Understanding the 1031 Exchange Tax Rules

Understanding the 1031 Exchange Tax rules is necessary to enjoy the full benefits of the tax-deferred concept. It is usually a good idea to get some assistance from a tax expert to help you through the IRS minefield.

The rules concerning 1031 Exchange transactions address the types of properties that can be used and the time limits for the completion of the transaction. It is necessary that the property be one that is used for a business purpose, a source of income, or an investment. In some cases, non-real estate property can be used for a 1031 Exchange, however, the proceeds from the sale of the property must be reinvested in a "like kind" type of investment.

The time limits are the most important part of understand 1031 Tax rules. Once the sale of the initial property is complete, you have exactly 45 days to name the new investment. You have 180 days to actually close the second purchase. The IRS will not allow an extension of this time limit for any reason. Even when the 180 day falls on Christmas or any other holiday, that will not buy even one extra day.

In cases where the transactions are not simultaneous, the taxpayer cannot actually receive the funds that result from the initial sale. They must be paid to a Qualified Intermediary. The Qualified Intermediary must be assigned prior to the completion of the first sale, so that he can receive the funds when the sale is closed.

There are several 1031 Exchange Tax rules that deal with a concept known as "boot". Although boot is not used in the tax codes of the IRS, it is commonly used when discussing the tax implications of 1031 transactions. Boot means value received for other considerations. These can be any number of different ways that value is added onto the transactions such as promissory notes or agreements to perform work on the property after the sale. It is important to be aware of all of the different things that could be considered boot by the IRS as it could result in a tax liability.

Even the simplest matter dealing with the Internal Revenue is going to be complex. 1031 Tax Exchange rules are no exception. It is usually recommended that the first step in the process is retaining a tax professional or a CPA who has a good understanding of what is required and any potential pitfalls. The second step is to be advised by them and to pay close attention to the advice.

Raynor James is with FSBOAmerica.org - get a free one month listing when you sell FSBO homes for sale by owner

1031 Exchange as a Marketing Tool - For Realtors

How Can 1031 Exchange Help You In Generating Business?

The §1031 tax deferred treatment of capital gains is one of the most attractive real estate investor vehicles for preserving and building real estate wealth: This provision of the tax code allows property owners to exchange their property for other like-kind property without recognition of capital gains.

The capital gain and tax liability are both transferred (“deferred”) from the “old” property into the “new” one, so there are not tax consequences or liability to the seller at the time of the sale of the “old” property.

The beginning

 

The concept of exchanging properties to avoid (“defer”) tax is not new. 1031 exchange reformed variation of Two and Multi-party exchange.

First; Two-party exchange

 

Direct exchange (i.e., a swap), or the "your property" for "my property" is called a two-party exchange. Here there are two property owners who each want the other's property. When this rare situation occurs, the parties exchange properties and avoid (“defer”) tax liabilities. The main problem here is that rarely there will be two property owners who each want the other's property.

Then; Multi-party exchange

 

The three-way or multi-party exchange technique was designed to solve the dilemma of a two-way swap. The big problem here is that if one or more of the parties would not cooperate with the exchange, the entire exchange failed like a “Domino Effect”.

Now; 1031 Exchange

 

By permitting you to "sell" your Relinquished (“old”) Property now and use the proceeds to buy the Replacement (“new”) Property later 1031 exchange eliminate the need of finding another real estate owner who agrees to exchange properties (instead of selling) to avoid tax liability.

Exchange Requirements

 

Overview

 

There are three conditions that must be met to accomplish non-recognition of gain under §1031:

1. The properties exchanged must qualify, and be of "like-kind".

2. There must be an actual exchange, not a transfer of property for money only.

3. The time requirements must be strictly followed. Qualify, "like-kind"

To qualify as a like-kind exchange, the property must be both (1) qualifying property and (2) like-kind property.

What is a qualify property? For income tax purposes, real estate is divided into four categories made as of the date the transaction:

1. Held for business use (§1231) – property used in normal course of business or rental property; Qualify

2. Held for investment (§1221) – property purchased and sold for generating capital gain; Qualify

3. Held for personal use – vacation home, second home; Does not Qualify

4. Held primarily for sale (dealer property) – resale or inventory; Does not Qualify

The first two classifications “held for business” and “held for investment” qualify for §1031 treatment while the second two “held for personal use” and “dealer property-do not”. What if a property falls under two categories?

For example what if a property held for investments partially used for personal use? The sale will be allocated between the two categories based on the portion of each one.

The Exchange Process

 

The following is a review of the process and timeline:

Sale of Relinquished (“old”) Property

To trigger the tax deferred transaction, you must sell your property.

Identification the Replacement (“new”) Property

You have 45 days from the day you sell the “old” property to identify the replacement (“new”).

Replacement Property is identified only if it is designated as one in a written document signed by you. This document must be hand delivered, mailed, faxed or otherwise sent before the end of the identification period to a person (other than yourself or a related party) involved in the exchange. The document must include unambiguous legal description or street address of the property.

Number of Replacement Properties that can be identified You may identify more than one property as Replacement Property subject to three rules:

3-Property Rule: The maximum number of replacement properties you may identify is three properties regardless of their fair market values.

