Articles

Tue
14
Jul

1031 Exchanges and Partnership Challenges

Submitted by Mary Lou Schwab on Tue, 07/14/2020 - 07:18

Partnerships holding real estate investments face major challenges when some partners want to do a 1031 exchange while others want to cash out at the sale. But there are a number of options that can allow all the partners to get what they want. Timing and planning are required to meet both the IRS partnership and 1031 exchange rules. Here are just a few of those strategies:

1. The Drop and Swap Method. Real estate investment partnerships can be distributed to the partners as a separate “tenancy in common interest,” and the partnership entity is dissolved. Property is then held for at least a year prior to the sale and each tenant in common owner can either cash out or participate in individual 1031 exchanges. There are stringent IRS tenant in common ownership requirements that must be met per Revenue Proc 2002-22, including annual management agreements.

Wed
02
Aug

Reviewing the 1031 Identification Rule

Submitted by Gary Gorman on Wed, 08/02/2017 - 12:44

 

Section 1031 is an IRS code section that lets you defer tax (in some cases a LOT of tax). Of course, they don’t make the deferral easy, but it's not impossible, either.

One of the rules that causes a lot of angst, especially in a fast-moving real estate market like we have now, is the requirement that within 45 calendar days you must identify a list of properties you might want to buy. Whatever you buy to complete your exchange must be on this list. The identification is made on a form provided to you by your Qualified Intermediary (the 1031 specialist that the law requires you use to guide you through this process).

Tue
09
May

Can I 1031-Exchange My Tiny House?

Submitted by Gary Gorman on Tue, 05/09/2017 - 00:00

Wikipedia defines a small house as one ranging from 400 to 1,000 square feet.  A tiny house is one that is less than 400 square feet.  Do people really live in spaces that small? Actually, yes – and they’re more common and popular than you might imagine.  I don’t know if they’ve always been out there and I just never noticed (probably), or if it’s a completely new trend that just popped up and made popular by the numerous TV programs that have sprung up recently.

Wed
04
Oct

Using 1031 Exchanges to Shift Gains Between Tax Years

Submitted by Gary Gorman on Wed, 10/04/2006 - 01:00

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
21
Jul

Structuring Single Purpose Entities in 1031 Exchanges

Submitted by Gary Gorman on Wed, 07/21/2004 - 01:00

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.

Wed
30
Aug

A 1031 Exchange When You Have Negative Equity

Submitted by Gary Gorman on Wed, 08/30/2006 - 01:00

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?

Tue
03
Jul

Have Your Cake and Eat It Too: Converting 1031 Property into Your Personal Residence

Submitted by Gary Gorman on Tue, 07/03/2018 - 14:08

Suppose several years ago you did a 1031 exchange and bought a charming rental property in a nice urban area as your replacement property. Now you’re planning retirement and are considering downsizing, making your rental property your residence. Will the IRS let you? If so, are there strings attached?

...Now you’re considering downsizing. Will the IRS let you? If so, are there strings attached...?

Section 1031 allows you, subject to certain rules, to sell an investment property and roll the gain over to a replacement investment property. The new property must be an investment property, so no – you couldn’t sell your rental and buy a different house that would be more comfortable for you to immediately move into.

Tue
28
Sep

IRS extends 1031 deadlines due to a RARE special circumstance

Submitted by Michael Eloranto on Tue, 09/28/2004 - 01:00

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.

Tue
01
Apr

“Fix and Flip” Properties & 1031 Exchanges

Submitted by Gary Gorman on Tue, 04/01/2003 - 01:00

Several months ago you stumbled upon a
property sorely neglected by its previous owners. Your practiced eye told you that there was a lot of money to be made if you bought the property, fixed the deferred maintenance items and did some basic cosmetic work.
Now you find out that you were right—you’ve received an offer that will return you a substantial profit. But here’s the problem—tax will eat a chunk of your profit—maybe as much as half!

The good news: your buddy tells you about a 1031 exchange and how you can roll the gain from this property to your next one. The bad news? You may not qualify for a 1031 exchange unless you structure the transaction correctly.

A 1031 exchange rolls the gain from the sale of your old property into your new one. Both properties have to have been held for investment, or used in a trade or business, and you only have 180 days from the sale of your old property to get your new property purchased.

Mon
11
Sep

Handling Debt in a 1031 Exchange: It’s Easier Than You Think

Submitted by Gary Gorman on Mon, 09/11/2017 - 11:23

One of the most confusing and misunderstood parts of Section 1031 is how debt is handled in an exchange. Recently some of our clients have had to deal with the pain of overleveraged property and, not surprisingly, want as little a debt as possible when they make a new purchase. And because loans are harder to get right now, some lenders require much larger down payments. The net result is that questions about the required amount of debt on the new property are common.

Someone, after Congress rewrote Section 1031, made the statement that the debt on the new property had to be at least equal to the debt that was paid off on the sale of the old property. History doesn’t reveal to us who first said it, but it has since been repeated so many times it’s now considered ‘fact’ by many exchange professionals, including many CPAs and attorneys.

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