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All posts by Robert Hetsler

Can You Complete a 1031 Exchange on Cryptocurrency?

Can You Complete a 1031 Exchange on Cryptocurrency?

As cryptocurrency continues to work its way into the mainstream, many investors are starting to ask whether exchanging one type of this virtual currency for another can qualify for capital gains deferral under section 1031. To date, the IRS has classified cryptocurrency as property (and has not excluded it specifically within section 1031), the intuitive answer would be yes. However, recent court decisions have begun to treat cryptocurrency as reportable income to the US government. So now it seems that the IRS is attempting to treat cryptocurrency as both property and currency. Likewise, the American Institute of CPAs is also recommending that cryptocurrency assets be reported to the IRS on […]

Can You Exchange Your Primary Residence Under Section 1031?

Can You Exchange Your Primary Residence Under Section 1031?

Section 1031 of the IRS code explicitly prohibits private residences from eligibility for a 1031 exchange. So the intuitive answer is no. But if your home has extensive equity, you may be looking for ways to avoid a hefty tax bill when you sell. Of course, you can use the 250,000/500,000 exclusion permitted by tax code on the sale of your primary residence. But that still leaves any equity above and beyond that amount (after you’ve subtracted the original purchase price and any capital improvements) exposed to capital gains taxes in the year of the sale. If you want to ensure tax deferral of all capital gains taxes, then a […]

Why Do Investors Like Delayed 1031 Exchanges So Much?

The idea of conducting a 1031 exchange is appealing to investors for a number of reasons, especially the tax-deferred nature of the transaction. Rather than paying capital gains tax immediately, an investor can trade up on investments and defer any tax liability for years. In some cases, where exchanged property is part of a decedent’s estate, capital gains can be effectively eliminated altogether. So why are delayed exchanges – where replacement property is not closed on for weeks or months after the relinquished property is sold – so popular? Two main reasons: The exchanger enjoys additional time to find and close on the purchase of suitable replacement property. This replacement […]

Can a Real Estate Professional Successfully Complete a Personal 1031 Exchange?

Can a Real Estate Professional Successfully Complete a Personal 1031 Exchange?

One of the key rules for a real estate exchange to qualify for capital gains tax deferral under section 1031 is that the property involved was held for either investment purposes or for productive use in trade or business. In many cases, this is a straightforward thing to show. However, questions may arise as to whether this strict requirement has been met when the exchanger works in real estate for a living. For example, if you are an exchanger who regularly buys and sells real estate or flips properties for profit, the IRS will scrutinize your exchange differently than if you were a casual real estate investor. That doesn’t mean […]

Do You Know About IRS Private Letter Rulings?

Do You Know About IRS Private Letter Rulings?

If you are an investor interested in conducting 1031 exchanges, you should be familiar with Private Letter Rulings (PLR) issued by the Internal Revenue Service. While you will likely never seek a PLR yourself, you will often rely on other rulings for guidance when conducting your own exchange. A Private Letter Ruling is a written statement issued by the IRS in response to a taxpayer’s formal request for guidance. The PLR interprets and applies tax laws to a specific set of circumstances. Given the potential complexity of 1031 exchanges, it is not difficult to understand why so many investors seek out PLRs for their proposed transactions. When a PLR is […]

Important Deadlines for 1031 Exchanges

Important Deadlines for 1031 Exchanges

If you’re thinking about completing a 1031 exchange for investment or business real estate, you should have a thorough understanding of all the deadlines involved. Failing to meet even one can jeopardize the tax-deferred nature of your transactions. The good news is there are really only two key deadlines to keep in mind, and compliance is not complicated. It does, however, require due diligence and careful counting of calendar days. You must identify or receive your replacement property within 45 days of transferring legal ownership of your relinquished property You must receive title to your replacement property within 180 days of transferring legal ownership of your relinquished property Your qualified […]

Beware This Unexpected Source of Boot In A 1031 Exchange

Beware This Unexpected Source of Boot In A 1031 Exchange

When it comes to 1031 exchanges, the key to full tax-deferral of capital gains is avoiding any real or constructive receipt of sale proceeds or other income related to the overall transactions. It sounds easy enough in theory, but many investors unwittingly violate this rule – and end up with taxable funds – when it comes to prepaid rent and security deposits on relinquished rental properties. In a typical, non-1031 exchange closing, any prepaid rents or security deposits held by the seller are credited to the buyer at closing. It is a clean way to do the transfer of these assets related to the sold real estate. However, the rules […]

What Is A “Drop And Swap” In A 1031 Exchange?

What Is A “Drop And Swap” In A 1031 Exchange?

When real property is held by a partnership or limited liability company, often disagreements can arise among the partners as to how to handle net proceeds when the property is sold. Some investors want to conduct a 1031 exchange while others simply want to sell for cash. When competing interests are in play, how can everyone be satisfied? One answer is what is known as a “drop and swap.” In such a transaction, before the exchange the property ownership title is changed to reflect individual partner names and their partitioned interests rather than the partnership or LLC itself. This title change is the “drop.” Thereafter, the exchange occurs and some […]

Six Tips for Identifying 1031 Exchange Replacement Property – Part 2

Yesterday, we shared with you some tips on properly identifying replacement property in your exchange. Today, we conclude this series with a few final thoughts. Each should become a requisite part of your process, so that your exchange does not fail because you made an error in identifying replacement property. Manner Of Identification – This must be in writing and signed by the investor, and the property must be unambiguously described. This generally means identified by address or legal description. If the property is one where the investor is acquiring less than 100% interest, the percentage share of the acquisition must be identified, too. Provide Information To The Right Person […]

Six Tips For Identifying Your 1031 Exchange Property – Part 1

The IRS is strict when it comes to applying the rules governing 1031 exchanges. Every year, hundreds of proposed exchanges fail because the investor fails to meet one of the requirements set forth in the code. One of the biggest areas where mistakes are made? Identifying the replacement property. To make sure you don’t make a misstep here and jeopardize your next exchange, we offer our top tips for identification. Tomorrow, we will share our final tips. 3 Property Rule – There are different rules that set forth how many possible replacement properties may be identified by an investor, but most follow this rule. It allows an investor to identify […]