The 200 Percent Rule: There is no limit on the number of properties you identify as long as their total fair market value does not exceed 200 percent of the total fair market value of all Relinquished Properties.

The 95 Percent Rule: There is no limit on the number of properties you identify as long as during the Exchange Period you actually received identified Replacement Properties having a fair market value equal to or more than 95 percent of the total fair market value of all identified Replacement Properties.

Value of Replacement (“New”) Property

 

The value of the Replacement Property must be equal to, or greater than, the adjusted sales price of the Relinquished Property.

All proceeds from the Relinquished Property sale need to be invested in the Replacement Property.

Sale Proceeds Go To Qualified Intermediary

 

Section 1031 requires an actual exchange of properties. If you simply sell your property and reinvest the money in another property, you will not qualify for exchange treatment, even though it is a simultaneous close.

A Qualified Intermediary is a person (or company) who, for a fee, acts to facilitate the deferred exchange by entering into an agreement with you for the exchange of properties. The Qualified Intermediary does not provide legal or specific tax advice to the exchanger, but will usually perform the following services:

1. Coordinate with the exchangers and their advisors, to structure a successful exchange.

2. Prepare the documentation for the Relinquished Property and the Replacement Property.

3. Furnish escrow with instructions to effect the exchange.

4. Secure the funds in an insured bank account until the exchange is completed.

5. Provide documents to transfer Replacement Property to the exchanger, and disburse exchange proceeds to escrow. Receipt of Replacement Property

You have 180 days from the day you sell the “old” property to receive the replacement (“new”).

Replacement property is treated as received before the end of the exchange period if:

1. You actually acquired the Replacement Property (close the transaction) prior to the end of the exchange period (180 days, or the due date of the taxpayers tax return, whichever is earlier), and

2. The Replacement Property acquired is substantially the same as identified during the 45- day identification period.

Boot and Taxable Gain

 

Money and unlike property in an exchange is called boot.

If, in addition to the Replacement Property, you receive money or some other kind of boot, you may have taxable gain. The tax is due only on gain that comes from

 the money and other boot received.

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3 Mistakes to Absolutely Avoid in a 1031/TIC Exchange

We've all made bad decisions in the past. Don't you just hate to hear "I told you so" from your friends and family? Or, maybe you catch yourself saying "If only I'd have...?"

Personally, I'm one of those people who prefers to learn from someone else's mistakes. If you're at all like me, and you have thought about doing a 1031 exchange into a tenant in common (TIC) property, take note. You can avoid making the 3 Major Mistakes that others wished they knew before leaping from the frying pan into the fire!

Before I let you in on the secrets, let me briefly explain what a 1031 exchange into a tenant in common property is. It's a fairly well-kept secret in and of itself.

A 1031 exchange is when an investment property owner sells his current property and exchanges it for a "like-kind" property of equal or greater value. By doing so, he defers the payment of capital gains tax and the consequences of recaptured depreciation.

By exchanging into a tenant in common property, or a TIC, he becomes a part owner of a large commercial property managed by professionals, who in turn pay him a monthly income. It comes with fewer strings than private annuity trusts, charitable remainder trusts, or an exchange into another property that still needs your attention and often drains your wallet. I find that very few individuals, CPA's, attorneys, or even financial advisors are sufficiently well versed in the 1031 exchange into a tenant in common property. It can be a terrific deal!

Those who benefit most from this type of an exchange usually have several things in common. 1. They own investment property that has appreciated significantly in value.

2. They are tired of all the hassles of property management.

3. They don't want to pay huge amounts of capital gains tax if they sell.

4. They would like to have a significant increase in monthly passive income.

5. And, lastly, they still enjoy the relative stability of owning real estate.

Know of anyone who fits this description? If so, read on.

There are 3 Major Mistakes that can turn your investment into a nightmare. So, avoid these at all costs when contemplating this type of exchange.

Mistake #1: Dealing with an investment company that does not have their act together. If they seem like they don't know what they are doing, run! Look into their history of TIC offerings, and ask for referrals from satisfied clients. Ideally, this should be their only business. Are all their properties "A" grade commercial buildings, or are they somewhat less desirable? Ask how they find the properties and what criteria they use to select them. Quality properties are hard to find and sell out quickly. In real estate, the quality properties will remain more desirable, even when the mediocre properties start to lag. Ask yourself if you would like to have your office in that building, or go to see your doctor there, or if you'd shop in that strip mall.

Note: Also be cautious going the private route and getting into Limited Partnerships when only one or two major players make all the decisions. And, unless you have extensive experience in commercial property, don't get together a bunch of your friends and choose this property on your own.

Mistake #2: Choosing an Accommodator that has not done many, many of these transactions. This Qualified Intermediary makes sure all the documents and money transfers meet all the IRS guidelines. They will set up your LLC. You must use an Accomodator that you don't already have a relationship with. Your family attorney or estate planning attorney may not qualify. The last thing you want is the IRS sending you a hefty bill for taxes or penalties, or the whole transaction falling through due to an incompetent or inexperienced Accommodator!

