1031 exchanges

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?

1031 Exchanges in a Tight Credit Market

Posted on | by Tom Gustafson | Leave a Comment on 1031 Exchanges in a Tight Credit Market

What happens to a 1031 exchange when the ability to secure a loan is restricted?  There is only one real option.  That is to infuse additional cash into the exchange.  Additional cash offsets debt, but debt does not offset cash.  Once the replacement property is purchased, establish an equity line of credit to pull out cash without triggering a tax also known as a post exchange refinance.

Reverse Exchange

Tough credit markets require additional planning.  Perhaps the replacement property should be acquired through a 1031 reverse exchange.  By purchasing the replacement property before selling the old or relinquished property, the outcome of tight credit will be mitigated rather than the alternative of a failed exchange because either the loan process exceeded the 180 calendar day time requirements or addtional cash was not available.

Installment Note

Another possible option is an installment loan, where the Exchangor carries the paper for the Buyer of their property.  The key is to convert the note into cash to use towards the purchase of the replacement property.  These are fairly rare and are accomplished by once again the infusion of additional cash to purchase the note from the Qualified Intermediary.  The exchange proceeds as normal while the payments received from the buyer are no longer taxable in the year they are received.

Planning is the key to exploring the options before entering into the sales agreement for the old property.  When considering selling an investment property call us (850.496.0090 or andgus@atlas1031.com) to discuss your options.

Five Emerging 1031 Exchange Trends

Posted on | by Tom Gustafson | Leave a Comment on Five Emerging 1031 Exchange Trends

The last several years in the 1031 exchange industry have been to say the least challenging. Don’t get me wrong, I love doing what I get to do everyday. What is that? As a qualified intermediary, I help individuals and companies defer capital gains taxes through what is known as a 1031 exchange.

1031 Exchange Trends

Since late 2006, real estate prices for investment properties began to stall, slowly falling into free fall from 2007 through 2010. States effected the most were those that also saw the rapid appreciation of 25 to 30% for the period 2003 – 2005 such as Florida, Nevada and California. I saw first hand how condominiums and rentals properties along the Gulf Coast from Texas to Florida experienced the highs and lows of perceived value compounded by natural disasters of hurricanes and an oil spill. Today, I see the following trends in the 1031 exchange market:

  • all cash buyers both individuals and corporations;
  • a desire to diversify replacement property into oil and gas royalties as an alternative to real estate;
  • unallocated gold and silver bullion exchanged for the physical metal;
  • bonus depreciation for corporations has reduced the need for 1031 exchanges in like-kind exchange (LKE) programs;
  • more reverse 1031 exchanges than the traditional forward acquiring under valued properties in preparation for the current upward trending business cycle.

The Joint Committee on Taxation estimates a 21.88% increase in the value of tax deferrals from $2.5 billion in 2011 to $3.2 billion in 2012. This is up from $2.1 billion in 2010. The majority of those exchanges or 62.5% are estimated to be by corporations in 2012.

The individual exchange will be a slower to rebound given Revenue Procedure 2008-16 effective March 10, 2008 requiring vacation rental properties to be held for two years followed by the replacement rental property to also be held for two years to qualify for a 1031 exchange.

Conclusion

Unless the 1031 exchange is eliminated as a deficit reduction measure, the number and value of the tax expenditure is estimated to continue a slow rebound from the 2003 – 2005 era when the estimated value of tax deferrals reached $73.6 billion in 2004.

When considering whether a 1031 exchange makes sense, consider other reasons than just the tax deferral. If you are not sure, call us for a free consultation.

What You Get

  • Rapid response within 12 hours of request;
  • Thoroughness and expertise of a Certified Exchange Specialist®;
  • The value of your potential exchange;
  • The estimated recognized tax if an exchange is not initiated;
  • Email summarizing plan of action and details of consultation.

What You Don’t Get

  • A sales call;
  • Mumbo jumbo technical jargon;
  • Responses that are not compliant with the 1031 code.

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 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.

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?