1031 exchange

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

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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.

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.

Three Easy Steps to Quantifying Capital Gains Tax

Posted on | by Tom Gustafson | Leave a Comment on Three Easy Steps to Quantifying Capital Gains Tax

1031 Replacement PropertyTax-Free Exchanges make sense when federal and or state capital gains taxes and recaptured depreciation exist.  Are they really tax free?  No, the taxes are simply delayed or postponed until the replacement property sells.  Another 1031 exchange can be initiated as many times as desired continuing to defer the capital gains tax.

Three Easy Steps to Determine Capital Gains

Adjusted Basis is determined by

Original Purchase Price

Plus Improvements

Less Depreciation

Realized Gain is determined by

Sales Price

Less Adjusted Basis

Less Selling Expenses

Taxes Due are determined by

Recaptured Depreciation:  Multiply the depreciation taken by 25%.

Federal Capital Gains:  Subtract the depreciation taken from the realized gain.  Then multiply the remainder by the capital gain rate for short term rate or ordinary income rate if asset is held for less than one year and a day.  If longer multiply the remainder by the long term rate or currently 15% as of November, 2010.

State Capital Gains:  In Indiana, the state capital gains rate is applied to the entire realized gain.  Each state may determine their gains differently.

Add the three numbers together and the total represents what is deferred in a 1031 exchange.  Some states do not impose a state capital gains tax, consequently, add the two numbers to determine the tax that can be deferred.

What is Capital Gains

Capitals gains is the tax on the investment income or profit earned from holding or owning real or personal property.  Capital gain is triggered when the asset is sold resulting in a tax obligation if as determined above a capital gain exists.  Recaptured depreciation is determined by taking the total amount of depreciation itemized on federal income tax returns multiplied by 25%.

To learn more exchange tips, download a free guide that also includes

  • FOUR Exchange Rules
  • What is and is not eligible for a 1031 exchange
  • Identification Rules

New Hampshire SB 483 and 1031 Exchange

Posted on | by Tom Gustafson | Leave a Comment on New Hampshire SB 483 and 1031 Exchange

Recently, the New Hampshire Governor signed Senate Bill 483 into state law. This is a significant event in the 1031 exchange world especially as states look for revenue generating sources.

“The new law amends prior law which would deprive taxpayers Section 1031 tax deferral on a state level if they purchased replacement property in the name of a new entity, notwithstanding that the acquiring entity was a disregarded entity. The typical situation would be that in which a taxpayer was required by a lender or TIC sponsor to acquire a replacement property in the name of a new single member LLC. The State of New Hampshire began disallowing exchange treatment on those transactions in 2008 and began to audit previously closed transactions as far back as 2004, without notice either to taxpayers or to the professionals in the industry.

The new law makes it clear that exchange treatment will not be affected by taking title in the new entity as long as the entity is a single member LLC, revocable trust or other entity which is disregarded for federal income tax purposes. The amendment eliminates the “claw back” efforts to 2004.” Provided by the Federation of Exchange Accommodators.

For New Hampshire the bill removes a tax liability that otherwise made 1031 reverse exchanges a non starter. Single member limited liability companies are frequently used to take title to either the new or old property in a reverse 1031 exchange.

What do you think about the New Hampshire state law?