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.

Deductible and Non Deductible Selling Expenses in a 1031

Posted on | by Tom Gustafson | Leave a Comment on Deductible and Non Deductible Selling Expenses in a 1031

Deductible Selling ExpensesWhat selling expenses in a real estate transaction are not taxable if paid from the 1031 exchange proceeds? Specifically, in a 1031 exchange, what selling expenses can be paid from exchange proceeds without triggering a tax?

Deductible Selling Expenses

Selling expenses that are not taxable typically include:

  • Commissions
  • Finder’s fees
  • Title charges
  • Title search fees
  • Title examination
  • Notary fees
  • Title insurance
  • Document Prep
  • Courier fees
  • Escrow fees
  • Tax certification
  • Pest inspection
  • Testing fees
  • Survey
  • Gov’t recording
  • Home warranty
  • Legal and 1031 fees
  •  QI fees

Minor repairs required for the sale can be paid from exchange proceeds directly to the contractor.

Non Deductible Selling Expenses

Selling expenses that should be taxable as ordinary income include:

  • proration of rents;
  • property taxes;
  • property insurance premiums debited against the Exchangor;
  • reserves deposited with the lender and utilities;
  • any items payable in connection with a loan are considered taxable.

Reimbursement for major repairs, capital improvements and earnest money deposits are considered taxable. The Service views the first dollar paid out as taxable. In a 1031 exchange if you need to pull these funds out, a post exchange refinance is an alternative. After the replacement property has closed, secure a line of credit on the property. You can then pull out cash without triggering a tax.

Another alternative is to do a partial exchange, recognizing that any cash received is taxable. There is a point when the equity pulled approaches 50% that it does not make sense to initiate a 1031 exchange. Always seek the counsel of your accountant for tax planning strategies like 1031 exchanges.

 

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 800-227-1031 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.

1031 Exchange Timeline Extensions

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1031 exchange 45 day identification and 180 day exchange periods can be extended by Presidentially declared disasters, terroristic or Exchangors serving in combat zones.  Extensions apply to both forward and reverse 1031 exchanges.

IRS Written Confirmation

The IRS publishes a notice or IRS News Release defining:

  • Location of disaster;
  • Length of exchange period postponements;
  • Exchangors affected;
  • Acts that have been postponed.

Do not rely on the verbal response of an IRS Agent.  Only IRS extensions in writing can be used to support Exchangor’s actions.

The Robert T. Stafford Disaster Relief and Emergency Assistance Act defines disaster as “any natural catastrophe (including any hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm or drought),or, regardless of cause, any fire, flood, or explosion, in any part of the United States, which in the determination of the President causes damage of sufficient severity and magnitude to warrant major disaster assistance to supplement the efforts and available resources of states, local governments, and disaster relief organizations in alleviating the damage, loss, hardship, or suffering caused thereby.”

Regulation § 301.7508A-1(d)(1) defines the seven types of affected Exchangors while terroristic or military action is defined in Internal Revenue Code § 692(c)(2).

Typically, the exchange periods are extended 120 calendar days but in no event may the postponement extend beyond the Exchangor’s tax return due date including extensions or one year.  Not all Exchangors qualify for an extension.  In all cases, seek the advice of your financial or legal advisor. To view tax relief for disaster situations, go to Item Two of Tax Updates.

 

 

Three Farmland Trends Impacting Use of 1031 Exchanges

Posted on | by Tom Gustafson | Leave a Comment on Three Farmland Trends Impacting Use of 1031 Exchanges

With the price of food beginning to increase, the underlying value of farm land has followed impacting the use of 1031 exchanges. Tax deferred exchanges have provided farmers multiple benefits besides deferring capital gain taxes when equal or greater real property is replaced. Some farmers elect for less labor intensive real estate such as oil and gas royalties, single tenant triple net leases with a CVS pharmacy or Tire America to owning commercial buildings with corporate client tenants in a tenants in common or TIC.

Benefits of a 1031

Benefits to taxpayers and farmers initiating 1031 exchanges include:

  • Consolidate holdings;
  • Diversify property mix;
  • Relocating property to path of progress and greater cash flow;
  • Replacing fully depreciated property for one that can be depreciated reducing offsetting tax on income;
  • Replacing farmland with a vacation rental property;
  • Selling at property market peak and reinvesting with property below market value.

