Articles

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.

Wed
07
Mar

Simultaneous Closings Can Save You 1031 Exchange Fees

Submitted by Gary Gorman on Wed, 03/07/2007 - 01:00

Rule #4 of my six basic rules for 1031 exchanges is you can not touch the money between the sale of your Old Property and the purchase of your New Property. IRS law requires that you use an independent third party (called a Qualified Intermediary) to handle your exchange. At least that’s the general rule. When you’re dealing with the IRS, there are usually exceptions to the rules, and such is the case with this rule. Being aware of this exception can save you the cost of an intermediary, which runs at least $500 in most parts of the country.

Mon
01
Mar

Six things you need to know about §1031 - Part 1 For Investment Use Only

Submitted by Gary Gorman on Mon, 03/01/2004 - 01:00

Section 1031 is an IRS code section that allows you to roll the gain from the sale of your Old Property over to your New Property.

To accomplish this, there are hoops you have to jump through, and the first of these is that both the Old Property you are selling and the New Property you are buying have to be held for investment or for business use. 1031 Exchanges allow the investor to defer paying any capital gains tax on the sale of their real estate. But it's NOT for your personal, primary residence -- it's only for investment or business use properties.

Sat
01
May

Six things you need to know about §1031 - Part 3 The 180-Day Rule

Submitted by Gary Gorman on Sat, 05/01/2004 - 01:00

Section 1031 of the Internal Revenue Code allows you to roll the gain from the sale of your Old Property to the purchase of your New Property -- and not pay any capital gains taxes! To do this, you have to jump through certain hoops. We've talked in the past about how your property has to be held for investment or business use, and that it can not be held for resale (like a developer or fix-&-flips). We've also talked about your requirement to identify and list potential replacement properties for your exchange within 45 days of the closing of your sale of the Old Property.

Mon
01
Dec

New IRS Ruling Impacts Arizona Real Estate and 1031 Exchanges

Submitted by Gary Gorman on Mon, 12/01/2003 - 01:00

The IRS Recently Issued a ruling that is bound to impact Arizona real estate and 1031 exchanges. Revenue Procedure 2002-69 says that a husband and wife, who own all of the shares of a limited liability company (usually called an "LLC") in a community property state (ie: Arizona), will be able to disregard the separate nature of the LLC and report all of the income and expenses in their personal return.

Until now, the IRS has refused to rule on whether a husband and wife who own all of the shares of an LLC constitute a "single member" for purposes of the "disregarded entity" rules for filing a return. If an LLC has only one member, the disregarded entity rules state that the LLC does not have to file a tax return, but may instead report all of its income and expenses in the tax return of the sole member.

Sat
03
Sep

Partnership and LLC Issues In 1031 Exchanges

Submitted by Gary Gorman on Sat, 09/03/2005 - 01:00

One of the requirements of a 1031 exchange is that the entity that sells the Old Property must be the same entity that acquires the New Property. Where the property is owned by a partnership or a limited liability corporation (LLC) with multiple partners, that entity is viewed as the exchanging entity.

A common question posed to our firm involves situations where the property is being sold, but one or more of the partners wishes to take their share of the cash and pay the tax, while the rest of the partners want to stay in real estate and desire to do a 1031 exchange. Let's use the FGH Partnership as an example where F, G, and H each own an equal one-third interest in the partnership. The partnership has entered into a Purchase and Sale contract to sell the Old Property. F and G wish to stay in real estate and have decided they want to do a 1031 exchange. H, however, has decided that it's time to cash out and wants his share of the cash.

Wed
07
Nov

1031 Exchanges Targeted for more audits by IRS and states

Submitted by Gary Gorman on Wed, 11/07/2007 - 01:00

Section 1031 of the Internal Revenue Code allows a taxpayer to roll the gain from the sale of their Old Property over to their New, provided they do certain things which are set out by the code. Most people seem to miss (or perhaps simply don’t understand) that Section 1031 is a “form driven” code section. This means you must do exactly what the code section requires. If you don’t, your exchange will be disallowed in an audit. In other words, you must dot the i’s and cross the t’s.

Thu
21
May

A reverse exchange could be your solution in this current real estate market

Submitted by Gary Gorman on Thu, 05/21/2015 - 01:00

The One problem that comes up in almost every conversation I have with clients right now is how hard it is to find a replacement property. There’s very little inventory, and worthwhile properties get scooped up immediately. As a result, many of my clients are afraid to pull the trigger on their sale. A reverse exchange could be their solution in this dilemma.

Just as its name implies, a reverse exchange allows you to take advantage of the tax benefits of a 1031 exchange, but instead allows you to purchase your new property before you sell your old one. In a reverse exchange, your qualified intermediary takes title to the new property and holds it until you close the sale of your old property. This allows you to tie down the purchase of your new property before you pull the trigger on the sale of the old.

Wed
01
Jan

Refinancing 1031 Property in an Exchange

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

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”?

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.

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