1031 News This Week

Sat
07
Apr

IRS Challenges State's Definition of Real Estate in a 1031 Exchange

One of the basic concepts of a 1031 exchange is if something qualifies as “real estate” under state law, it qualifies as “real estate” for purposes of a 1031 exchange. For example, several years ago we were involved in an exchange of an oil and gas pipeline that crossed several states. Whether or not that pipeline was considered real estate depended on the laws of each state. As a result, we ended up with a situation where the portion of the pipeline in one state was classified as real estate, even though it was above ground, while another section of pipeline in another state was NOT considered real estate, even though it was buried in the ground.

In a recently released court case, the IRS challenged a state’s characterization of a property. This is the first time I’ve seen them do this, and it causes me some concern with how some types of exchanges are handled in Colorado.

Wed
07
Mar

Simultaneous Closings Can Save You 1031 Exchange Fees

Rule #4 of my six basic rules for 1031 exchanges is you can not touch the money between the sale of your Old Property and the purchase of your New Property. IRS law requires that you use an independent third party (called a Qualified Intermediary) to handle your exchange. At least that’s the general rule. When you’re dealing with the IRS, there are usually exceptions to the rules, and such is the case with this rule. Being aware of this exception can save you the cost of an intermediary, which runs at least $500 in most parts of the country.

Wed
21
Feb

Narrow Deviation Allowed in 1031 title holding requirement

One of the critical requirements for a 1031 exchange is the same taxpayer must hold title to both the Old and New Properties in the exchange. While the exact amount of time these properties must be held is not defined by the IRS, it is clear that it has to be the same taxpayer, and both properties must be held for investment.

If Fred and Sue, for example, own an apartment building they are selling as joint tenants, and buy a replacement property for their exchange as joint tenants, then clearly the exchange involved the same taxpayers since Fred and Sue were on title for both the Old and New Properties. But what if Fred and Sue wish to protect themselves by putting the New Property into an LLC as soon as they acquire it? Most attorneys would say that was a smart business decision and quickly set up the LLC for them.

...if you have control over a transaction . . . the IRS could view your transaction as a violation...

Wed
01
Nov

1031 Exchanges Involving Your Personal Residence

1031 exchanges involve property you hold for investment, not your personal residence.  So why write an article about doing a 1031 exchange on your personal residence?  Everyone knows that your personal residence does not qualify for a 1031 exchange!  Or does it?

When you sell a residence you’ve lived in for two of the last five years, $500,000 of the gain is tax free if you’re married; ($250,000 if you are single).  This is your personal residence, which does not have anything to do with 1031 exchanges, right?  However it might.  You know the two-of-the-last-five-years rule, but did you ever ask yourself what the property was used for during the other three years?

Wed
04
Oct

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, 2006, their 45-day identification deadline for their exchange is January 14, 2007. 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.

Wed
30
Aug

A 1031 Exchange When You Have Negative Equity

As a result of the current real estate slowdown, we’re starting to see clients selling properties with negative equities.  By negative equity, I mean situations where they might owe more than the property is worth they can sell the property for.  Because of this, some interesting questions arise.  How does negative equity affect a persons ability to do a 1031 exchange?  Can you do an exchange when you owe more than the property is selling for?  Why bother if there is no cash, or if you have to bring cash to the table?

Most people (even many real estate professionals) tend to think of cash as the same as “gain.”  Therefore, according to their thinking, if you don’t receive any cash from a sale, you don’t have any gain.  And if you, as the seller, have to bring cash to the closing, you must have a loss, right?

Wed
07
Jun

What to do when a 1031 exchange overlaps years

Suppose Fred and Sue sell their bare lot on September 30, 2005 for $100,000 and buy a gorgeous red condo on February 15, 2006 for $90,000, completing their exchange. They have bought down by $10,000, and as a result they have $10,000 of proceeds left over. This money is returned to them by their intermediary after the close of their exchange. When is the $10,000 taxable? In 2005 when they sold the land? Or in 2006 when they received the check from the intermediary?

Tue
06
Jun

SIZE MATTERS When Purchasing A TIC (Tenant-In-Common) Interest

The big rage in real estate these days are TIC interests. TIC stands for "tenant-in-common," which is the legal title that these types of interests hold title to property. TIC interests are program investments similar to the partnership tax shelters of the 1970s and '80s, in that they pull together a group of investors to purchase one large property.

There are two major reasons for this great surge in these type of investments: the first is that the IRS approved TICs as suitable replacement properties for 1031 exchanges in 2002. Prior to that date it was uncertain whether a TIC interest could be purchased as the replacement for a 1031 exchange because their structure so closely resembles a partnership. As a result investors were wary of them. Today, however, approximately 70% of the TIC interests are purchased by such investors.

Wed
17
May

Handling Tax Basis in a 1031 Exchange

One area in which we get a lot of questions, is about the handling of basis in a 1031 exchange. The questions go: “When I sell my Old Property, what happens to that basis?” “What about the depreciation I already took?” “If I fully depreciated my Old Property, will doing a 1031 exchange let me ‘freshen up’ my depreciation schedule?” “If I buy the New Property for $100,000, can I depreciate the whole $100,000?” Questions like these all relate back to what happens to the basis of the property when you do a 1031 exchange.

Wed
05
Apr

The Wall Street Journal - REAL ESTATE FINANCE Joint Property Ownership Picks Up

 

Tenant-in-Common Deals Allow Buyers to Chip In On Commercial Properties

-By Jennifer S. Forsyth

 

Cathy Scullin was in a pickle.

Enticed by high prices, the Beverly Hills, Calif., commercial real-estate broker began selling off pieces of her small southern California real-estate portfolio about two years ago. Only then did she realize she couldn't use the profit to buy another property.

"Everything I found needed an enormous amount of work and, in my opinion, was way overpriced," says Ms. Scullin. If she didn't reinvest in real estate quickly, she would have to pay capital gains taxes on the proceeds.

Her solution: a Tenant-in-Common transaction, where she joined a group of investors who each bought a fractional share of investment property--in this case a small retail center.

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