation right now, naturally we’ve been getting a lot of calls from investors who want to know if they can, or should, do a 1031 exchange in a short sale situation.

Just so we’re all clear on what I’m talking about, a ‘short sale,’ as I use it here in connection with real estate, is ‘the sale of a property for less than what is owed to the bank.’


Where's Your Commingled Exchange Account Invested?

Interest rates on separate exchange accounts are currently in the toilet. So it’s not surprising that taxpayers who are doing 1031 exchanges are intrigued with Qualified Intermediaries that offer a high rate of interest on their exchange accounts. But how are they earning those rates? If you use them to do your exchange, what will they be investing your money in? Will you even know where your money is?

Most intermediaries commingle their client’s money. By commingle, I mean the pooling of all the clients’ exchange funds into one account. The benefit of pooled accounts is that the intermediary is investing a larger amount of money, and is therefore able to obtain a greater return. Just look in the business section of your Sunday paper: you’ll notice the difference in interest rates on $1,000 invested in a money market account versus $1 million invested in a CD.

...A 1031 exchange is a relatively short-term event, but losing your money could be forever...


IRS Issues Vacation Home Ruling

The IRS has just issued a new ruling that sets forth the guidelines for those taxpayers that wish to do a 1031 exchange involving a vacation home. While I believe that the IRS intends that the ruling will put to bed all of the controversy surrounding this issue, it will certainly create more controversy than it settles.

By way of background, you can only exchange property held for investment or used in a trade or business. Personal use property, such as a residence, does not qualify for an exchange; so the question is: are vacation homes investment property or personal use property? Up until last year there was no guidance from the IRS that said that vacation homes do not qualify for an exchange, but that changed when the U.S. Tax Court disallowed a taxpayer’s exchange from one vacation home into another.


How I Handle My Vacation Home So That I Can Do A 1031 Exchange

After a recent Tax Court ruling that disallowed one taxpayer's 1031 exchange of his vacation (or "second") home, I've seen articles on this topic that range from "this was a bad ruling, so ignore it," to "the sky is falling and you can no longer 1031 vacation homes under any circumstance."

So can you exchange a vacation home? For those of you who are not familiar with this controversy, let me summarize the issue: Section 1031 allows the deferral of the gain from one investment property into another. Properties held strictly for personal enjoyment do not qualify. The question is, "Are vacation homes held for investment, or for personal enjoyment?” The Tax Court ruling clarified that vacation homes held strictly for personal enjoyment do not qualify. The trick then is to differentiate your property from purely personal enjoyment, and cast it, or document it, as investment property.


Security of Funds One of the Biggest Issues Facing 1031 Exchanges

Security is the big issue for those investors doing 1031 exchanges. There have been a lot of stories in the news lately about intermediaries who’ve taken their clients’ exchange funds. All of the bad things that happen with exchange accounts stem from commingled accounts, rather than separate exchange accounts. Yet few intermediaries place each exchange client’s money in a separate account for them; commingling is the industry standard.

When “commingling,” all of the exchange funds are placed in a single account rather than in a series of multiple, or “separate,” accounts set up for each client. The primary reason that intermediaries commingle is to maximize their personal return on your money – they earn a large return and pay you a small portion of it. With a separate account you get all the earnings from the account.


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