Mistake #3: Skimping on the property management company. They are extremely crucial to the performance of your investment. You will be depending on them to handle the day to day problems that arise, carry the proper insurance, pay the property taxes on time, and keep your building fully occupied and in tip top shape. This company should offer you a long term triple net lease that has your annual income percentages spelled out, along with scheduled increases. There aren't many out there willing or able to do this. Ask for an accounting of their track record with other properties, how long they've been in business and for a list of any judgments brought against them. See if they've ever requested special assessments, or had any foreclosures. A good management company is worth its weight in gold. You want them to make a tidy profit, because their performance is directly related to your investment stability.

Well, there you have it. Don't be "Penny wise and Pound Foolish". This is one time that hiring the best will definitely bring you the most favorable results. It should truly be a win-win situation for everyone involved.

By avoiding the 3 Major Mistakes for a 1031 exchange into a tenant in common property, you will be the one saying "I told you so" as you collect your monthly check and watch your investment grow!

Paula Straub is a Financial Advisor, Insurance Agent and Mortgage Loan Originator in San Diego, CA. As a successful business owner, Paula strives to guide clients to financial independence in the most timely and efficient manner possible.

How much would you pay to save thousands in Capital Gains Tax? I'll teach you for free in a Teleconference that may change your life. Sign up at ==> http://www.savegainstax.com

 

 

1031 Exchange Odds and Ends

A 1031 tax deferred exchange, as you know, allows you to use money from a real estate sale to acquire real estate of like kind. It also allows you delay the payment of the capital gains tax that would normally be levied on such a sale. A 1031 tax deferred exchange is a godsend for people looking to build their equity. This article details some of the things you need to know about 1031 tax deferred exchanges.

The Rules Governing a Totally Tax-Free Exchange

When you sell your property, a 1031 tax deferred exchange will allow you to acquire a property as replacement. To qualify for a totally tax-free exchange, the replacement property must be relatively equal to the value of the property that was sold. All of the equity you received from your initial sale should be used on acquiring your exchange properties. For instance, if you sold your original property for US$100,000, you must use up that same amount to acquire your replacement properties

The Rules Governing a Partial Tax-Deferred Exchange

A 1031 tax-deferred exchange does not necessarily mean that you have a totally tax-free exchange. Remember that you need to use all of the proceeds of your sale in acquiring the replacement properties to qualify for a 1031 tax-deferred exchange. Should you not do so, however, you may still qualify for a partial tax-deferred exchange. For instance, if you sold your original property for US$100,000, and you use only US$ 75,000 to acquire your replacement property, then you will be taxed on your US$ 25,000 gain.

The Disadvantages of a 1031 Tax-Deferred Exchange

As advantageous as 1031 tax deferred exchanges are, they nevertheless have a few disadvantages. One disadvantage is that you will be assessed a lower depreciation schedule when you acquire your new properties. The tax authorities will use your old taxes as a basis for this depreciation schedule. The other disadvantage is that you cannot deduct losses on your tax return if you use a 1031 tax deferred exchange. If you want to declare a loss, it will be better to make the transaction an outright sale, not an exchange.

You Don’t Have To Swap

You don’t have to swap one property for another immediately. In other words, when you sell your property, you don’t have to buy another right away. The law permits delayed exchanges. This means that that you can sell your property now, declare it 1031 tax deferred exchange, and then buy your desired property at another time.

You don’t necessarily have to swap the same number of properties either. For example, when you sell two tracts of land and place them in a1031 tax deferred exchange, it doesn’t mean that you have to get two pieces of property to qualify for the exchange. You can get one, three, or even ten properties in exchange for your two tracts of land! As long as the properties concerned are for investment purposes and are of relatively equal value, they will qualify. This means that you can diversify and expand your real estate properties without paying income taxes.

Matthew Bass of 1031-Exchange-Answers.com provides more recommendations and information on 1031 Exchanges that you can research at your leisure on his website.

1031 Exchange - How to Acquire Properties

This article will focus upon the use of a qualifying intermediary and identify the work which is done by these companies. It will also give a short and simple breakdown on the fees most often charged by qualifying intermediaries.

This paragraph will explain the technical work of a qualifying intermediary. The qualifying intermediary prepares the legal paperwork related to the 1031 tax exchange as well as documents related to the transactions: both the selling of your old property and the purchasing of your replacement property. These documents can also be used to properly structure the 1031 exchange. The qualifying intermediary is also the escrow agent in this process as the company will receive and hold your funds from the sale of the old property until you purchase the new property. The company will also act as a consultant due to helping you meet the guidelines for purchasing your replacement property. This is a great deal of responsibility for one company so be sure to choose wisely.

This paragraph will focus upon fees which may be charged by your qualifying intermediary. Doing a simple 1031 tax exchange will normally be the cheapest with fees normally between four hundred and six hundred dollars. With your 1031 exchange, you are allowed to buy up to three properties and the second and third properties will often incur a fee of roughly a couple of hundred dollars each. A quick turnaround time may cost money and a 1031 reverse exchange often is the most costly with a fee that can run into several thousand dollars.

Hopefully this article on a 1031 exchange and the understanding of the technical side from the qualifying intermediary gives you a sense of what must be done from their end as well as the types of fees you can incur. This should give you a good sense of what to look for when choosing a qualifying intermediary as well.

Ellen writes for Great Hawaii Real Estate where you can find Molokai real estate listings to great Molokai homes, condos and land.

