1031 Exchange Blog

Over the past 17 years, we have had the pleasure of guiding thousands of Exchangors through the 1031 Exchange process. Our Blog draws from that experience and includes content ranging from the basics of an Exchange for first time Exchangors to detailed commentary on complex exchanges for the expert investor. If you do not find the topic or specific question you are looking for, reach out to us via email at info@atlas1031.com or call our office to speak with our team at 1 800 227 1031.

IRS Section 721 Exchange and UPREITs

Posted on | by Tom Gustafson | Leave a Comment on IRS Section 721 Exchange and UPREITs

In a recent speaking engagement, I was asked about the relationship between Section 721 and 1031 of the Internal Revenue Code. The answer starts with Real Estate Investment Trusts (REITs) which can be publicly traded companies. REITs buy, sell and hold real estate portfolios consisting of a variety of different commercial properties ranging from shopping malls, apartments, office buildings, hotels, medical facilities and warehouses. Owning shares in a REIT is one way to own real estate.

UPREIT

An Umbrella Partnership Real Estate Trust (UPREIT) is an ownership structure consisting of an operating partnership with a REIT as the general partner and real estate investors as limited partners. Property owners can contribute their property to the operating partnership and receive an interest in the partnership called operating units. The tax free (or tax deferred) contribution of property for partnership interest is known as a 721 exchange or Section 721 of the Internal Revenue Code.

UPREITs represent an exit strategy for property owners of institutional grade property who rather than exchanging for another real property in a 1031 exchange, prefer the benefits of owning an interest in an UPREIT’s operating partnership. These operating units benefit from the REITs capital appreciation and distributions of operating income. At a time determined by the taxpayer, the operating partnership units can be exchanged for shares in the associated REIT. This conversion has tax consequences.

Taxpayers owning commercial property that is not institutional grade, can sell and replace through a 1031 exchange into a tenancy in common (TIC) property investment or acquire UPREIT grade property. Given the UPREIT wants to acquire the property and after holding the property for twelve to eighteen months, the TIC or property can be contributed to the UPREIT in exchange for operating partnership units through the 721 exchange.

Conclusion

Section 721 of the Internal Revenue Code provides an alternative strategy to a Section 1031 exchange allowing the property owner to convert their property into shares of a REIT. Owning shares in a REIT provides the benefit of a diversified real estate holding portfolio, professional management and liquidity.

Securing the counsel of a tax advisor familiar with 721 exchanges and subsequent converting of operating units to shares in the associated REIT is an important step to understanding the tax consequences.

For those who have used 721 exchanges, what do you suggest for those considering the exchanging for operating units rather than using the traditional 1031 exchange for replacement property?

Three 1031 Exchange Myths

Posted on | by Tom Gustafson | Leave a Comment on Three 1031 Exchange Myths

Over the years while speaking at seminars and in phone consults, three common 1031 exchange myths appear. Prior to getting to the three myths, let’s cover “what is a 1031 exchange?”

1031 Exchange

A 1031 exchange allows the seller of a rental property to sell and defer the capital gains and recaptured depreciation taxes as long as any type of real property such as land, oil and gas royalties, or commercial property are acquired of equal or greater value. Tangible and intangible personal property such as livestock, aircraft and patents are also eligible for 1031 tax deferral treatment.

The tax obligation does not evaporate, but rather delayed, postponed until the replacement property is sold. The tax can represents up to 40% of the old property’s sale price. Why not use those dollars towards purchasing the replacement property?

1031 Exchange Myths

The top three exchange myths are:

  • land must be exchange for land or rental for rental property.

As with all 1031 exchanges, consideration must be given to the nature and character of conveyed rights of the 1031 exchange properties to determine whether they are essentially alike. This includes the likeness of physical properties, character of title conveyed, rights of the parties and period or duration of interests. Real property can be exchanged for any real property.

  • Earnest money deposit can be returned at propert closing tax free.

The IRS views the first dollar out as taxable. Yes, that means being taxed twice.

  • Replacing retired debt from first closing is not required.

Many assume only the net equity from the sale needs to be reinvested. If the old property has debt, then that debt must be replaced in the replacement property, unless additional cash takes its place. Cash offsets debt, but debt does not offset cash. If the debt is not replaced, a tax is triggered called mortgage boot or a benefit of no longer having the debt.

Conclusion

There are many 1031 exchange rules. Engage a qualified intermediary that will ask the appropriate questions to help make sure you are aware of your responsibilities.

Do you have a question regarding a 1031 exchange? I always suggest to engage the qualified intermediary when you are considering placing the property up for sale. Experience matters.

What a Lender Should Know About a 1031 Exchange

Posted on | by Tom Gustafson | Leave a Comment on What a Lender Should Know About a 1031 Exchange

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

Posted on | by Tom Gustafson | Leave a Comment on Realtor 1031 Exchange Qualifying Questions

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

Posted on | by Tom Gustafson | Leave a Comment on 1031 Exchange Mistakes

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

Posted on | by Tom Gustafson | Leave a Comment on Flipping and 1031 Exchanges: Incompatible

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.