1031 News This Week

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.

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."

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