The New 1031 Exchange Alternative

This strategy is aimed at an investor needing passive, partially tax sheltered income without day-to-day management hassles. Further, it is often the goal of the exchanger to be able to transfer real estate wealth to surviving loved ones' upon death capital gains tax free. This tax vanishes at the death of the owner and the investment passes on to heirs on a stepped-up basis. Ask yourself, "Would I Like my life to be less complicated? Would I Like to avoid taxation on my capital gain? Am I tired of managing real estate?

The 1031 tax-deferred exchange is a crucial building block in the real estate investment strategy. Section 1031 of the IRS Tax Code allows you to sell your current investment property and within certain time constraints and following the required formula, purchase a new replacement property while deferring all capital gains taxes. Normally, one would exchange or trade-up to a property equal or greater in size and debt. This process saves money by not only escaping all the capital gains taxes; it also avoids state taxes and the recaptured tax on depreciation of the property being sold. Those savings are put to work as equity in the new investment property. What if you could roll those investment dollars into major real estate and actually own buildings valued at millions of dollars plus?

There are 1031 Exchange Alternatives that can help investors step up to Wall Street real estate opportunities. What does this mean to you the average investor? Foremost, it means you are finally going to get an opportunity to move into the kind of investment you could only dream of before. Nationally accredited tenants with triple-net leases finally let you in the door. This is done with a "Tenant-In-Common" (TIC) purchase. Instead of owning all of a property, now you can own perhaps 10% of a larger, newer and better-performing property by becoming a TIC; it is not a partnership, trust or LLC; it is direct ownership, between two or more investors. It is a fractionalized interest, in which you secure your own deed, and qualifies you for the 1031 exchange.

This is the cutting edge in real estate today - an exit strategy that truly allows the small investor to step up to the big leagues. The TIC alternative can help you solve many problems commonly associated with the standard 1031 tax-deferred exchange. With the standard 1031 exchange, it's difficult to find that perfect match to satisfy your "like kind exchange". A TIC will not only match your relinquished property's dollar amount, but will provide you with prearranged financing and management staff ready to take over your day-to-day responsibilities.

First-rate properties are often secured by nationally known, credit rated tenants that are able to withstand recessionary periods. Typically these properties are valued between $10 million and $30 million and are located throughout the country; yet you can purchase an undivided interest for as little as $100,000. You can choose from an assortment of properties ranging from RETAIL, CLASS A OFFICE, MULTI-FAMILY or INDUSTRIAL classifications. This allows an investor to gain economies of scale with fewer dollars.

If you are delaying your exchange because you fear there is a shortage of good replacement property, think again. With nearly 30 million dollars worth of TIC properties available, every month, the qualified investor is spared the grief of trying to locate the ever elusive replacement property within very restrictive time constraints. In a 1031 exchange, you can identify three replacement properties, without regard to their value. By naming one or two of the three as TICs, the savvy investor protects himself with a safety net should the purchase of another replacement property fall through.

"American has always had two tax systems; one for the informed and one for the uniformed. Both systems are legal" Former Justice Learned Hand

- Article written by Ty E. Jobin

For more information call 1-800-466-2003 or visit www.1031ea.com

Ty Jobin is the founder of 1031 Exchange Alternatives. 1031 Exchange Alternatives has has helped investors complete 1031 exchanges for nearly 9 years utilizing Tenant-In-Common investments. Visit http://www.1031ea.com for more information or call 1-800-466-2003.

1031 Exchange Rules and Requirements

Following is a reproduction of the IRS's rules and requirements for 1031 tax deferred exchanges with regards to real property. If you have any questions regarding the sale of your real property or questions about what qualifies for a 1031 exchange or not, please consult your tax professional.

