1031 News This Week


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.


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.


IRS Clamps Down on Commingled Accounts in 1031 Exchanges

The IRS has just released proposed regulations dealing with the treatment of interest earned by Qualified Intermediaries while they hold a client's 1031 exchange proceeds. The goal of these regulations appear to be designed to curtail the practice of holding exchange proceeds in commingled accounts.

In a 1031 exchange, you can't touch the money from the sale of your Old Property, and you are required to use a Qualified Intermediary to hold your money until you purchase your New Property. There are two ways intermediaries can hold your exchange proceeds: they can pool all of their clients' money into a single account (called a commingled account); or they can put each client's money in a separate account.


The Role of Debt in a 1031 Exchange

The role that debt plays in a exchange is probably one of the most misunderstood areas of 1031 law. Many people (including qualified intermediaries, CPAs, and attorneys) believe that you are required to have debt on your New Property in an amount equal to or greater than the debt that was paid off on your Old Property. This is NOT, In fact, a requirement for a 1031 exchange.

The actual requirement is two fold: you must buy equal or up, and you must reinvest all of the cash. Assume for example that you sell a purple duplex for $100,000 and you buy a replacement property for $90,000. You did not buy equal or up; in fact you bought down. As a result, the $10,000 buy-down is taxable—yes, the entire $10,000 is taxable, and you do not apportion any of the original cost of the duplex to this gain.


What Year is “Boot” Taxable in a 1031 Exchange?

Boot is the term that the IRS uses for the part of an exchange that is taxable. Boot generally arises for one of two reasons: the Seller bought down, or the seller did not reinvest all of the cash from the sale of Old Property. Most of the year, it doesn't matter what caused the boot: it's simply taxable. But when a transaction overlaps the end of the year, the year of taxability becomes important.


Predictions of Things to Come for 1031 Exchanges

Around the end of most years I write a column predicting what you are likely to see in the 1031 arena over the following 12 months. I recently spent an afternoon in a meeting with one of the people responsible for Section 1031 of the tax code for the IRS. Based on that meeting, what follows are my predictions of changes to look for during the next year.

Tightening of the requirements for qualified intermediaries -The IRS knows that they have problems with what they call “Accom-modating Accommodators.” These people are qualified intermediaries (QI) who are pretty loose with the requirements of a 1031 exchange. The problems range from these QIs regularly allowing clients to do 1031 exchanges on fix-and-flips, to their allowing clients to change their identification letter after the 45th day. The IRS knows they are out there, but it is not always easy for them to tell who these intermediaries are.


Capital Gains Without Tax

1031 Exchanges allow you to defer the taxes over capital gains generated on the sale of an old property to be exchanged for a new property. Sooner or later, whoever wishes to make money in the Real Estate market in the United States understands that this is a serious mechanism to consider.

Popular wisdom has many proverbs allusive to the details, in which the part that world investments transactions play can hardly be ignore. Sometimes this transactions looks like angels, sometimes like demons. In the case of Real Estate and in the context of the opportunities that real its boom presents in the South Florida area, thousands or millions of dollars can be spared.


More 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, the partnership or LLC is viewed as the exchanging entity.


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.


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?"


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