1031 News This Week

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.

Sat
04
Sep

1031: 101 - Tax-Deferred Real Estate Exchanges for Beginners

The sheer number of investment vehicles available to you these days is absolutely staggering. Stocks, bonds, precious metals, commodities, options, derivatives, real estate, etc., etc., etc. - it can make your head spin! Now, all things being equal, none of these investments are better than any other. If you know what you're doing, you can make money in any of them.

Wed
01
Sep

IRS Approves Delaware Statutory Trusts as a 1031 Exchange Vehicle

One of the basic requirements of a 1031 exchange is you must take title to the New Property in the same way you held title to your Old Property (i.e. the same tax return). For example, if you held title to your Old Property as Fred Jones, you could not take title to the New Property as Jones Investment Corporation because your Old Property was owned by your Federal 1040, whereas the Corporation files a different tax return (which will invalidate the exchange).

Wed
04
Aug

Bifurcating Closings Can Add Flexibility to Your 1031 Exchange

"bi‚fur‚cate: verb, meaning to divide into two parts." "Bifurcate" in real estate terms means to divide into two closings. Bifurcating your closing can result in some serious 1031 benefits for you. In the correct situation it can really supercharge your exchange.

Let's take a hypothetical situation and let me show you how this works: Let's say that you are selling a large piece of land for $10 million. This land is composed of two parcels: one 20 acre and one 30 acre for a total of 50 acres.One of the requirements for a 1031 exchange is that within 45 days you have to identify a list of properties you might buy. If your list has three properties or less, there are no limitations. However, if your list exceeds three properties, you are subject to the "200 Percent Rule" of Section 1031, which requires that the combined total purchase price of everything on your list can not exceed twice the selling price of the Old Property.

Sun
01
Aug

The Reverse Exchange -- A Useful Tool

In a market this hot, if you want to do a 1031 exchange you have quite a dilemma. You would like to exchange your highly appreciated Old Property, but finding replacement property in time is difficult. In a straight 1031 exchange, you have 45 days from the date of sale to identify potential replacement property and 180 days to close the purchase. There are no extensions to these time frames! Property not identified or purchased in time will toast your exchange, and you'll pay tax on the sale of your Old Property.

We're currently in a market where inventory is in short supply, and if you don't act fast, properties are gone. If you're hesitant to sell your Old Property first for fear of not being able to find the perfect New Property in time, consider doing a "Reverse Exchange."

Sun
01
Aug

Six things you need to know about §1031 - Part 6 Equal-or-Up Rule

Section 1031 allows you to roll the gain from the sale of your Old Property to the purchase of your New Property. To do this, you have to jump through certain hoops: we've written previously about how your property has to be held for investment and that it can not be held for resale. We've talked about the requirement to identify potential replacement properties for your exchange and how you have to complete a list of these potential properties within 45 days with the stipulation that what ever you purchase must be on your 45 Day List. We also talked about how your money must be held by an independent third party called a qualified intermediary and how you must make sure that the intermediary holds your money in an account separate from their other exchanges. And last month we talked about the requirement that you need to take title to the new property in the same name or entity that held title to your Old Property.

Wed
21
Jul

Structuring Single Purpose Entities in 1031 Exchanges

What happens to your 1031 exchange if the lender requires that you take title to your New Property in its own separate, single purpose entity -- like an LLC? Will it toast your exchange? Is there a way to salvage the exchange? What are your options?

This is a common problem, especially with commercial properties. From the lenders standpoint, a "single purpose," or "bankruptcy remote" entity makes sense. What the lender is seeking to prevent is another of your properties that might be having problems from dragging down this one good property and putting their loan in jeopardy.

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