1031 Exchange Archives - Commercial Partners Title

December 13, 2018 by Jeff Peterson Leave a Comment

The Pros & Cons of a 1031 Exchange

With any real estate transaction, there are advantages and disadvantages. In this article, we are going to look at some of the pros and cons of a 1031 exchange.

Pros of a 1031 Exchange

Here are some of the pros of doing a deferred exchange under section 1031:

Tax Deferral. When you complete a 1031 exchange, you get to defer your capital gains taxes on the sale of your property.
Compounding Interest. In a 1031 exchange, you get to defer your taxes and keep that money working for you and compounding interest in a continued investment that will reap benefits over time.

Cons of a 1031 Exchange

If you’re looking to save money on taxes, there really aren’t too many downsides of doing a 1031 exchange. There is one situation in which you may not want to consider a 1031 exchange, however:

You Don’t Keep Your Proceeds. In order to complete a successful 1031 exchange, you need to move all of your sales proceeds into your replacement property. That means you don’t get to pocket any of these proceeds. If you’re strapped for cash, this can be one downside of a 1031 exchange.

Begin the 1031 Exchange Process

If you’re looking to begin the 1031 exchange process on a property you own, you’ve come to the right place. At Commercial Partners Exchange Company, we have more than two decades of experience working in the1031 exchange industry. We facilitate real estate exchanges for clients throughout the state of Minnesota and across the country. Our intermediaries can help you prepare all of your documents for closing and advise you throughout the process. Contact us today at our Minneapolis office to learn more and set up a time to chat with one of our intermediaries!

December 11, 2018 by Jeff Peterson Leave a Comment

The Benefits of a Reverse 1031 Exchange in a Downward Market

A downward market is where real estate values are declining and opportunities are rising; opportunities to buy real estate at a cheap price. Remember price is set by the market, value is established by the cash flow in an economic analysis. So, it is possible to buy a property at a price below its value and in the marketplace, if you find such an opportunity you want to seize on it immediately! You don’t want to wait around; you want to buy it now!

Well, you say to me, I cant buy it now because if I do a 1031 exchange, the typical structure is that I sell and close on my relinquished property FIRST, and then SECONDLY, I buy my replacement property. If this great opportunity comes up, how can I take advantage of it and still avail myself of a 1031 exchange? A good example of this is if a bank takes back a property; they don’t want to have it on its books. They have to reserve for it, they have to pay for expenses related to the property; they just want to get rid of that! They sell it at a deep discount; a discount below its actual value just to get it off their books. If you want to acquire that property, you have to move fast! You have to move before another investor moves in and takes it away from you and you will have to move in with money now! A strong cash offer will ensure you are the successful bidder.

Parking Your 1031 Exchange Property can be the Key Getting a Quick Good Deal

What you need to do is a reverse 1031 exchange. In a typical reverse exchange, your intermediary sets up an exchange accommodation titleholder. This is typically a LLC wholly owned by the intermediary and this holding company acquires the new property (for you). It purchases it and holds it so nobody else can get it. The IRS has laid out a safe-harbor in revenue procedure 2000-37. This is basically a recipe on how to do a reverse exchange. The best part of this deal (procedure ) is that you can have your intermediary take down this property. The bad side is, your intermediary can only park (own) this property and hold it for up to 180 days under the safe-harbor. That means, you basically have six months to unload or dump your old relinquished property.

The IRS 1031 Exchange Rules Favor Investors for Six Months

If the stars come into alignment, and you can get this great deal and park it with your intermediary, and take the next six months to market and get the highest and best price for your old property, you can really benefit. You can have your replacement property all teed up, ready and waiting for you, and then you dispose of your old relinquished property. Relinquished property sells, replacement property received, exchange is over, done! Exchange completed! Tax is deferred and YOU ARE A WINNER!

If You Don’t Make It You Still Have 1031 Options for Another Real Estate Exchange

If the stars do not come into alignment (within six months), and you cannot unload your old relinquished property, its not the end of the world. You’ll end up owning both properties. You can still do a 1031 exchange on your old relinquished property. But you will have to exchange into something else that you don’t already own. At the end of the 180 days, your exchange accommodation titleholder is done holding it (parking is over); they will transfer it to you, so that it is your property now. You cant exchange into something you already own, but it is still possible to exchange into something else.

December 10, 2018 by Jeff Peterson Leave a Comment

What to Know About 1031 Exchanges of Vacation Homes

For years tax controversies have stemmed from taxpayers selling their highly appreciated vacation/second homes. The problem has been that these “personal use” vacation-properties have fallen outside of the favorable tax treatments that many other real properties qualify for.

First, vacation homes normally do not qualify for the Section 121 Principal Residence Exclusion (provides an exclusion of up to $500,000 of gain for married persons filing a joint return / $250,000 of gain for single persons) because the property has not been used as the taxpayer’s primary residence for two of the past five years. Second, despite the fact that many taxpayers feel that their second home or vacation condo is one of the best “investments” they ever made, and should qualify for tax deferral under Section 1031 (provides for non-recognition or deferral of capital gains tax for exchanges of properties held for “Investment” or for use in a “Trade or Business”); the IRS does not agree that these “personal use” type properties qualify for 1031 exchange treatment.

The IRS takes the position that vacation homes are held primarily for personal use rather than for investment. In May of 2007, the IRS successfully convinced the Tax Court that a taxpayer’s exchange of a lake-side vacation home for another did not qualify as a 1031 exchange despite the taxpayer’s expectation that the property would appreciate in value and could eventually be sold at a gain; Moore v. Commissioner, T.C. Memo. 2007-134.

