Exchange Blog

1031 Exchange and Delaware Statutory Trust

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A 1031 Exchange Strategy for Highly-Leveraged Property Owners With Significant Tax Liability

Many commercial property owners find themselves in a situation where their loans are coming due or they need to refinance because their property is not performing sufficiently to cover their existing debt. Unfortunately, they are frequently unable to secure replacement financing due to their very high leverage needs, particularly in today’s challenging lending environment. An example of this would be a property that was purchased for $2,000,000 with a loan of $1,000,000 which has lost $600,000 of its original market value. Now, instead of 50 percent loan to value (LTV), the taxpayer has over 70 percent LTV, a degree of leverage that is not likely available to them in the present lending environment. And the truly gut-wrenching dilemma for the taxpayer is that even if they can negotiate a sale, the resulting tax bill can be disastrous, often as a result of the depreciation that has been taken.

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Qualified Intermediary 1031

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Qualified Intermediary 1031A Qualified Intermediary of 1031 tax deferred exchanges was instituted by the Internal Revenue Service and Department of Treasury in 1991 as one of four safe harbors to eliminate problems associated with taxpayers having access or control to their exchange proceeds. “A Qualified Intermediary under Safe Harbor No. 3 is not considered the agent of the taxpayer for purposes of a tax-deferred exchange. The taxpayer’s transfer of relinquished property and subsequent receipt of like-kind property is treated as an exchange and the determination of whether or not the taxpayer is in actual or constructive receipt of money or other property before the taxpayer actually receives like-kind replacement property is made as if the QI is not the agent of the taxpayer.” [1]

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Non Resident Withholding Tax in a 1031 Exchange

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A foreign person, including a nonresident alien individual, foreign entity or government, may be subject to a U.S. withholding tax of thirty percent on most types of U.S. sourced income. If a tax treaty exists between the U.S. and the foreign person’s country of residence, a reduced rate, including exemption, may apply. Generally, the tax is withheld from the payment made to the nonresident by a withholding agent. The withholding tax is required under sections 1441, 1442, and 1443 of the Internal Revenue Code.

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1031 Exchange Properties Post

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Post Your Property1031 exchange properties are made up of real and personal property held for productive use in a trade, business or investment. When sold, 1031 exchange properties trigger federal and potential state capital gains and recaptured depreciation taxes that can amount to 40 percent of the sales price. A 1031 exchange allows for the individual, corporation or partnership, either domestic or foreign to defer these taxes given a replacement 1031 exchange property is acquired within 180 calendar days post-closing on the old real or personal property of equal or greater value.

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1031 Land: Like-Kind Requirement

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1031 Land RequirementOften the question is asked whether in a 1031 like-kind exchange must land be exchanged for land. The answer is found in the like-kind requirement under Internal Revenue Code (IRC) Section 1031. To qualify for consideration in a 1031 exchange, the relinquished or old property and the replacement property must be like-kind. Property is either real or personal property held for productive use in a trade, business or for investment.

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Conservation Easements and A Section 1031 Exchange

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Conservation Easement is 1031 EligilbleTaxpayers who are looking to reduce taxes on the sale of property often consider the possibility of entering into a Section 1031 Exchange in lieu of a straight sale. If the transaction qualifies, any capital gains taxes that would otherwise be due can be deferred until the sale of the replacement property. Among other requirements, a 1031 Exchange requires the seller to exchange the property for a property of “like-kind” in order to be eligible for 1031 Exchange treatment. The “like-kind” component of a 1031 Exchange can create confusion when specific rights to property, such as an easement, are exchanged instead of the all rights to the property.

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