1031 News This Week

Sat
03
Sep

Partnership and LLC Issues In 1031 Exchanges

One of the requirements of a 1031 exchange is that the entity that sells the Old Property must be the same entity that acquires the New Property. Where the property is owned by a partnership or a limited liability corporation (LLC) with multiple partners, that entity is viewed as the exchanging entity.

A common question posed to our firm involves situations where the property is being sold, but one or more of the partners wishes to take their share of the cash and pay the tax, while the rest of the partners want to stay in real estate and desire to do a 1031 exchange. Let's use the FGH Partnership as an example where F, G, and H each own an equal one-third interest in the partnership. The partnership has entered into a Purchase and Sale contract to sell the Old Property. F and G wish to stay in real estate and have decided they want to do a 1031 exchange. H, however, has decided that it's time to cash out and wants his share of the cash.

Sun
07
Aug

Why 'flipping' won't work in a 1031 exchange

In a real estate market that is moving as fast as Florida's, "flipping" property seems to be the favorite pastime for many people. Flipping is when you buy a property with the intent of selling it very soon after the purchase. But can you do a 1031 exchange and defer the gain in a flip situation?

In order to qualify for a 1031 exchange (which rolls the gain from the sale of the old property to the new), both properties have to be held as an investment or used in a trade or business. Held for investment refers to intent to hold the property for future appreciation. Used in a trade or business means income producing, like rental property. In a flip, you've never rented the property, so it's not income producing. So the question really is, "Did you hold it for investment?"

Wed
06
Jul

Are Contracts Exchangeable?

 

The “Contract Question” provides more questions than answers...

In certain areas of the country, real estate prices have been skyrocketing. It is not uncommon to see properties double in price over the course of a year -- even before the builder has completed construction! This phenomena has created a situation we are seeing more and more in the 1031 exchange business. Many investors are getting property under contract (pre-construction) and selling that contract prior to closing on the purchase at a substantial profit. In this situation, can they perform 1031 exchange?

As an example, Ivan Investor sees a new condominium development planned for completion in about a year and a half. Ivan plans to buy a unit and rent it out once it is completed. So, Ivan gets a unit under contract for a purchase price of $300,00

Sun
05
Jun

What is a “Reverse” 1031 Exchange?

A 1031 exchange is a valuable tax shelter when you sell investment or business property. Instead of just selling, you take the money you had invested in your Old Property and reinvest in a New Property ("exchanging" the Old for the New) through a Qualified Intermediary (or Q.I.), following I.R.S. guidelines.

Pay attention to the term "New." To complete a 1031 exchange that will qualify under the rules, you have to acquire a property that is new to you -- meaning, you can't apply your sale proceeds to a property you already own, or even a property that you have owned any time in the past 18 months. This means you can't have an exchange if you ever own the Old and New Properties simultaneously.

Thu
05
May

The "Year-and-a-Day" Rule: Great advice, but it's not The Law

Recently we encountered a great deal of confusion concerning 1031 Exchanges and the so-called "year-and-a-day" rule. You've probably heard that you should hold both your Old and New Properties for at least a year-and-a-day prior to and after completing a 1031 Exchange -- and this remains sound advice.

However (and this is a HUGE "however") THE "YEAR-AND-A-DAY RULE IS NOT THE LAW. Nowhere in Section 1031, the regulations, tax court decisions, or any other authority will you find any mention of a "year-and-a-day" rule. The "year-and-a-day" rule is only a guideline divined from a few Tax Court decisions, a non-binding IRS ruling stating that holding property for at least two years in a particular instance was fine, and common sense considerations - for instance, long-term capital gains kick-in after holding property for a year.

Sat
05
Mar

Can You Exchange the Converted?

 

A NonReligious Look at 1031 Exchanges and Apartment-Condo Conversions...

Apartment-condominium conversions have become a very lucrative way to make money in real estate these days. They are very popular in resort areas as people see that individual condominiums are worth more as separate units as compared to a single apartment building for rent. In addition, investors and developers are converting office buildings for rent into office condominiums for similar reasons. However, a question we are frequently asked by our clients is whether such a conversion will qualify for a 1031 exchange. The short answer is "maybe," as long as they are structured properly

Wed
02
Mar

“Fix-and-Flips” ...Exchangeable? or Audit-Fodder?

A couple of months ago, you discovered a real diamond-in-the-rough -- a good house in serious disrepair. Upon closer inspection, you realize that all of the problems are merely cosmetic. With a little money and hard work, this ugly duckling can become a beautiful, and highly lucrative, swan.

So, you acquire the property, perform your work, and a couple of months later, you list the property for sale. Happily, you soon receive a full-price offer-- netting you a sizeable profit! Not so happily, you discover that short-term capital gains taxes will eat a huge chunk of your earnings! What to do?

Take heart - all is no lost. You may be able to do a 1031 Exchange. However, a "fix-and-flip" must be structured in exactly the right manner to potentially qualify for a 1031 Exchange. And, even then, performing a 1031 Exchange on a "fix-and-flip" is a risky proposition because of the very nature of the "flip," or quick resale.

Tue
01
Mar

Everything's Relative ...except in 1031 exchanges

One of the trickiest rules to figure when structuring a 1031 exchange is the rule involving exchanges between related parties. Can you defer capital gain taxes with an exchange if you sell a property you own to a relative? What if you sell your property to a third party but buy your replacement property from a relative? What if you and a relative wish to swap properties? The answer to all these questions is .....sometimes. The reason for that cop-out answer is because the IRS is a little unclear about when it will and will not allow a related party exchange.

So, what is a related party? In IRS terms, a related party includes certain blood relatives (like siblings and children), spouses, and business entities you may own, like corporations or partnerships.

Tue
01
Feb

The Mystery of the 1031 Holding Period

 

Is there a holding period for property involved in a 1031 Exchange?

This may be the single-most asked question we hear in the 1031 Exchange business. Exchangers have a suspicion that there’s a “holding period” requirement for exchanges – meaning, that they have to “hold” (own) a property for a certain time period before or after doing an exchange, in order to qualify. In truth, these people are both right and wrong.

They’re right in that the amount of time a property is owned – both the Old (or Relinquished) Property and the New (or Replacement) Property - is a major factor in determining whether a property qualifies for exchange.

However, they’re wrong in thinking that the issue comes down to an official time period.

Tue
28
Sep

IRS extends 1031 deadlines due to a RARE special circumstance

In a VERY rare move, the IRS granted deadline extensions to some taxpayers for their 1031 exchanges. The IRS granted the extensions due to the hardships caused by Hurricane Charley and Tropical Storm Bonnie.

The IRS doesn't make the rules, but is required to enforce them. It's like a traffic cop monitoring people evacuating an area where a storm is approaching; he can't change the speed limit, but he can choose to extend grace to victims by not writing the ticket. In this special circumstance, the IRS has chosen not to enforce tax deadlines in 26 select Florida counties.

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