Tom Gustafson

What a Lender Should Know About a 1031 Exchange

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Recently I spoke with a mortgage office about 1031 exchange basics and the circumstances where they would typically see one. Here’s a quick read for those new and old to the mortgage industry.

1031 Exchange Basics

Who: Individuals, trusts, partnerships, corporations both domestic and foreign are eligible for the tax deferral.

What: Real and personal property held for an investment or for use in a business are eligible for 1031 consideration. Property is sold and replaced. Real property can be replaced with any kind of real property while personal property must be replaced with like-kind personal property. U.S. for U.S. based property while international is replaced with international property.

Why: A 1031 exchange enables the titleholder to defer federal and state capital gains and recaptured depreciation taxes representing upwards of 40% upon sale of the old property.

When: The tax deferred exchange must be signed prior to or at the closing of the first property. The Exchangor must complete their tax deferred within 180 calendar days post the first closing.

How: The use of a qualified intermediary is required to effect a 1031 exchange, except in a two party or “pure” exchange. Given the moderate intermediary fee, it is well worth an accommodator facilitate the exchange.

Forward and Reverse 1031 Exchange

There are two types of exchanges a forward and a reverse. Forward exchanges are when the old or relinquished property is sold first followed by the acquisition of the replacement property. In a reverse, the replacement property is purchased first, with 180 calendar days to sell the old property.

Here’s where you come into the transaction. The Exchangor needs to acquire the replacement property first. In a reverse 1031 exchange, the Exchangor is not allowed to own both the new and the old at the same time. The qualified intermediary creates an Exchange Accommodator Titleholder (EAT) in the form of a single member limited liability company to take title to either the new or the old property for the duration of the 1031 exchange.

If the EAT takes title to the new property that the Exchangor is financing with you, the EAT signs a non recourse note, guaranteed by the Exchangor. Payments continue as normal with the EAT temporarily on title. The Exchangor signs a triple net lease with the EAT to cover insurance, taxes and expenses of renting the property. Once the old property is sold, title for the new property is transferred to the Exchangor.

If the EAT takes title to the old property, the new property financing continues as normal. With the EAT on title to the old property, mortgage payments continue to be paid by the Exchangor. The property is marketed and sold with the Exchangor signing the settlement statement under “Read and Approved” while the EAT signs as the Seller. The 1099 bears the name and address of the Exchangor.

If the old property fails to sell, the property parked with the EAT is conveyed to the Exchangor by the 180th calendar day.

Many of my referrals come from mortgage brokers seeking a seasoned qualified intermediary to accommodate reverse 1031 exchanges. If you have a question, call us at 850.496.0090 or

If you would like a tri fold semi glossy brochure with Atlas 1031 business cards for your office, send me a note and thirty will be sent including the plastic brochure holder.

Experience matters.

Realtor 1031 Exchange Qualifying Questions

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Realtor 1031 Exchange Qualifying QuestionThe Realtor who understands a 1031 exchange is in a position to benefit over those Realtors who do not. Knowledge is power.

All too often when it is too late to initiate a 1031 exchange, I hear “Why didn’t my Realtor tell me I should have considered a 1031 exchange?” Was the Realtor asleep at the wheel? What should the Realtor ask?

First, two sales commissions are better than one, right? I facilitated one exchange with five properties being sold and three replacement properties being purchased. How about eight sales commissions from one Exchangor? More importantly, the exchange must be completed in 180 calendar days. Exchangors are motivated to act within a short period of time.

1031 Qualifying Questions

What questions should the Realtor ask?

  • Is the property for sale an investment or rental property?
  • Is the replacement property an investment or for business use?

The next step is to provide the name and contact information of a Qualified Intermediary to listen and explain the steps of a 1031 exchange. Take the monkey off your back and toss the responsibility over to the expert. It’s that easy. You don’t need to get into the details.

The outcome of thirty percent of phone consultations is not to initiate a 1031 exchange for a variety of reasons. Perhaps, there is a loss that offsets the gain. Or the Taxpayer wants to cash out. Often, the decision to exchange or not is passed on to their accountant. Either way, the Exchangor is making an informed decision based on facts.

