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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 […]

The Wheels of Justice Move Slowly When It Comes to 1031 Exchanges

For anyone who has ever had to deal with the stress of a lawsuit, it may seem like it takes an eternity to finalize the matter. In some cases, years and years. But how about 15 years? The recently decided case of Estate of George H. Bartell v. Commissioner, 147 T.C. No. 5 (August 10, 2016) is one such matter. This US Tax Court matter involved a somewhat complex set of real estate transactions that eventually involved a 1031 exchange. The IRS originally sought to deny the exchange on the grounds that the exchanger received the benefits and burdens of ownership on the replacement property prior to selling the relinquished […]

Comparing Fractional Ownership Options for 1031 Exchanges

With the IRS’s inclusion of fractional ownership under the tax-deferral of section 1031 of the tax code, the opportunities for investors rapidly grew. But for any investor making the leap from single-owner property to something like a Delaware Statutory Trust or Tenancy in Common, a comparison and understanding of the two investments is necessary. Tenancy In Common (TIC)   Delaware Statutory Trust (DST) IRS Reference   Rev. Proc. 2002-22 Rev. Ruling 2004-86 # of Investors   35 max. 499 max. Ownership Interest Direct ownership in real property as an undivided Tenant in Common   Proportional ownership in the DST itself, no ownership of real property Who Holds Deed? Individual investors […]

1031 Exchanges: How Many Owners Is Too Many?

If you’re an investor who’s successfully used the power of a 1031 exchange to reduce your capital gains tax liability and grow your portfolio, you may be wondering “what’s next?” After all, the tax savings is great and you’ve steadily increased the value of your properties along the way. Now, perhaps, it is time for a more sophisticated investment. But what is out there? One possible answer may be with fractional or co-ownership investments. Vehicles like Delaware Statutory Trusts or Tenancies in Common allow groups of investors to pool their resources and purchase more expensive – and potentially more lucrative – pieces of investment real estate than they could do […]

Swap ‘Til You Drop and Other Ways to Beat Uncle Sam At the Tax Game

Anyone involved in real estate investing is always on the lookout for ways to trim their tax obligations. Of course, you want to make sure that your methodologies don’t run afoul of US tax law. But what exactly are the rules these days? Thanks to the current election, even non-investors are now familiar with the loss carry forward provision of US Tax Code. But are there other, lesser known strategies for keeping the tax man from knocking at your door? A recent article in The Real Deal did a great job of summarizing the most common strategies used by real estate investors to avoid Uncle Sam’s clutches. In addition to […]