1031 News This Week


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...


Where’s Your Pooled Exchange Account Invested?

If your exchange account isn’t in a separate account, do you know what it’s invested in? Last week one of the largest title companies in the United States filed for bankruptcy. While that may not be surprising is this time of trouble for the real estate industry, what was surprising to most people is that this was a $1.5 billion (with a B!) publicly held company that was brought down by its' 1031 exchange operation.

I’m adamantly against pooling, yet most intermediaries pool their client’s money. By pooling, I mean the placing of all the client’s 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.

...what WAS surprising is this was a $1.5 billion (with a B!) publicly-held company brought down by its’ 1031 operation...


Section 121 - Congress Limits Gain Exclusion on the Sale of Some Primary Residences

When Congress passed the Housing Assistance Act of 2008 a few months ago, their goal was to help those people who were losing their homes in foreclosure. One of the side affects of the bill, however, was a change that could effect taxation on the gain from the sale of your personal residence.

IRS law excludes $250,000 of the gain from taxation if you're single, and $500,000 if you're married, when you sell a primary residence you've lived in for at least two years of the last five years. This is so even if a portion of the gain was rolled over into the property in a 1031 exchange transaction.

...This new law penalizes you for the time your property was not your primary residence...


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...


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