Sec. 1031. - Exchange of property held for productive use or investment

(a) Nonrecognition of gain or loss from exchanges solely in kind
(1) In general
No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
(2) Exception
This subsection shall not apply to any exchange of -
(A) stock in trade or other property held primarily for sale,
(B) stocks, bonds, or notes,
(C) other securities or evidences of indebtedness or interest,
(D) interests in a partnership,
(E) certificates of trust or beneficial interests, or
(F) choses in action.
For purposes of this section, an interest in a partnership which has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership.
(3) Requirement that property be identified and that exchange be completed not more than 180 days after transfer of exchanged property For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if -
(A) such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or
(B) such property is received after the earlier of -
(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or
(ii) the due date (determined with regard to extension) for the transferor's return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs.
(b) Gain from exchanges not solely in kind
If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
(c) Loss from exchanges not solely in kind
If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.
(d) Basis
If property was acquired on an exchange described in this section, section 1035(a), section 1036(a), or section 1037(a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of property permitted by this section, section 1035(a), section 1036(a), or section 1037(a), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For purposes of this section, section 1035(a), and section 1036(a), where as part of the consideration to the taxpayer another party to the exchange assumed (as determined under section 357(d)) a liability of the taxpayer, such assumption shall be considered as money received by the taxpayer on the exchange.
(e) Exchanges of livestock of different sexes
For purposes of this section, livestock of different sexes are not property of a like kind.
(f) Special rules for exchanges between related persons
(1) In general If -
(A) a taxpayer exchanges property with a related person,
(B) there is nonrecognition of gain or loss to the taxpayer under this section with respect to the exchange of such property (determined without regard to this subsection), and
(C) before the date 2 years after the date of the last transfer which was part of such exchange -
(i) the related person disposes of such property, or
(ii) the taxpayer disposes of the property received in the exchange from the related person which was of like kind to the property transferred by the taxpayer, there shall be no nonrecognition of gain or loss under this section to the taxpayer with respect to such exchange; except that any gain or loss recognized by the taxpayer by reason of this subsection shall be taken into account as of the date on which the disposition referred to in subparagraph (C) occurs.
(2) Certain dispositions not taken into account
For purposes of paragraph (1)(C), there shall not be taken into account any disposition -
(A) after the earlier of the death of the taxpayer or the death of the related person,
(B) in a compulsory or involuntary conversion (within the meaning of section 1033) if the exchange occurred before the threat or imminence of such conversion, or
(C) with respect to which it is established to the satisfaction of the Secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax.
(3) Related person
For purposes of this subsection, the term ''related person'' means any person bearing a relationship to the taxpayer described in section 267(b) or 707(b)(1).
(4) Treatment of certain transactions This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.
(g) Special rule where substantial diminution of risk
(1) In general
If paragraph (2) applies to any property for any period, the running of the period set forth in subsection (f)(1)(C) with respect to such property shall be suspended during such period.
(2) Property to which subsection applies
This paragraph shall apply to any property for any period during which the holder's risk of loss with respect to the property is substantially diminished by -
(A) the holding of a put with respect to such property,
(B) the holding by another person of a right to acquire such property, or
(C) a short sale or any other transaction.
(h) Special rules for foreign real and personal property
For purposes of this section -
(1) Real property
Real property located in the United States and real property located outside the United States are not property of a like kind.
(2) Personal property
(A) In general
Personal property used predominantly within the United States and personal property used predominantly outside the United States are not property of a like kind.
(B) Predominant use
Except as provided in subparagraph [1] (C) and (D), the predominant use of any property shall be determined based on - ''subparagraphs''.
(i) in the case of the property relinquished in the exchange, the 2-year period ending on the date of such relinquishment, and
(ii) in the case of the property acquired in the exchange, the 2-year period beginning on the date of such acquisition.
(C) Property held for less than 2 years
Except in the case of an exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection -
(i) only the periods the property was held by the person relinquishing the property (or any related person) shall be taken into account under subparagraph (B)(i), and
(ii) only the periods the property was held by the person acquiring the property (or any related person) shall be taken into account under subparagraph (B)(ii).
(D) Special rule for certain property
Property described in any subparagraph of section 168(g)(4) shall be treated as used predominantly in the United States

Neda Dabestani-Ryba is a licensed Realtor in Maryland. She is a member of the President's Circle of Top Real Estate Professionals. She can be reached at (800) 536-3806 or visit her website for more information: http://neda.dabestani.pcragent.com/ Prudential Carruthers REALTORS is an independently owned and operated member of Prudential Real Estate Affiliates, Inc., a Prudential Financial company. Equal Housing Opportunity.

1031 Exchange – Benefits and Rules

Section 1031 of the IRS offers a golden opportunity for real estate investors to defer their capital gain taxes by reinvesting their sales proceeds in purchase of another like kind property. One important condition that governs this law is that the transaction needs to take place within 45 days of selling the property.

The benefit potential of a 1031 exchange can be better comprehended if we look into a case study…

An investor gains $400,000, by selling his land and incurs a total tax amount of $120,000. He is left with $280,000 after the transaction is complete.

If the seller wants to reinvest the proceeds for a new property, considering a 25% down payment with 75% loan to value ratio, he will be able to buy a property worth $1,120,000.

Had this been a 1031 exchange the seller could reinvest the entire sales proceed of $400,000 and with same loan to value ratio he could have availed a property worth 1,600,000.

With the increasing awareness about 1031 exchange and its benefits more and more people are investing in real estate, however, to gain the maximum out of it, it is important that we have a clear understanding of all the terms and conditions mentioned in this section of the IRS.

The rules for a successful 1031 exchange has been clearly laid down in section 1031 of the IRS and can be explained as given below.

 

• The foundation of 1031 exchange rule is that only properties held for productive purpose in a business or trade or for investment purposes qualify for a 1031 exchange.
• The properties involved in the transaction should also be of like kind. Under Section 1031, one kind or class of property should be exchanged for another property of the same kind or class. A taxpayer's personal residence cannot be exchanged for income property, and income or investment property cannot be exchanged for a personal residence, which the taxpayer will reside in.
• Section 1031 of the IRS also marks the guidelines about the sales proceeds. It stated that the entire amount from the sales proceeds should be reinvested towards acquisition of the new property. The sales proceeds should also go through the hands of a qualified intermediary and not through the seller or the seller’s agent. Any cash proceed from the sale, if retained, becomes taxable.
• For a successful 1031 exchange there are also some time limitations laid down in Section 1031, which needs to be followed.

   

  Identification Period: This is a 45 days period from the day of selling the relinquished property during which the seller needs to identify a replacement property that he proposes to buy. This is a strict timeline and is not extended even if the 45th day falls on a holiday or on weekends.

  Exchange period: This is the period within which the seller of the relinquished property needs to receive the replacement property. This period ends at 180 days after the date on which the person transfers the property relinquished or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property occurred, whichever is earlier. This is a strict timeline and cannot be extended even if the 180th day falls on a holiday or on weekends.

