Articles

Wed
28
Nov

“Drop-and-swap” Problems with 1031 Exchanges

Submitted by Gary Gorman on Wed, 11/28/2007 - 01:00

Structuring transfers of property for partnerships or limited liability companies without running afoul of the 1031 exchange rules can present problems. It's a common problem because you seldom can get all of the owners of a property to agree on the same course of action.

For example, Fred, George and Howie are equal partners in the FGH Partnership, which owns an office building they are under contract to sell. George and Howie want to sell the property, take their share of the proceeds and pay the tax. Fred, on the other hand, wants to do a 1031 exchange into a small apartment building he's found.

Mon
06
Apr

Allowable and Unallowable 1031 Exchange Closing Costs

Submitted by Mary Lou Schwab on Mon, 04/06/2020 - 16:00

There are always issues with closing costs associated with 1031 exchanges. All exchangers want to have their closing costs paid with 1031 proceeds without creating a taxable event. Some closing costs paid by exchange proceeds are allowable by the I.R.S., while others are taxable. The I.R.S. Revenue Ruling 72-456 specifies, for example, that if exchange funds are used to pay a broker’s commissions, it does not ruin a 1031 exchange. 

Here’s a list of specific exchange expenses that are allowed by most tax advisors:

Wed
25
Aug

Identification Rules for a 1031 Exchange

Submitted by The Experts Team on Wed, 08/25/2021 - 16:45

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

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

Wed
01
Dec

Using 1031s to transfer wealth tax-free

Submitted by Gary Gorman on Wed, 12/01/1999 - 01:00

A 1031 exchange is a technique that investors commonly use to transfer property tax-free. However, our sophisticated investors are using 1031 exchanges to transfer large amounts of wealth, tax-free to their children.

This is how it works:

Mom and Dad own a building that is worth $100,000 and is free and clear. Finding a new building worth $150,000 the sell their old building and use a 1031 exchange to buy an undivided two-thirds interest in the new building for cash. Their children buy the other undivided one-third interest.

A year or two later they sell the building for $250,000 of which $166,667 is the parents’ two-thirds share with the balance of $83,333 belonging to the children. Both the parents and the children do 1031 exchanges and buy a new property for $400,000 of which $166,667 (or 42 percent) is the parents, and the balance of $233,333 (or 58 percent) belongs to the children.

Mon
04
Feb

How I Handle My Vacation Home So That I Can Do A 1031 Exchange

Submitted by Gary Gorman on Mon, 02/04/2008 - 01:00

After a recent Tax Court ruling that disallowed one taxpayer's 1031 exchange of his vacation (or "second") home, I've seen articles on this topic that range from "this was a bad ruling, so ignore it," to "the sky is falling and you can no longer 1031 vacation homes under any circumstance."

So can you exchange a vacation home? For those of you who are not familiar with this controversy, let me summarize the issue: Section 1031 allows the deferral of the gain from one investment property into another. Properties held strictly for personal enjoyment do not qualify. The question is, "Are vacation homes held for investment, or for personal enjoyment?” The Tax Court ruling clarified that vacation homes held strictly for personal enjoyment do not qualify. The trick then is to differentiate your property from purely personal enjoyment, and cast it, or document it, as investment property.

Thu
01
May

Clearing Up Confusion about Debt in a 1031 Exchange

Submitted by Gary Gorman on Thu, 05/01/2003 - 01:00

Saving tax money can be a complicated process. Although confusing, understanding IRS Code Section 1031 is worth it! 1031 exchanges can provide significant savings on capital gain taxes.

An exchange connects the sale of an old property and the purchase of a new property to postpone taxes. Exchanges are great for investors who are selling investment property that has increased in value or has been depreciated for tax purposes.

Unfortunately, legal and tax experts are oftentimes confused about these IRS rules. Much of the confusion comes from the relief (payoff) and replacement of mortgage debt on exchange properties.

The common misunderstanding about debt is that the investor must replace 100% of the debt held in the old property by taking on an equal amount of debt against the new property. This is incorrect. The solution lies in a thorough understanding of two tax themes addressed in The Code – taxable cash and taxable debt relief. 

Sat
10
Jul

Can "Flips" Work in a 1031 Exchange?

Submitted by The Experts Team on Sat, 07/10/2021 - 18:17
Photo by Anastasia Shuraeva from Pexels

In a real estate market moving as fast as it is right now, "flipping" property seems to be the favorite pastime. Flipping is when you buy a property with the intent of turning around and selling it soon after the purchase. But can you do a 1031 exchange and defer the gain in a flip situation?

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 means you intend to hold the property for future appreciation over time. Used in a trade or business means the property produces income, like rental property. Since you don't rent the property in a flip, it isn't income-producing. So the question is, can a fix-and-flip be 'held-for-investment?'

Fri
28
May

Related Party Rules for 1031 Exchanges

Submitted by The Experts Team on Fri, 05/28/2021 - 12:57

Good properties come on the market but don't last long — sometimes only hours or minutes, and oftentimes there are multiple offers competing against you. As a result, a common question we get right now is, "can I buy a property that is owned by a relative?" Section 1031 law does not allow you to sell property to, or buy property from, a relative if your motive is "tax avoidance." But what does that mean?

Tue
16
Sep

Common 1031 Misconceptions

Submitted by Cody Walkup on Tue, 09/16/2014 - 15:06

In simple terms, a 1031 exchange moves the gain from the sale of an old investment property into the purchase of a new investment property. By moving the gain into a new property, you defer paying tax on that gain into the future.

For example, suppose Jane Doe sells her rental house for $200,000. She bought it five years ago for $150,000. Now using a 1031 exchange, she buys another investment property for $200,000. By following the IRS’s requirements, she is able to transfer all her gain into her new property instead of paying taxes on the sale.

Since the most recent real estate boom, people have become more aware of 1031 exchanges than ever before. Even with this increased awareness, there are still some prevalent misconceptions about this specific section of the tax code. As a 1031 exchange consultant, I hear these misconceptions everyday. Here are the most frequent three I hear:

Mon
27
Apr

Refinancing 1031 Property In An Exchange

Submitted by Gary Gorman on Mon, 04/27/2015 - 13:05

 

To refinance or not to refinance: this is the common question many 1031 exchangers ask.

By refinancing, exchangers are usually hoping to pull money (cash) out of their sale transaction to use for purposes other than investing in new 1031 property.

To answer the question, we need to understand the timing of the refinance. Based on the whether you, the taxpayer, are pulling money from the old relinquished property or from the new replacement property, the IRS has varying positions. 

When refinancing the old property, a key 1031 exchange requirement drives the IRS’ position. The taxpayer cannot receive, touch or control the funds generated from the sale of the old property during the period until the purchase of the new property. Does refinancing the old property right before the exchange constitute “receiving money”?

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