TEE-Shots Newsletter

How does the Jobs & Growth Tax Relief Reconciliation Act of 2003 affect 1031 exchanges?

If I buy down, how much is taxable? Or does that screw up my exchange?

In order to not pay any tax, you must buy equal or up. If you buy down, the amount of the buy down is taxable. For example, if you sell your Old Property for $100,000 and you buy the New Property for $90,000, you will pay tax on the $10,000 buy down and the whole $10,000 will be taxable.

--The Experts

How do I get an extension to my 45-day deadline?

The IRS's list of QIs...

Every year, the IRS considers revisions to their tax forms. Among these is Form 8824 (the form that you attach to your tax return to report your 1031 exchange).

News Flash: IRS Gets Tough with Related Party Rules!

Two new events are confirming the IRS's determination to put teeth in their related party rules. A recent Revenue Ruling says that you can't use your qualified intermediary as a buffer between you and the related party, and soon to be released changes to Form 8824 will make you state, in black and white, that your dealings were not with a related party.

"The old property that I sold was in the name of my revocable living trust. The lender on my new property won't make a loan to the trust. Is this a problem?"

"The intermediary I use is an attorney/CPA/title company. They tell me that the bond from their other business covers their intermediary work. Is this correct?"

It might, but probably not. Ask for a copy of their bond; they should be more than happy to give it to you. Once you get the copy, review what it covers and look for wording about a 1031 exchange, or qualified intermediary, or exchange services, etc.

"I have 45 days to identify replacement property for my exchange. What if I change my identification after the 45 days?"

If you change your identification after the 45th day, you’re in big trouble. If you get caught, your exchange will be disallowed. You’ll also be subject to penalties, which will probably run 100% of the tax. You’ll owe interest on both the tax and the penalties, and you could even end up in jail (yes, people have gone to jail for this).

--The Experts

"Can I use exchange funds that are being held by my intermediary for items like earnest money and appraisals prior to the closing of my new property?”

Yes and no. The intermediary may only advance funds from your exchange account (the money being held from your sale) for items that are refunded if the closing never occurred. Earnest money is the most common example of this.

“How do I report my 1031 exchange to the IRS?”

IRS Form 8824: This is the official 2-page form that you submit with your federal tax return to report the details of your 1031 exchange. You may be required to submit additional tax forms and calculations that relate to your exchange, but 8824 is the only form used for reporting the exchange itself.