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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.

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?

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.

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.