 

These are some of the basic rules that need to be followed to complete a successful 1031 exchange. While qualified intermediaries are an indispensable party to a 1031 exchange transaction and can often provide good advice, it is advisable that you do proper study about this section of the IRS and consult a knowledgeable company for professional advice on 1031 exchange.

This article is written by Ray Smith, a marketing expert with years of experience in different industries and specialized knowledge on branding and Internet marketing. 1031 Exchange – 1031 Exchange Information

1031 Exchange Oil Royalty Tax

1031 exchanges are structured transactions that combine together the sale of an old property and the purchase of a new property with the aim of deferring taxes. It is possible to sell hard real estate, such as an office building or an apartment building, and buy mineral interests as replacement properties. Mineral interests can be exchanged for any other interests like real estates. Real estates could be something like an office building or an apartment building.

Production payments do not qualify for a 1031 exchange, because production payments are for services you perform in connection with extracting oil or gas from the ground. These payments are considered as ordinary income. The sales of working interests often involve the sale of the related equipment used in extraction. While the IRS allows one to transfer a minimal amount of equipment tax free, transfers of substantial equipment exceeding 15% of the sale price require the equipment to be treated as a separate exchange. Equipment exchanges have different rules in 1031 exchange.

The costs one incurred to drill and develop the well site must be recaptured to the extent that one does not acquire qualified natural resource property. In other words, if one sells a working interest and buys an office building, he would have to recapture the Intangible Drilling Costs (IDC) costs that have been previously deducted. Experts offer excellent options with expert exchange features. All of their exchanges are handled by a team of experienced attorneys. Choosing these licensed professionals ensures that the education, knowledge, and ethical standards of the team have passed rigorous testing. These attorneys check for real property use, identification, and exchange periods for mineral interests. Reinvestment requirement is another important issue in oil and gas investments.

The process of 1031 exchange for oil royalty can be started with just a telephone call or an e-mail to experts who specialize in 1031 exchanges. These experts maintain their profile through which they can be accessed for further discussion.

1031 Tax Exchange provides detailed information on 1031 Tax Exchange, 1031 Tax Exchange Laws, 1031 Tax Exchange Opportunities, 1031 Tax Exchange Forms and more. 1031 Tax Exchange is affiliated with 1031 Exchange Requirements.

1031 Reverse Exchange Rules

The 1031 reverse exchange rules allow you to acquire your like kind replacement property before you sell your relinquished property. We will look more closely at the 1031 reverse exchange rules and potential ways this strategy is being applied.

Reverse 1031 exchanges give the Exchangor the flexibility to take all the time they need to locate the ideal replacement property, without the pressure of the forward 1031 exchange deadlines. Reverse 1031 exchanges have been structured by legal and tax advisors for years, but in terms of the actual "1031 reverse exchange rules" there was precious little guidance from the Department of the Treasury or Internal Revenue Service. Until very recently, investors only could look for guidance from certain tax court decisions that were handed down. Fortunately, exchangors no longer have to rely on the educated guesses of their advisors on 1031 reverse exchange rules about how to properly structure their reverse 1031 exchange transactions. Rules and guidelines have been established are basically as follows:

First, the reverse exchange must involve an Exchange Accommodation Titleholder (EAT). The EAT is an independent third party that holds, or parks, the Exchangor's Replacement Property following or prior to the exchange period. The EAT must have a qualified indicia of ownership at all times from the date of acquisition until transfer.

There are several types of reverse exchanges. The Safe-Harbor Reverse is an exchange whereby the EAT parks the replacement property prior to the sale of the old property. The exchanger must identify the relinquished property or properties within 45 days of the parking arrangement, and must have the entire transaction complete within 180 days of the parking arrangement.

The Traditional Reverse is a reverse exchange that typically looks identical in structure to the Safe-harbor reverse, yet it will fall outside of the safe-harbor due to the fact that it can not be completed within the time frames provided. Typically, the exchanger is unable to sell their old property within 180 days of the parking arrangement, and therefore the time frames set forth by the safe-harbor are not met. This type of transaction is not necessarily a "red flag" for an audit by the IRS, but does require quite a bit more documentation and consultation by the intermediary to assure the transaction is done properly to avoid scrutiny by the IRS.

A Construction/Improvement Reverse allows the exchanger to park a piece of property or land that will be built upon or improved during the exchange period. This is the most powerful reverse exchange available, as it allows the exchanger to literally create the exchange property they will eventually exchange into through the development or construction process.

As is probably no surpise from the cursory review of the 1031 reverse exchange rules, the costs surrounding 1031 reverse exchanges are considerably more than those for a traditional, Forward Delayed Exchange. However, with replacement property often being the biggest challenge to a successful exchange, many investors

 think they are quite often well worth the expense.

A Primer on a 1031 Realestate Exchange

The 1031 real estate exchange is popular because it allows taxpayers to dispose of certain real or personal property and defer their federal, and in most cases, state income tax liability by exchanging the real or personal property (relinquished property) for qualified use "like-kind" property (replacement property). But investors should remain aware that the transaction is governed by IRS rules and regulations. To use this technique you must become a student of the concept.

