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July, 2014 |
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Asset Exchange Company |
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Free 1031 Exchange Hotline: 877-471-1031 |
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 Notes from Leonard, Your 1031 Guy
 1031 Exchanges benefit millions of American investors and businesses every year by encouraging businesses to expand and help keep dollars moving in the U.S. economy.
Unfortunately, Congress is debating tax reform and one of the items under consideration is repealing or modifying Section 1031 of the Internal Revenue Code.
Communicating with your Representatives and Senators is the most effective effort you can make to persuade lawmakers that these proposals should not advance.
The Federation of Exchange Accommodators has made it easy to educate Congress about how important Section 1031 Exchange is to our profession and the economy overall.
Click here to send a message to Congress.
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1031 Exchange: Most Common Issues
It's almost impossible to cover every issue that could come up in a 1031 Exchange. Below, however, are some of the most common issues that need to be considered when exchanging real property:
Seller Financing “Carryback Notes”: If Exchangor is helping the buyer of the Relinquished Property acquire the property, the seller carryback note must be assigned to the Qualified Intermediary and replaced with cash prior to the acquisition of the Replacement Property, otherwise the note may be taxable.
Same Taxpayer Requirement: The same taxpayer who sells the Relinquished Property must acquire the Replacement Property. Example, if a partnership owns and is paying taxes on the Relinquished Property prior, the same partnership must own and pay taxes on the Replacement Property after acquisition.
Related Party Transactions: If related parties are in any way involved in purchasing the Relinquished Property or selling the Replacement Property, the exchange may be disallowed. The IRS has strict related party rules, so please consult with a tax advisor before proceeding with a related party exchange.
Combo Sales and Exchanges: If the Relinquished Property was at any time used in part, or in whole, for both personal use and investment use, both Section 121 (the Homeowner’s Exemption) and Section 1031 may be applicable. We suggest the Exchangor discuss this with their tax advisor prior to the close of escrow.
Identification Period: All Replacement Property must be identified in writing by Exchangor no later than 45 days after the close of the Relinquished Property. It is strictly Exchangor’s obligation to properly identify.
Replacement Property Improvements: Improvements made to the Replacement Property after Exchangor acquisition will not count towards the value of the exchange. If Exchangor would like to make improvements to the Replacement Property using exchange proceeds, a special “Construction Exchange” will be required and a Qualified Exchange Accommodation Agreement (the “QEAA”) must be entered into. If Exchangor wishes to perform a Construction Exchange, it should inform Qualified Intermediary in writing as soon as possible, and no less than 14 days prior to the closing of the Replacement Property. Please also note that Construction Exchanges are not possible on all transactions.
Closing Costs: Non-recurring closing costs related to the sale and purchase of exchange property may be considered exchange expenses that can be paid for using tax-deferred Exchange Consideration.
Tax Deferral: In order to fully defer taxes, clients must re-invest all of the equity “cash” proceeds from the sale of the Relinquished Property into the Replacement Property AND purchase Replacement Property that is equal or greater in value to the Relinquished Property that was sold. Any reduction in value from Relinquished Property to Replacement Property, or any receipt of Exchange Consideration by Exchangor will be subject to tax, dollar for dollar. Tax deferral is not pro-rated.
Earnest Money Contract Deposits: It is recommended that earnest money deposits for replacement property be made with cash out of pocket. Exchangor can then request a refund from exchange proceeds at the close of escrow. If client would like to place a deposit using exchange proceeds, written notice should be given to the qualified intermediary with two business day advanced notice.
Tax Reporting: Individual tax returns for the tax year in which the Relinquished Property must not be filed until all the Replacement Property is acquired and exchange complete. Deadline extensions may be required.
No Legal or Accounting Advice: Federal and state law prohibit qualified intermediaries from providing legal or accounting advice. You must not rely on the qualified intermediary for tax advice.
For more information regarding the 1031 Exchange process please don't hesitate to contact us at 877-471-1031.
Common 1031 Exchange Questions
How long do I have to own my property before I can exchange it?
The longer the better. Unfortunately, there is no safe holding period for property to automatically qualify for an exchange. Keep in mind, the property only need to be "held for investment" for it to be eligible for an exchange. Time of ownership is ONLY one factor at which the IRS looks at when determining if the property was "held for investment". In one private letter ruling (PLR 8429039), the IRS stated that a minimum holding period of two years would be sufficient. Although a private letter ruling does not establish legal precedent for all investors, there are many advisors who believe two years is a conservative holding period, provided no other significant factors contradict the investment intent.
Other advisors recommend that Exchangers hold property for a minimum of at least twelve months. The reason for this is twofold: (1) A holding period of 12 or more months means the investor will usually reflect it as an investment property in two tax filing years. (2) In 1989, Congress had proposed a one year holding period for both the relinquished and replacement properties. Although this proposal was never incorporated into the tax code, some believe it represents a reasonable minimum guideline.
Can I sell my duplex and purchase bare land?
Certainly. Properties involved in an exchange need to be held for either productive use in trade or business or for investment. Holding land for its future appreciation would be considered held for investment.
Can I purchase my replacement property first?
Yes; this requires that you do a reverse exchange however. The reverse exchange 'may' be an option provided you have the ability to structure the reverse exchange according to the safe harbor guidelines.
Can I move into a rental that I originally bought as part of 1031 Exchange?
Yes. However, please keep in mind that the property must first qualify for the 1031 Exchange. In determining if the property qualified the IRS will look at several factors including how long it was rented for an also your "intent". If the IRS feels your original intention when the property was acquired was to use it as a primary residence, you may have your exchange disqualified.
Do I have to reinvest ALL of my cash/equity?
No. However, any cash (equity) that is not reinvested in real estate will be taxable (and is known as cash boot).
How long do I have to complete my exchange?
180 days. However, also keep in mind you will be required to identify your potential replacement properties on day 45 of your exchange. Your timeline starts when you close escrow on the property you are selling.
Can I get an extension on my day 45 or day 180 deadlines?
No. The IRS only issues extentions in cases of a Presidential Disaster Declarations and the exchange has to have been directly effected by the disaster.
If you have any questions about the 1031 Exchange process or would like to open a 1031 Exchagne account, please don't hesitate to contact us at 877-471-1031.
The subject matter in this newsletter is intended as general information only and not intended as tax or legal advice. Please always consult your tax or legal advisor for any specific tax or legal matters.
The subject matter in this newsletter is intended as general information only and not intended as tax or legal advice. Please always consult your tax or legal advisor for any specific tax or legal matters.
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