1031

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.

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.

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.

 

1031 Exchange: Vacation Property Rental

Posted on | by Tom Gustafson | Leave a Comment on 1031 Exchange: Vacation Property Rental

Jeff Boll is General Counsel for SETCO Services, LLC in Perdido Key, Florida. He has worked with Atlas 1031 Exchange and Andy Gustafson for a couple of years referring clients interested in 1031 tax deferred exchanges. When it came to his personal 1031 exchange, he followed his guidance to others and engaged Andy at Atlas 1031 Exchange.

In his forward exchange, he sold a lot and acquired a condominium of greater value. It was a straight forward exchange, replacement property was identified within the 45 day time line and acquired shortly thereafter.

“The 1031 exchange was a very smooth process. I found Andy easy to work with and very professional. Though I have known and referred clients to Andy in the past, I trusted his knowledge and procedures to safeguard my exchange proceeds. VIST Bank provided monthly account statements reflecting my exchange funds balance. When if came time for the replacement funds, Andy initiated the wire out and VIST Bank called to confirm the personal identification number authorizing the disbursement. Andy responded to everyone of my emails or phone calls within the same day.”

Jeff Boll
Perdido Key, Florida

 

1031 Exchange: Land for Rental Property

Posted on | by Tom Gustafson | Leave a Comment on 1031 Exchange: Land for Rental Property

Chris Kim was referred to Atlas 1031 Exchange by his Realtor to accommodate the 1031 exchange of vacant land for a rental property in different cities in Texas. The old or relinquished property was sold and the exchange proceeds were wired to an escrow account established under his tax identification number in Leesport, Pennsylvania with VIST Bank. Chris identified a couple of properties as potential replacement property by the 45th calender day post closing. After negotiating the purchase contract for rental property, the closing was held and the exchange proceeds were wired the day before the closing.

The exchange went smoothly allowing the capital gains to be deferred and replacement property acquired before the 180th calendar day.

“Andy made the exchange an easy process.  At first, I was hesitant of working with someone I hadn’t met. But with each conversation, he answered all of my questions and did what he said he would. I found him patient, proactive in making me aware of decisions to be made in advance of the time lines. I hope to work with Andy and Atlas 1031 Exchange again and happily refer them to anyone who could use their fine services.”

Chris Kim
Houston, Texas

 

Land for Land 1031 Exchange

Posted on | by Tom Gustafson | Leave a Comment on Land for Land 1031 Exchange

Vicki Hoover at H & S Title and Escrow in Destin, Florida referred this 1031 exchange to Atlas 1031. The Taxpayer lives in Colorado and was selling and replacing property in the Florida Panhandle.

Simultaneous Exchange

A same day closing for both the old and new property was requested. Vicki coordinated the closing with all parties. This allowed for the exchange proceeds to be directed to the replacement closing without having to hold the net equity or exchange proceeds in an escrow account by the Qualified Intermediary.

Testimonial

“The reason, I wanted a 1031 exchange was to use those tax dollars towards purchasing the replacement property rather than paying the taxes now. It was completely painless and a simple process. The 1031 exchange could not have been any easier. I was comfortable with Andy from the start.”

Monica Holley
Telluride, Colorado