Articles

Wed
21
Dec

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.

Tue
01
Apr

Beware of Tenant-In-Common Schemes with 1031 Exchanges

The market for fractional ownership of commercial real estate (popularly known as Tenants-In-Common or TICs) is expanding its reach -- and look out!

These new ownership programs allow individuals, who normally may not have access to the institutional real estate market, to buy interests in large scale commercial real estate. In March, 2002, the IRS released Revenue Procedure 2002-22 which set forth the conditions and guidelines under which the IRS will allow a small group of single owners to invest into large real estate projects such as: office buildings, apartment complexes, shopping centers, even the neighborhood Wal-Mart store. But there are some inherent drawbacks, such as no established secondary market for selling your TIC interest, resulting in a less liquid investment.

Fri
05
Jun

SOLD! Tax Strategies for Selling Vacation Property

Due to economic factors or life changes, investors who have held vacation rental property for many years can face significant tax liabilities when they sell it. Federal long term capital gain tax rates can be anywhere from 15 to 20%. The unearned income tax rate is 3.8%, and a depreciation recapture at 25% could be incurred. Additionally, state tax rates will also apply. Adding it all up, a potential tax liability upwards of around 39% can come as a rude surprise for most investors. 

So what other options do investors have to limit or defer their tax liability? One option is to convert the use of the property into your primary residence. Another is to do a 1031 Exchange.

Wed
04
Oct

Using 1031 Exchanges to Shift Gains Between Tax Years

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
Feb

Narrow Deviation Allowed in 1031 title holding requirement

One of the critical requirements for a 1031 exchange is the same taxpayer must hold title to both the Old and New Properties in the exchange. While the exact amount of time these properties must be held is not defined by the IRS, it is clear that it has to be the same taxpayer, and both properties must be held for investment.

If Fred and Sue, for example, own an apartment building they are selling as joint tenants, and buy a replacement property for their exchange as joint tenants, then clearly the exchange involved the same taxpayers since Fred and Sue were on title for both the Old and New Properties. But what if Fred and Sue wish to protect themselves by putting the New Property into an LLC as soon as they acquire it? Most attorneys would say that was a smart business decision and quickly set up the LLC for them.

...if you have control over a transaction . . . the IRS could view your transaction as a violation...

Fri
16
May

IRS Ruling Gives Guidance on Contract Notes for a 1031

In today’s economic environment, an increasingly common question we get is how to structure a 1031 exchange for the seller of a property when the buyer wants the seller to carry back a contract in connection with the sale. We started advising our clients on this very issue over five years ago—this year the IRS said we were right!

Say you are selling your property, which is free and clear, for $200,000. The buyer offers to pay $50,000 at closing and wants you to carry a contract for the balance of $150,000. You have a $75,000 gain on this transaction and would prefer to do a 1031 exchange and want to know the procedures.

Wed
06
Jul

Are Contracts Exchangeable?

 

The “Contract Question” provides more questions than answers...

In certain areas of the country, real estate prices have been skyrocketing. It is not uncommon to see properties double in price over the course of a year -- even before the builder has completed construction! This phenomena has created a situation we are seeing more and more in the 1031 exchange business. Many investors are getting property under contract (pre-construction) and selling that contract prior to closing on the purchase at a substantial profit. In this situation, can they perform 1031 exchange?

As an example, Ivan Investor sees a new condominium development planned for completion in about a year and a half. Ivan plans to buy a unit and rent it out once it is completed. So, Ivan gets a unit under contract for a purchase price of $300,00

Mon
08
Feb

Trump's Out and Biden's In—What does this mean for 1031 Exchanges?

Trump's Out and Biden's In—What does this mean for 1031 Exchanges?

Finally, the dust appears to have settled, the drama has ended, and the Biden regime has begun. So where are we now, and what do I think the 1031 Exchange industry can expect in the foreseeable future?

I've been writing a prediction article every year or so since about 1998—especially when we've had a Presidential regime change. I've struggled with writing this article more than any other because, frankly, I don't have a clear vision of what's going to happen next. So I'm going to start with big, broad categories, then break them down into smaller details. In the end, I'll try to tie them all together into a prediction of where the 1031 industry is going.

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.

Tue
06
Jun

SIZE MATTERS When Purchasing A TIC (Tenant-In-Common) Interest

The big rage in real estate these days are TIC interests. TIC stands for "tenant-in-common," which is the legal title that these types of interests hold title to property. TIC interests are program investments similar to the partnership tax shelters of the 1970s and '80s, in that they pull together a group of investors to purchase one large property.

There are two major reasons for this great surge in these type of investments: the first is that the IRS approved TICs as suitable replacement properties for 1031 exchanges in 2002. Prior to that date it was uncertain whether a TIC interest could be purchased as the replacement for a 1031 exchange because their structure so closely resembles a partnership. As a result investors were wary of them. Today, however, approximately 70% of the TIC interests are purchased by such investors.

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