These benefits are in addition to the interest free loan on the deferred tax dollars that otherwise would be paid out that are instead used towards the purchase of the replacement property.

Three Farm Land Trends

The Standard & Poor’s 500-benchmark index’s average annual return between 1950-2008 was 11.8 percent, while the return on farm land with current yield and capital appreciation was 11.6 percent. Three farmland trends contributing to the rise in farm land values are:

  • Capital appreciation of the land.
  • Current cash yield of the crops grown annually.
  • Assets such as livestock, seed sales, mineral, oil, gas and water rights, hunting and wind rights.

Conclusion

With the continued improvement in farm technology, herbicides and disease resistant seeds, increasing farm yields are contributing to interest from investors wanting to include farm land in their mix of asset holdings. For farm land owners, this equates to how best to maximize their investment and 1031 exchanges represent a consistent strategy helping them to secure the desired yield.

Are you considering selling your farm land? Talk with us about how a 1031 exchange can benefit you.

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.

1031 Exchange Rules: Multiple Owner Insight

Posted on | by Tom Gustafson | Leave a Comment on 1031 Exchange Rules: Multiple Owner Insight

Though 1031 exchange rules provide the requirement for who the Taxpayer is and can be in a 1031 exchange, Section 1031 does not provide the absolute definition. Rather the inference the Taxpayer is the same is found in Section 1033.

1031 Exchange Rules

1031 exchanges can be initiated by a variety of parties. Which party is on title to the relinquished (old) and replacement property is critical. 1031 exchange rules require the Taxpayer who sells is the Taxpayer who buys. The tax return that sells is the tax return that buys. So what happens given:

  • A single or multi member limited liability company;
  • Husband and wife;
  • Taxpayer Death;
  • Corporation.;
  • Grantor Trusts.

Limited Liability Company

The sole member of a single member limited liability company (smllc) can hold the old property in the sole member’s name and the replacement property in the smllc or vice versa. This is provided the state law allows a smllc.

If a multi member limited liability company or partnership is on title to the relinquished or old property, the entity must be on title to the replacement property, not the individual partners. The partnership may change from a general partnership to a limited partnership or limited liability during the exchange without effecting the 1031 exchange.

Drop and Swap

What happens if in a two member limited liability company (mmllc) one member wants to go forward in a 1031 exchange and the other wants to cash out? The IRS has become more attentive to the drop and swap of old when partnerships and multi member limited liability companies dropped ownership to the individual members allowing one member to go forward in a 1031 exchange while the other cashes out. On Form 1065, Schedule B, questions 13 and 14, the IRS is now asking whether in the current or prior tax year, did the partnership or mmllc distribute property to another entity or to any partner in a tenancy in common interest.

Though IRS has not provided a specific time frame, a one year hold prior to or post the acquisition is suggested to support the intent of holding for investment.

Husband and Wife

Given husband and wife are on title of the old property, then both should also be on title to the replacement property. If only the wife is on title to the old property, then the new property should also be titled to the wife. Latter, once the exchange is “old and cold” the husband can be added.

Taxpayer Death

If the Taxpayer dies after initiating a 1031 exchange in either a reverse or forward exchange, the Taxpayer’s estate or trustee can complete the exchange.

Corporation

If a corporation and not its shareholders are on title to the relinquished or old property, then the corporation must be on title to the replacement property. If the shareholders are on title to the old property, then they must be on title to the replacement property and not the corporation.

Grantor Trusts

A revocable living trust or “grantor” trust may be on title to the replacement property while the Taxpayer is on title to the old or relinquished property and vice versa. For federal tax purposes revocable living trusts or “grantor” trusts are not considered separate entities from the Taxpayer.

Conclusion

When planning a 1031 exchange, the same Taxpayer requirement must be followed. If considering acquiring the replacement property in a different entity, planning is critical along with a solid understanding of the exceptions.

Is your company selling a commercial building or real property and the acquiring titleholder is different? Do you have a question how this impacts your 1031 exchange?

The Certified Exchange Specialist on staff has been accommodating simple and complex 1031 exchanges for professional advisor’s and their domestic and foreign clients since 2003. If you have any questions regarding multiple owners, call our office at 1-800-227-1031 or start your free consultation above.

IRS Section 721 Exchange and UPREITs

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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?