A good first course is to have basic understanding of the rules for a 1031 real estate exchange. A good place to start is by knowing the different types of like-kind exchanges:

A simultaneous exchange occurs when the exchange (disposition) of the relinquished property (sale property) and the purchase of the like-kind replacement property occurs at the same time. The delayed exchange, the most common form of exchange, occurs when there is a time delay between the transfer (conveyance) of the relinquished property (sale property) and the purchase of the like-kind replacement property. This type of exchange is subject to time limits set by the Department of Treasury.

When the like-kind replacement property is purchased first, prior to transferring (conveying or selling) the relinquished property to the actual buyer, it is called a reverse exchange. Built-to-suit exchange refers to the technique of allowing the taxpayer to build on, or make improvements to, the like-kind replacement property, using the exchange proceeds before they actually take title to the property. And finally, the personal property exchange occurs when personal property is exchanged for other personal property of like-kind or like-class as long as the personal property has been held for investment, income production (rental) or use in a business.

Also, knowing the types of property that can be exchanged under a 1031 will help property owners find replacement properties in a changing market place. Qualifying use property is property that has been or will be held for income production (rental), investment or used in a trade or business. Your personal residence and vacation home are not qualifying use property and thus do not qualify for 1031 real estate exchange treatment. Assuming the property satisfies the qualified use test, then the property must also satisfy the "like-kind" test. Real property is "like-kind" to real property, so as long as you are exchanging real property for real property it will qualify as "like-kind" for 1031 exchange treatment. In general, any type of real estate may be traded for another type of real estate as long as it satisfies the qualified use test.

1031 Exchange Preconstruction Contracts

The 1031 exchange and pre-construction contracts – these have two of the more popular tools used by real estate investors in recent years. The question is the same one asked by Reese’s when it looked at peanut butter and chocolate – are they two great things that are better together?

The answer with the resulting Reese’s Peanut butter Cups was a resounding yes. For the 1031 exchange and pre-construction contracts the answer is much less clear. Indeed, “use caution” seems to be the answer best applies. Let’s see why:

First, as with all 1031 exchanges, the same common-sense rules apply to transactions involving pre-construction contracts as with all other potential real estate transactions. Specifically this means: holding the contract to be sold for at least one year, using a qualified intermediary to handle the details, applying all the initial contract proceeds toward the replacement contract purchase, and purchasing or entering into replacement contracts of at least as much value as the sold contracts.

Beyond these basics, investors should enter into potential 1031 exchanges with pre-construction contracts with even more caution for several reasons. Let’s use the most common example: a condominium pre-construction contract. In this instance, investors need to bear in mind that the condominium developer's approval generally is required in order to sell a pre-construction contract. And, as a condition of approval, many developers require a share of the sale's profits. In addition, many lenders and financial institutions frown upon on numerous assignment contracts and prefer to see actual contract buyers.

The conservative and safe approach to using a 1031 exchange for pre-construction contract on a condominium is to obtain a tax opinion letter from a certified public accountant stating that the contract-for-contract exchange qualifies. Investors must be careful since, if the transaction is not handled appropriately, the IRS may raise a red flag if it suspects the contracts being exchanged are for flipping, not investing.

When attempting to navigate the path that leads to successful 1031 exchanges for pre-construction contracts, all real estate professionals and investors should seek legal and tax counsel on their transactions. In addition, exchangers should hire a well-experienced, independent qualified intermediary to ensure their 1031 transactions are managed according to IRS guidelines.

1031 Exchange Boot Tax

 

1031 exchange deals with a real estate transaction. The transaction is realized under the rules of section 1031 of the Internal Revenue Code. A 1031 exchange allows for deferring relevant taxes until a future date or even completely eliminate potential taxes associate with the sale of real estate. 1031 therefore allows the owner to have more money available on an interest free basis, which could be invested and thus allows for a more expensive property.

The term is increasingly being heard across states, with the real property business witnessing an unprecedented boom in recent times. A typical 1031 exchange would involve a property owner trading a property for another like-kind replacement property. It is something similar to how humans used to transact business centuries ago. It is similar to the "barter" system of ancient times, where you would exchange one product for another. 1031 exchange allows for one property in exchange for another like-kind.

When one says like-kind real properties, they could be improved or unimproved properties. However the property in one country and outside the country cannot be deemed to be like-kind. The entire deal to be transacted needs the service of a qualified intermediary, also known as an accommodator, who is a person that holds the funds received from the sale of the relinquished property till the replacement property is purchased. The person also ensures that the rules around 1031 exchanged are abided by both the parties to the deal.

The "boot" in exchange is anything of value exchanged which is not like-kind to the relinquished property. The boot is mostly in form of either cash or mortgage debt. This enables to equalize the transaction. One can get extensive information on 1031 exchange boot tax through online resources. Your personal financial advisor is perhaps best placed to advise you on the intricacies involved in 1031 exchange. It is therefore highly recommended that you get in touch with your personal financial advisor, before you go in for a 1031 exchange.

1031 Tax Exchange provides detailed information on 1031 Tax Exchange, 1031 Tax Exchange Laws, 1031 Tax Exchange Opportunities, 1031 Tax Exchange Forms and more. 1031 Tax Exchange is affiliated with 1031 Exchange Requirements.

