Supreme Court Hints at TIC Referral-Fee Rules for Real Estate Brokers

Two years ago, the IRS issued Revenue Procedure 2002-22 which blessed Tenant-In-Common, or "TIC" (rhymes with "pick") properties as qualifying for Section 1031 as replacement properties. In the last two years I've watched that industry explode. For example, a recent search on Google under "Tenants in Common" returned about 490,000 hits -- most of them sellers or "sponsors" of TIC properties. Many of our client's real estate brokers are uncertain as to what the ramifications are if they accept a commission or referral fee from a sponsor to whom they refer clients. A recent Supreme Court case would seem to answer this question -- and it isn't pretty!


The Role of Debt in a 1031 Exchange

The role that debt plays in a exchange is probably one of the most misunderstood areas of 1031 law. Many people (including qualified intermediaries, CPAs, and attorneys) believe that you are required to have debt on your New Property in an amount equal to or greater than the debt that was paid off on your Old Property. This is NOT, In fact, a requirement for a 1031 exchange.

The actual requirement is two fold: you must buy equal or up, and you must reinvest all of the cash. Assume for example that you sell a purple duplex for $100,000 and you buy a replacement property for $90,000. You did not buy equal or up; in fact you bought down. As a result, the $10,000 buy-down is taxable—yes, the entire $10,000 is taxable, and you do not apportion any of the original cost of the duplex to this gain.


1031 Exchanges Targeted for more audits by IRS and states

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.


Section 121 - Congress Limits Gain Exclusion on the Sale of Some Primary Residences

When Congress passed the Housing Assistance Act of 2008 a few months ago, their goal was to help those people who were losing their homes in foreclosure. One of the side affects of the bill, however, was a change that could effect taxation on the gain from the sale of your personal residence.

IRS law excludes $250,000 of the gain from taxation if you're single, and $500,000 if you're married, when you sell a primary residence you've lived in for at least two years of the last five years. This is so even if a portion of the gain was rolled over into the property in a 1031 exchange transaction.

...This new law penalizes you for the time your property was not your primary residence...


IRS Challenges State's Definition of Real Estate in a 1031 Exchange

One of the basic concepts of a 1031 exchange is if something qualifies as “real estate” under state law, it qualifies as “real estate” for purposes of a 1031 exchange. For example, several years ago we were involved in an exchange of an oil and gas pipeline that crossed several states. Whether or not that pipeline was considered real estate depended on the laws of each state. As a result, we ended up with a situation where the portion of the pipeline in one state was classified as real estate, even though it was above ground, while another section of pipeline in another state was NOT considered real estate, even though it was buried in the ground.

In a recently released court case, the IRS challenged a state’s characterization of a property. This is the first time I’ve seen them do this, and it causes me some concern with how some types of exchanges are handled in Colorado.


IRS Issues Vacation Home Ruling

The IRS has just issued a new ruling that sets forth the guidelines for those taxpayers that wish to do a 1031 exchange involving a vacation home. While I believe that the IRS intends that the ruling will put to bed all of the controversy surrounding this issue, it will certainly create more controversy than it settles.

By way of background, you can only exchange property held for investment or used in a trade or business. Personal use property, such as a residence, does not qualify for an exchange; so the question is: are vacation homes investment property or personal use property? Up until last year there was no guidance from the IRS that said that vacation homes do not qualify for an exchange, but that changed when the U.S. Tax Court disallowed a taxpayer’s exchange from one vacation home into another.


TALES OF THE TEXAS EXCHANGERS! IRS deadlines extended due to winter storms

The Internal Revenue Service recently announced that Texas taxpayers—including 1031 exchangers—can have up to June 15, 2021 to file returns, identify replacement property, purchase replacement property, or make other payments due to the chaos caused by February’s winter storms. 

For affected Texans, FEMA has issued a disaster declaration for the entire state. Other tax-related accommodations can be made for taxpayers in other states impacted by these winter storms. A list of eligible localities can be found at on their disaster relief page.


THE FUTURE of The 1031 Exchange Industry

So far in 2007, there have been three spectacular 1031 intermediary defalcations: Southwest Exchange of Henderson, Nevada ($100 million), Scoop Daniel of Breckenridge (the attorney that took one million and disappeared), and IXG (locally) and its related companies ($150 million).

All of these problems arise from two systemic problems with the industry: first of all there are no entry barriers to become an intermediary. Both Southwest and IXG were existing intermediary companies that were purchased by people who had no intermediary experience and whose sole intention for purchasing the company, apparently, was to get control of the exchange balance. Locally, Mile High Capital from last year is another example of this problem because according to several press reports they set up their own intermediary company and hired a convicted felon to run it.


TICs Sold in Colorado are Securities

Colorado Securities Commissioner, Fred Joseph has determined that TIC interests sold in the state of Colorado by Mile High Capital and Replacement Property Solutions are considered securities rather than real estate.  Replacement Property Solutions was the qualified intermediary arm of Mile High Capital, a real estate investment firm.  Both companies have been closed by the State and their principals indicted for securities fraud.

A TIC (Tenant-In-Common) interest is a small ownership slice of a large property.  In 2002 the IRS ruled that TIC interests qualify for 1031 exchanges.  This means an investor can sell a piece of investment property and buy a partial interest in a large property, such as an office building or an apartment complex.  Prior to the IRS ruling, there was confusion as to whether TICs were treated as real estate, or as partnership interests (which are not allowed as 1031 exchange replacement property).


1031 EXCHANGES vs. Qualified Opportunity Zone Investments

The Tax Reform Act of 2017 created “Qualified Opportunity Zones” to promote investments in low income communities across the United States. The Qualified Opportunity Fund, or, “QOF,” was created to give investors capital gains tax reduction or elimination to encourage economic growth in specific areas. There are two similarities between QOFs and 1031 Exchanges: 1. they’re both tax-gain deferral strategies (and sometimes even tax elimination!), and 2. the investments must be made within 180 days from the sale of the Old Property. There’s where the similarities end. If a taxpayer decides to invest in a QOF after starting a 1031 Exchange with a Qualified Intermediary, the access to the 1031 proceeds is limited until one of two things happen: 1. If no replacement 1031 property is identified by the investor by the forty-fifth day of the exchange, the funds can be released on the forty-sixth day of the exchange. OR 2.