Conclusion

Next time your client or potential client calls to ask about selling a property, ask the two questions that will set you apart from other Realtors. More importantly, understand the impact of another referral from a satisfied client who sold and purchased a property with your guidance within 180 calendar days.

Two sales are better than one.

1031 Exchange Mistakes

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1031 exchange mistakes to avoid will help novice and experienced 1031 Exchangors gain insight how to be better informed and take ownership of their 1031 exchange. With ownership, Exchangors ask better questions.  The outcome of better questions is fewer if any surprises.

When Is It Too Late?

Is it too late to initiate a 1031 exchange? If you have closed and received the net proceeds of the sale, it is too late. Once you receive the proceeds it is nearly impossible to unwind the closing. When considering selling an investment property like a farm, ranch, rental property or collectible, one of the first steps is to talk with your accountant to determine whether a 1031 exchange makes sense.

After The 45th Day Can The ID Letter Be Changed?

Can the identification letter be changed after the 45th calendar day? No.

Confirm receipt of the identification letter with your qualified intermediary. The best way to avoid missing the identification deadline is to complete the task by the 44thcalendar day and follow up with the accommodator confirming receipt. Otherwise be sure to send the identification letter by fax to your qualified intermediary no later than 11:59 PM of the 45th calendar day post closing.

Postponing the 45th and 180th Calendar Days

Can the 45th and 180th calendar days be postponed? Yes. Under the following conditions, the identification and replacement periods can be extended.

  • Presidentially declared disasters;
  • Terroristic actions;
  • Military actions or Exchangors serving in combat zones.

Requesting Exchange Funds

You want your exchange proceeds when? The best time to request receipt of exchange proceeds is:

  • At the relinquished or old property closing, take a partial disbursement.
  • If no replacement properties are identified by the 45th calendar day, the exchange is over and exchange proceeds are wired to your bank account.
  • Exchange proceeds are held until the 180th calendar day unless used to acquire replacement property, then wired to your bank account.

Once into a 1031 exchange, the exchange proceeds cannot be received by the exchangor unless at one of the three exceptions described above. Otherwise, the accommodator could be considered an “accommodating accommodator” and taint their third party, independent status.

When considering selling real or personal property call us to discuss a 1031 exchange.

We Can Help 

Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.

Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.

Flipping and 1031 Exchanges: Incompatible

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Flipping is a real estate transaction where before you buy a property your intent is to sell it soon after. Is flipping eligible for 1031 consideration? No and the answer is in the facts. Whether the property is held for proper purpose is the taxpayer’s burden of proof.

What is the qualified purpose requirement? IRC §1031 does not define “held for productive use in trade or business” or “held for investment.” Qualifying property must be held for investment or use within the taxpayer’s trade or business. The taxpayer’s intent or purpose for holding the relinquished or old property and the replacement or new property is determined when the exchange takes place.

How long the property needs to be held or better known as the holding requirement is one fact of many, and is not defined in the 1031 code. The Service takes the position that two years is sufficient. In addition, the Service views property acquired primarily to dispose of it, held for resale, rather than to hold for productive use in a business or trade, or to allow it time to season as an investment, a sale not an exchange or held for qualified purposes. The shorter the time held before or after an exchange, the stronger the facts must be to establish proper purpose or intent.

It is a slippery slope qualifying property for 1031 exchanges if the property is not held for the proper intent without supportive facts. Hold the property for at least a year and a day to qualify for long term capital gains tax.

A vacation home exchange now requires that the property is held for two years with 14 days of rental income in each of the two years as defined by Revenue Procedure 2008-16. Realtors, Developers, Building Contractors must watch that their property is not considered inventory or that they are considered a dealer which makes those properties ineligible for 1031s.

Contact Atlas 1031 Exchange as your Qualified Intermediary to learn more.

1031 Exchange: Leasehold – Wind Turbine, Billboard, Cell Tower

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A 30 year or more leasehold of land is considered like-kind to a fee interest in land. Providing that the taxpayer has the right to extend the lease, the thirty year leasehold interest is eligible for Internal Revenue Code Section 1031 exchanges, allowing the taxpayer to defer federal and state capital gains while replacing with any type of real property.