1031 Exchange Options

 

In a 1031 exchange, one can exchange any real property for any other real property within the United States or its possessions, if the properties are held for productive use in trade, business, or for investment purposes and are like-kind properties. Examples of qualified like-kind exchanges can be an apartment building for farm/ranch, an office building for hotel, or an unimproved property for commercial property.

Exchange options are varied and can involve reverse exchanges, construction (improvement) exchanges, oil-gas exchanges, aircraft exchanges, or personal property exchanges.

The reverse exchange provides greater flexibility in structuring the exchange. This code doesn't allow for an exchanger to exchange into a property that is already owned. But reverse exchange offers the provision of closing on a replacement property, while still trying to sell the old property. There are various options in this exchange like the safe-harbor reverse, traditional reverse, construction/improvement, and the reverse leasehold improvement reverse.

Safe-harbor is a transaction whereby the accommodator takes control of the replacement property prior to the sale of the old property. Time frame provided is 180 days before which the transaction should be completed. Traditional reverse is a reverse exchange that typically looks identical in structure to the safe-harbor reverse, yet it will fall outside of the safe-harbor due to the fact that it cannot be completed within the time frame provided. Construction/improvement is a type of reverse exchange that allows the exchanger to park a piece of property or land that will be built upon or improved during the exchange period. This is the most powerful reverse exchange available for development or construction process. Leasehold improvement reverse is an exchange whereby the exchanger will actually build on property they already own, treating the building as the parked property.

Personal property or aircraft exchange deals with like-kind exchanges personal property or aircrafts respectively. Oil-gas exchanges are mineral or drilling equipment exchanges.1031 Exchange provides detailed information on 1031 exchange, 1031 exchange companies, 1031 exchange experts, 1031 exchange forms and more. 1031 Exchange is affiliated with 1031 Tax Exchange Opportunities.

 

 

1031 Property Exchange

 

1031 Exchange is a tax deferred plan for any one who wants to get involved in the property exchange. This exchange has a lot of value for re-investors who plan to exchange their property for a better value property without involving any monetary gains. In this exchange the tax payers are exempted from tax as the exchange doesn’t involve any monetary gains and exchanges.

1031 Exchange talks about the real estate property that can be qualified as business, trade or investment purpose like apartments, office buildings, multiplexes, single family or condo rentals, raw land, farms, ranches, commercial, and industrial. Thus, the exchange of this property with a similar property for again investment or business purpose without the hassle of paying any federal or income taxes is one of the many advantages of 1031 Exchanges. The exchange is restricted only to the provision of Real property including Land, Rental, and Business property and doesn’t involve deals and exchanges of Personal property.

1031 Exchange is thus a great way of settling down your non-income producing real estate investments for a better land that can in other ways help you in gaining some cash and income flow in return. The exchange is also helpful for people who have been holding various properties for long and have not much value for them; they can be disposed off in this exchange and can help them acquire various new ones that can be much more beneficial for them. 1031 Exchange is also helpful for those properties that may be located in areas not much value of now and can be traded with those in a better location. 1031 exchange is thus a great way of exchanging your property without any tax paying hassle and with proper planning you can gain a lot via these exchanges.

Investing in Property is a safe bet & investment for most of the people as it helps them gaining a lot by selling and reinvesting again and again. With the 1031 Property Exchange you can not only gain a lot in the name of exchange and reinvest the same on the better property which can help you pay your previous debts. Most of the people have misconceptions about the 1031 Exchange, it is not necessary that you buy and sell property at the same time to get an exchange, but rather you can do that at a later time which is acceptable in this section and is known as "Delayed Exchange" by which you can sell now and buy at a much later time.

Similarly by this 1031 Exchange you can buy and sell multiple properties and all would be counted in the exchange, if the financial gain is none. Most of the law firms tell an easy formula to calculate this exchange and that is when you sell your property, the replacement property must equal or be greater than the VALUE (sale price) and existing DEBT of the property being sold (exchanged), and all of your EQUITY from the property you are selling (exchanging) must go into acquiring the replacement property(s). T gain and for that you have to pay tax.he only disadvantage in the section 1031 as far as property is concerned when you get a financiaBy Ray Walker
More Information about 1031exchange resources

What is a 1031 Exchange?

 

The IRS has an exchange provision that allows you to put the extra money you make off the sale of real estate into another equal or higher value property without paying taxes on the capital gains. You can’t do this on your primary house, but you can on a beach condo or a rent house. There are some things the experts suggest you do.

Get what the IRS calls a “Qualified Intermediary.” They will charge between $500 and $1500 for the deal. They escrow the money from the time you sell to the time you buy the new property. You must trade up within 45 days of selling and close the deal within 135 days. Make sure your “QI” is bonded and insured for negligence and fraud.

Watch the details. For example, if you bought a property for $200,000 and have depreciated it out for taxes to $100,000. Now you sell it for $400,000. Think you’ll roll over $200,000? Nope. The IRS says you have to drag the depreciation with you – only $300,000 total.

Also, don’t rush to trade up. Sometimes its best just to pay the tax. Don’t end up with something worse or something that appreciates slower than what you had. Its not always a good deal.

Check out 1031.org for the Federation of Exchange Accomodators.Stuart Simpson http://www.voip-telephony-review.com/