1031 exchange Archives - Commercial Partners Title

November 23, 2020 by Jeff Peterson

Can You do a 1031 Exchange with a Property You’ve Lived in for Less than 2 Years

Recently I spoke to a client who was selling their house that they had lived in for less than 2 years. They had about $100,000 in capital gains on the home after all expenses. This taxpayer wanted to consider a 1031 exchange and was wondering if it was possible.

Principal Residence Exclusion

1031 may not be an option in this case if the house has been used as the taxpayer’s principal residence. For the IRC 1031 to qualify, you need to HOLD the replacement property for business or investment purposes.

It’s your home and generally speaking, you can’t do a 1031 exchange on your home. That’s usually not a big deal because under IRC section 121 the principal residence exclusion you get to take up to $500,000 of that profit tax return married filing a joint tax return or $250,000 for single filing.

Extenuating Circumstances

But what if you must move early (prior to the two year period) because of:

Job related circumstances?
Health reasons?
Or other unforeseen circumstances?

You may still be able to take a portion of the two year exclusion if any of the following apply.

121(c)(2) EXCLUSION FOR TAXPAYERS FAILING TO MEET CERTAIN REQUIREMENTS:

(2) Sales and exchanges to which subsection applies. This subsection shall apply to any sale or exchange if:

(A) subsection (a) would not (but for this subsection) apply to such sale or exchange by reason of–

(i) a failure to meet the ownership and use requirements of subsection (a), or

(ii) subsection (b)(3), and

(B) such sale or exchange is by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances.

November 19, 2020 by Jeff Peterson

Do You Need to Reinvest the Net Proceeds or the Sales Proceeds in a 1031 Exchange?

Many people who are looking into doing a 1031 exchange don’t really know how much they need to buy and reinvest in order to defer all of their gains. This article will walk through the basics of performing a successful 1031 exchange.

Buy Up

If you think about it as needing to continue your investment into a like-kind property of equal or greater VALUE and EQUITY, you’ll see that you need to buy a replacement property of roughly equal or more than what you sold your relinquished property for. You are able to net off certain transactional expenses like a realtor commissions, closing costs, etc., but if you want a rough rule of thumb, look at buying a replacement property at a higher price. Many tax problems can be solved by buying a more expensive replacement property.

Cash can Burn you with Taxes

The next element to look at is you don’t want to have any net proceeds go into your pocket. That cash would burn you with taxes. Remember to redeploy all of that cash (from the sale of your relinquished property) into your new replacement property.

Debt Relief

The last element to think about is debt relief. Any mortgages, liens, deeds of trust that you pay off on the sale of your old property need to be offset by either new debt or cash out of pocket. To summarize, buy a replacement property of greater value, reinvest all of your net proceeds, and offset any debt relief with new debt or additional cash. If you satisfy these rules of thumb, you’ll likely have an effective 1031 exchange.

November 12, 2020 by Jeff Peterson

How to Determine the Relinquished Property Owner in a 1031 Exchange

When you do a 1031 exchange the taxpayer that owns the old relinquished property has to receive the new replacement property. That begs the question: “who owns the relinquished property?”

Who Owns the Relinquished Property?

Often, people aren’t sure exactly who the official owner of the relinquished property is. They may have a vague recollection that they bought it when they were not married and then later became married and they’re not sure if their new spouse is in title on the property.

Additionally, they may have done some estate planning and created an irrevocable trust and they’re not sure if this asset got put into the trust. And they may be in certain corporations or partnership and may or may not have contributed this property officially into the business entity.

Finding the Owner

Step one in a 1031 exchange is to determine who is the taxpayer that’s going to do this exchange. That’s the taxpayer that has officially owned and held the property for investment or business purposes. There’s two ways to investigate this. First we can pull a copy of the last vesting deed for the subject property and see who in the public records is shown as the owner of the property.

Next, we can work with the taxpayer and the accounting firm to look at their previous tax returns to see how this property has been dealt with on their tax returns. For example, Susan and Martha may own the property as tenants-in-common on their public record on their deed, but Susan and Martha may have also filed partnership tax returns showing the asset as being in their business entity in their partnership. So we need to delve into this to determine who is the taxpayer that should do the exchange.

November 10, 2020 by Jeff Peterson

The Challenges of Completing a 1031 Exchange with Auctioned Property

When you go to an auction and sell your 1031 relinquished property it can be challenging because the treasury regulations say that you have to give written notice to the other parties to your sale contract.

No Direct Contact with the Buyer

In an auction sometimes you don’t have that direct interconnection with the buyer of your property because it happens so fast and it happens through an auctioneer.

You don’t have direct contact with the buyer, but the treasury regulations say that you need to give written notice to the other party to a contract. So oftentimes we suggest that when you put the property up for sale at the auction that you specify that it is part of a 1031 exchange and that your interest in it will be a assigned to the qualified intermediary. That also can be contained in any brochures or flyers that are used to advertise the auction properties.

Tips for Auctioning 1031 Property

If you really want to be safe and secure the best way to evidence that you gave the proper and requisite notices to the buyer is to find the buyer and ask them to sign a notice that states that you’re doing a 1031 exchange, you have assigned your interest in this property and the sale contract to the intermediary.

That’s the best way to button up your exchange and verify that you gave written notice, and if you’re ever audited now you’ve got written proof to show that you complied with that requirement. But in a crazy auction environment where deals are happening quickly and property is moving fast it can be challenging, and people do struggle to find a way to give the requisite notice to the other parties.