SAFE-HARBOR

As a matter of administrative ease or convenience, the IRS has laid down a new safe-harbor for vacation home owners. Revenue Procedure 2008-16 gives owners who primarily rent out their vacation homes, but still occasionally use them for some personal use, a safe harbor to qualify for 1031 tax deferred treatment. Revenue Procedure 2008-16 requires that both the “relinquished property” that is sold and the “replacement property” that is purchased, must be used by the taxpayer consistent with a Qualifying Use Standard:

TWO YEAR “OWNERSHIP” TEST: The taxpayer must have owned the vacation home for least 24 months immediately before the exchange;
“USE” TEST FOR EACH OF THE PRIOR TWO YEARS: The taxpayer must have within each of the prior two 12-month periods immediately preceding the exchange:

(i) rented out the vacation home to another person or persons at a fair rental for 14 days or more, and (ii) not used the vacation home for personal use for more than 14 days; or more than 10 percent of the number of days during the 12-month period that the vacation home was actually rented at a fair rental.

A similar Qualifying Use Standard must be applied to any vacation home replacement properties. The taxpayers may take only limited personal use of their rented replacement properties for the 24 month period after completing their 1031 exchange into a vacation home.

Section 1031 has a very broad “like-kind” standard for real property. Generally any real property within the United States that is held for “Investment” or for use in a “Trade or Business” can be exchanged for other US real property that will also be held for “Investment” or for use in a “Trade or Business”.

Raw land may be exchanged for improved real property. Commercial property may be exchanged for residential rental property. Undoubtedly, many taxpayers who have grown weary of property management will consider purchasing vacation homes to be placed into a rental pools with the fringe benefit of occasional personal.

A smart taxpayer desiring more recreation might consider exchanging into multiple vacation home replacement properties. Each property would have a separate 14 day/ 10% personal use allowance. This is more advantageous than buying only one vacation home replacement property that would allow for less personal usage.

Real Estate Exchanges Under Section 1031

Under section 1031 of the Internal Revenue Code, taxpayers are able to defer their taxes when selling real property as long as they re-invest their net proceeds into replacement property. There are many rules and regulations you need to follow in a given exchange so it’s important to work with a qualified intermediary. Reach out to our 1031 exchange professionals today to talk about the details of your like-kind exchange. We work with taxpayers throughout the state of Minnesota and across the United States.

December 6, 2018 by Jeff Peterson Leave a Comment

Reverse 1031 Exchange Options – Switching It Up

Sometimes it’s not advantageous to park your new property. Reasons can be that the financing can be too complicated to have an exchange accommodation titleholder acquire the new property. It may not be feasible to get it through the financing committee when banks are already very jittery and uneasy. In a declining market, the financing can be the lynchpin and we don’t want to upset the applecart with very sensitive lenders. Another reason you may not want to park the ownership of your new property in a holding company is, you may want to get your hands on it right away because there might be tax incentives that go with the property. Perhaps there are low-income tax credits or other credits related to the stimulus package that may encourage you to get into the property as soon as possible. You will want to take advantage of those tax incentives you don’t want to waste them on some holding company that is holding the property as inventory.

How Do We Structure the Deal So You Can Get Into the New Property as Soon as Possible?

The way we do the deal is, we structure the transaction as a front leg reverse exchange. (This is also sometimes called an exchange first reverse exchange) That means, we have the exchange accommodation titleholder, (the LLC) take title to your old relinquished property. That gets the property out of your name; you basically sell it to the exchange company. That liberates you and frees you up. Now you are no longer tied to that (old) property and this allows you to immediately acquire the new replacement property. The exchange is done except one lingering detail; you still need to find a (real) buyer for the old relinquished property. The 1031 intermediary holding title through this LLC can only hold on to the property for 180 days (per Rev. Proc. 2000-37).

Rush to Sell Your old 1031 Exchange Property within 180 Days

What are you going to do? You will need to market the relinquished property and hopefully, a third party purchaser will acquire the property from the intermediary. The Intermediary doesn’t have any money of its own, so it would have borrowed that money from you or from a bank with your guarantee. So, it behooves you to get the intermediary out of title and get the new purchaser in so you or your lender can get paid off and you can be free of the guarantee.

A White Knight to Your Rescue

The EAT (exchange accommodation titleholder), needs to get out of title but, what if you can’t get a 3rd party purchaser and nobody will buy your old relinquished property?

The IRS has been rather liberal. In recent private letter rulings (PLR), where a related party, (i.e. your brother in law or some entity you have an interest in) comes in and buys the relinquished property and holds it for eventual sale. These recent private letter rulings are tolerant of a related party purchase from the EAT (exchange accommodation titleholder) and thus completing the reverse exchange in a nice tidy (180 day) transaction.

Excerpt from IRS Private Letter Ruling No. 2007-12013

Under the given facts and representations, Section 1031(f) will not apply to trigger recognition of any gain realized when (1) Taxpayer purchases like-kind Replacement Property from an unrelated third party via EAT, (2) Taxpayer sells Relinquished Property to Related Party for cash consideration received by a QI, and (3) Related Party disposes Relinquished Property within two years of the acquisition.

What Do You Need to Take Away From All of This

In a downward market you can’t wait around. You need to seize opportunities when they arise! A reverse exchange is another tool to get the deal done tax deferred! Â It allows you to purchase a property by having your exchange accommodation titleholder acquire either the new property or alternatively, take title to your old relinquished property, thus freeing you up to immediately acquire this new replacement property. Reverse exchanges are excellent and powerful tools, but they are sophisticated creatures. You need to have your CPA, your tax attorney and all your other advisors on board to get these deals done correctly.