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What Does the Qualified Intermediary Do, Anyway?

The role of the Qualified Intermediary is essential to completing a successful 1031 exchange. While the exchange process itself is relatively straightforward (once you understand the basic rules), the QI plays is an indispensable part of almost every exchange. But what does this key player do, exactly? A lot more than you think. Holds exchange funds Since the investor cannot have actual or constructive receipt of sale proceeds from the relinquished property (or even be allowed to benefit from the exchanged funds in any way during the transaction), the QI will be the fiduciary who holds onto the sale proceeds until closing on the replacement property occurs. Given the large […]

What is Constructive Receipt in a 1031 Exchange?

One area that catches potential exchangers off guard (and torpedoes the exchange altogether) is the idea of constructive receipt. While actual receipt is easy to identify – the exchanger directly receives the sale proceeds from the relinquished property. It doesn’t matter what form the funds take – cash or wire transfer into an account – either. The bottom line is if the exchanger has direct access to the funds at any time, the transaction no longer qualifies as a 1031 exchange. But constructive receipt is a slightly more elusive concept. Constructive receipt occurs when the exchanger has the right to receive or control funds, even if he or she does […]

How is 2017 Shaping Up for 1031 Exchange Legislation?

As 2016 draws to the close and the country prepares for a sea change in leadership in Washington, DC, one topic that remains on the radar of investors across the country is the status of section 1031 of the U.S. Tax Code. While limitations to the breadth of 1031 exchanges under the current tax code have been bandied about for several years, to date no limitations have been implemented. So how do things look with a new administration taking the helm? The House Republican Blueprint for Tax Reform is a good place to start. This document, titled “A Better Way” proposes sweeping changes to the tax code. Several key provisions […]

What is the Reinvestment Requirement for Full Tax Deferral in a 1031 Exchange?

Investors flock to 1031 exchanges for the beneficial tax deferral of capital gains. But how, exactly, can you be sure that you will be able to defer 100% of your capital gains tax liability on your transactions? The IRS has two requirements to ensure 100% tax deferral: You must reinvest all the cash that was generated from the sale of your relinquished property. You must purchase property equal or greater in value to the property you sold. Of course, if you are not concerned with deferring 100% of your capital gains tax, you can also conduct a partial exchange. This results in, as you would expect, a partial deferral of […]

Can Oil, Gas and Minerals Rights Qualify for a 1031 Exchange?

While most 1031 exchanges involve real property, there are occasions when investors inquire about more esoteric property rights, like rights to natural resources. The answer to whether these type of rights qualify under section 1031 is both straightforward and complex. It starts by determining how one’s contractual rights are classified. A working interest is considered a real property interest, but a royalty interest is not. The distinction has to do with the investor’s rights and obligations to the property’s access. A working interest provides an exclusive right to enter land to obtain and develop the natural resource. It also includes the obligation to pay for the expenses related to obtaining […]

Five Common Myths About 1031 Exchanges

With years of popularity, most every investor or aspiring investor has heard about 1031 exchanges. What better way to defer capital gains taxes and build a real estate portfolio faster? But along with the popularity comes a lot of misinformation. And, if you believe everything you hear, you can quickly jeopardize your transactions. Read on for five common myths surrounding section 1031 of the U.S. Tax Code. The 180-Day rule can be extended. FALSE! The IRS is very strict when it comes to enforcing the time limitations imposed on 1031 exchanges. Like-kind exchanges must be completed within 180 days after the deed transfer date of the relinquished property (or the […]

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 […]