Leasehold Interests

Wind energy projects are plentiful in north western Indiana, where it doesn’t take long driving county roads to see the ever present three whirling blades of megawatt turbines, producing electricity and revenue for the land owner. Purdue University, located in western Tippecanoe County, Indiana, is working towards a 100-megawatt turbine park that includes 50 two-megawatt turbines on 1,600 acres. Annual leases are projected to generate $10,000 per turbine. Many Indiana farmers have opted for similar thirty year leases with developers who combine engineering and construction services with power purchase agreements from utilities.

The right to use someone else’s property is a leasehold interest. Improvements made to land leased for thirty or more years are considered real estate. In the example of the wind turbines, the taxpayer who owns the wind turbines, along with the leasehold, can sell the lease. As long as the remaining term of the lease is 30 years or more including extensions, the taxpayer can defer the capital gain taxes when replacing with another thirty plus year lease or other real estate.

Examples of Leasehold Interests

In addition to wind turbines, other common construction projects on leasehold land include cell phone towers, billboards and outdoor advertising. Given the leasehold interest of thirty or more years, billboards and cell towers are improvements to the land and considered  like-kind to a fee interest in other real property.

Leasehold Gray Area

As a general rule, leaseholds with a term of less than thirty years are not considered like-kind to real property. In private letter ruling 200842019, the Internal Revenue Service (IRS) stated in an exchange of leaseholds:

“ if the two leased locations vary in value or desirability or in lease terms, these are factors that relate only to the grade or quality of the properties exchanged and not to their kind or class.”

The IRS may be saying that a lease for less than 30 years may be like-kind to a lease of more than 30 years. In Everett v. Commissioner Internal Revenue, a timber lease for three and six years for rights to remove timber on 5,000 acres was exchanged for a ten year timber lease on 24,000 acres.

If you are considering whether your lease is eligible for a 1031 exchange, contact our office or click the button below to ask a question. We will respond within six hours or less.

Foreign Property, Virgin Islands and 1031 Exchange

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As is often the case during the cold winter months in North America, questions regarding whether a 1031 exchange is applicable to properties in the Caribbean surface for clarification. As a former Rio Mar resident in Rio Grande, Puerto Rico, the question and picture stirs memories of sand, aqua blue waters, a young family, good friends, deserted beaches, lechon asado, Metropol in barrio Hato Rey, Medalla and warm sea breezes.

Foreign Property

In 1989, Section 1031 was amended with Subsection (h)(1) stating that real property located in the United States is not considered like-kind with real property located outside the United States. Foreign real and personal property used predominantly in a foreign country is eligible for 1031 exchange tax deferral treatment when exchanged for real and personal property located in a foreign country.

Virgin Islands

Section 7701 of the Internal Revenue Code (IRC) defines the borders of the United States as all fifty states and the District of Columbia. The Internal Revenue Service defined the borders of the U.S. to include the U.S. Virgin Islands for 1031 eligibility given the Exchangor is:

(1) A citizen or resident of the United States and

(2) Has income derived from sources within the U.S. Virgin Islands, is effectively connected to the performance of a trade or business in the U.S. Virgin Island or files a joint return with an individual who derives an income or is connected to a trade or business within the U.S. Virgin Islands.

Both requirements must be satisfied to exchange real property in the fifty states and real property located in the U.S. Virgin Islands.

Puerto Rico and Guam

Puerto Rico, though a Commonweath of the U.S. is not eligible for 1031 consideration. Guam is eligible for 1031 tax deferrals. It has been suggested that Sections 932 and 935 of the Internal Revenue Code provide special rules that treat Guam and the U.S. Virgin Islands as part of the U.S. while Puerto Rico is not.

FIRPTA

US citizens and foreigners owning real property outside the US defer federal capital gains taxes with a 1031 exchange when replacing with real property located outside the US. Foreigners selling US located real property must comply with the Foreign Investment in Real Property Act of 1980 (FIRPTA).

A nonresident alien individual, foreign corporation (unless a valid election under Section 897(i) has been made), foreign trust, but not a resident alien individual is considered a foreign person according to Regulation Section 1.4445-2(b)(2)(i)(C).

We Can Help 

Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.

Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.