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 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 3, 2018 by Jeff Peterson Leave a Comment

Business Industries You May Not Have Considered for 1031 Exchange

Here are some business industries that can utilize 1031 exchanges for tax deferral.

Hotels and Motels

The hotel and motel industry is ripe for 1031 exchanges. Often, the operators of hotels and motels have about a 5-7 year hold time before they want to exchange into something different, another bigger and better hotel. 1031 exchanges can be layered into a hotel transaction very easily. Remember, 1031 exists to encourage people to continue to invest into another like-kind property. In my experience, hotel operators like to buy more of what they know and understand; they want to expand into bigger better hotels to compound and build their hotel portfolios over time.

TV and Radio Stations

The sale of television or radio broadcast stations often times have a FCC license, which can be exchanged for another FCC license in a bigger better market. Also included in the sale of a TV or radio station would be some other items, the transmitter tower, and personal property that goes along with the radio station, as well as some real estate, the buildings and improvements that the business operates in.

Focus on the Tax Incentives in Brokering a Sale of a Business

In summary, let’s remember when we are structuring the sale of a business, to always contemplate how we can do this in the most tax efficient manner. 1031 is a valuable tool for folks selling their business. Remember the like-kind requirements of real estate are very broad, so if I’m getting out of the grocery business and want to put my investments on auto-pilot, I could exchange into a management-free (real estate) investment and still preserve my capital by deferring the recognition of all of the capital gains tax from my old grocery store buildings and real estate.

Start Your 1031 Exchange Today

Under section 1031 of the IRC, real property can be exchanged without recognition of any taxable gain. This property needs to be used for investment or business purposes, and the net proceeds from the sale need to be reinvested into a newer replacement property. Give us a call today to learn more about our services and see if your property qualifies for 1031 exchange treatment. Our primary office is located in downtown Minneapolis but we work with clients throughout the country.

November 13, 2018 by Jeff Peterson Leave a Comment

3 Tips for Navigating the Ins and Outs of a 1031 Exchange

There are a lot of complexities when it comes to 1031 exchanges of real estate. In this article, we are going to offer up a few tips for navigating the ins and outs of a 1031 exchange.

Tip 1 – Work with a Qualified Intermediary

The most important tip we can give you is to work with a qualified intermediary on your 1031 exchange. An intermediary is someone who knows section 1031 backwards and forwards and can help you with every aspect of your exchange. They are the most important advisor you can have by your side throughout the 1031 exchange process.

Tip 2 – Know the Rules

It’s essential to have at least a basic understanding of the rules that govern 1031 exchanges of real estate. This includes the timing rules, the qualified purpose rule, among others.

Tip 3 – Don’t Wait Until the Zero Hour

Lastly, it’s always a good idea to prepare, prepare, prepare as much as possible for your exchange. If you are thinking about doing an exchange, start looking into the details well before you intend to sell your relinquished property. This will give you and your intermediary enough time to effectively prepare everything that needs to happen to ensure a successful exchange.

1031 Exchange of Real Property

Commercial Partners Exchange Company prides itself on providing top-notch services to taxpayers around the country who are looking to exchange their property under section 1031. Our qualified intermediaries can help you through each and every step of your exchange. We can advise you on identifying replacement property, prepare all of your documents, and answer any questions you might have along the way. Contact us today at our Minneapolis office, or any of our satellite offices across the United States to set up a time to chat about your exchange.