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Monthly Archives: November 2016

Can a Flipped Property Qualify for a 1031 Exchange?

When it comes to meeting the requirements of section 1031 of the U.S. Tax Code, one key element that the IRS will scrutinize is the taxpayer’s intent. This is especially true when it comes to determining whether property has been held for investment purposes. With the popularity of house flipping still at an all-time high, many real estate investors naturally inquire about whether their flipped properties might qualify for an exchange. However, the IRS is fairly clear that flipped properties do not qualify as investment properties, thus fall outside the safe harbor of section 1031. However, this does not necessarily mean that a property you originally bought to fix up […]

Planning for Retirement for the Self-Employed

With more and more individuals opting out of traditional employment and charting their own course as self-employed, one major area of concern is retirement planning. This is especially true when the independent work involves certain industries, like farming, agriculture and ranching. And even though places like the wide open spaces of Montana and Wyoming come to mind, this is an especially important topic for other places like rural Florida, where horse ranches and farms are an integral part of the overall economy. U.S. Labor Department statistics prove what most people intuitively know – farmers and ranchers work longer than those in almost any other occupation. And while they may be […]

Can I Recoup My Initial Down Payment in a 1031 Exchange?

If you are an investor preparing to sell one property and acquire another, one question you might be wondering about has to do with your original down payment on the relinquished property. More specifically, can you withdraw that amount and still achieve 100 percent tax-deferral on your capital gains. Unfortunately, the IRS takes the position that any money taken out of the 1031 transactions is subject to immediate tax. So while the answer is yes, of course you can reclaim your original down payment, you will be subject to immediate tax. Since most investors want to defer all their tax exposure with a 1031 deal, they usually wait until they […]

The Tragic Tale of TIC’s Fall from Grace

Tenancies in Common were once the golden child of real estate investment. However, the financial crisis of 2008 led to the collapse of the sector, at least according to this recent article. What started off as a great opportunity for investors to defer capital gains and trade-up to larger, more lucrative properties, became more of an albatross as underwater properties and warring co-investors caused these once-favorite investments to fall from grace. Then along came Delaware Statutory Trusts (DST) to fill the void left by the collapsing TIC market. And the securitized 1031 industry regained the strength it once had with TICs. In fact, securitized 1031 deals exceeded $1 billion in […]

How Are State Taxes Impacted by a 1031 Exchange?

As a qualified intermediary and licensed real estate professional, I’ve personally seen the surge in taxpayers leveraging the power of a 1031 exchange. It is a great way to defer capital gains taxes and more quickly build a portfolio of business or investment properties. Yet one area where I have seen more than one taxpayer caught out involves the impact of state income tax liability on the transactions, particularly when it comes to interstate exchanges. And since broadening one’s geographic scope is a key driver in many 1031 exchanges, the ramifications of interstate transactions should not be overlooked. While federal law makes no distinction for exchanges conducted across state lines, […]

Can I Exchange Domestic Property for Foreign Property?

More often than you might expect, an investor is considering an exchange that involves property in and outside of the U.S. Unfortunately, current IRS rules do not consider property within the US to be “like-kind” with property in a foreign country. Thus, a tax-deferred exchange is not possible. There is, however, case law that clears the way for an exchange between property in the US and a US territory. The fourteen US territories include: American Samoa, Baker Island, Guam, Howland Island, Jarvis Island, Johnston Atoll, Kingman Reef, Midway Island, Navassa Island, Northern Mariana Islands, Palmyra Atoll, Puerto Rico, Virgin Islands and Wake Island. So if you happen to want to […]

Can I Go Down in Value and Reduce My Debt in a 1031 Exchange?

One of the nicer features of a 1031 exchange is that it is a flexible tool for exchanging your investment property. While for many investors the goal is total tax-deferral with the transaction, there are times when competing investment goals make that impossible. The good news is that a 1031 exchange is not an “all or nothing” proposition. You can still complete an exchange, and defer part of the capital gains, even if you reduce your debt, take money out of the transaction or even buy a lesser valued property. The only catch is that you will be liable for the capital gains on the difference. This is known as […]

What Property Does Not Qualify for a 1031 Exchange?

Yesterday, I discussed what property qualified for a 1031 exchange. While the definition is fairly broad, there are some items of property that seem to meet the general criteria – held for business or investment purposes – but still do not qualify. This includes stocks, bonds, notes, securities and interests in partnerships. Other property that is “held primarily for sale,” such as business inventory, is also excluded from qualification. This further extends to things like real estate bought with the intent to flip or vacant land that will be developed with a house. Which brings up one last important point. A primary residence usually does not qualify for an exchange, […]

Does My Property Qualify for a 1031 Exchange?

So you are an investor thinking about trading your current investment property for something else. Perhaps you’re relocating and want property closer to your new location. Or you’ve decided that you need a change in the type of investment you’re managing. Or myriad other reasons that investors look to trade up, into or out of an existing investment for something new. Rather than selling outright, you’re convinced that the tax-deferred nature of a 1031 exchange is preferable for your immediate and longer-term goals. But how do you know whether your property qualifies? The IRS makes it a little bit easier to determine that. Any property held for productive use in […]

What Is the Theory Behind Section 1031?

Section 1031 of the US Tax Code has rapidly become a popular way for investors to shield themselves from immediate tax liability when they sell and buy investment property. While it once was a rather enigmatic section of the Code, with the passage of the 1990 Omnibus Budget Act, the process was clarified allowing a broader swath of everyday investors to take part in 1031 exchanges. But what is the rationale behind allowing tax-deferral with a 1031 exchange? The IRS logic is that when an investor reinvests their sale proceeds into another property (one that is “like-kind” to the property they sold), the economic gain is not actually realized. The […]