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“Equal Or More” Investments Are The Rule In 1031 Exchanges

So you want to do a 1031 exchange and defer capital gains taxes. Great. All you have to do is sell your old property and buy something new, right? Sort of. There are myriad rules surrounding legitimate 1031 exchanges, and the value of your replacement property is one of them. In order to defer 100% of your capital gains, the value of your replacement property must be equal to or greater than the property you sold. In determining the equal or up number, you must keep two important factors in mind. The first thing has to do with debt. The amount of money used to pay off debt (any mortgages, […]

Beware Hidden “Boot” Risks In A 1031 Exchange

One of the golden rules of 1031 exchanges is that if you receive any cash out of the transaction, it is considered “boot” and subject to capital gains taxes. Most investors understand this. But there is one element of “boot” that often catches investors off guard, and it has to do with mortgages and other debt. If you fail to consider outstanding loans during the 1031 transactions, you can find yourself facing unintended taxes on unexpected boot. How so? If you don’t receive cash back but do see your liability go down, the reduction in debt will be treated just like cash. Let’s say you had a mortgage of $1,000,000 […]

How broad is the definition of “like-kind” in a 1031 exchange?

Although the IRS does not set forth a definitive description of what “like-kind” means, they do offer guidance. Both properties involved in a 1031 exchange must be “the same nature or character, even if they differ in grade or quality.” From my own practical experience working with 1031 exchanges for nearly two decades as a qualified intermediary and an investor myself, I have seen many seemingly incongruent “like-kind” exchanges that were permitted by the IRS. Things like: – Exchanging an apartment building for a duplex. – Exchanging a single family rental property for a commercial office building. – Exchanging rental property for a restaurant space. Seeing the diverse nature of […]

What if my replacement property costs less than my relinquished property?

Even investors who understand the basics of 1031 exchanges sometimes get caught out when it comes to finding replacement property that is equal or greater in value to the relinquished property. Perhaps the investor has located the right replacement property and it actually costs less than the investment/business property he or she sold. Must the investor keep looking until they find something else more expensive? Or must they forego a 1031 exchange altogether if they really want to buy that specific parcel of replacement property? The answer to both questions is…no. When faced with a situation where replacement property costs less than relinquished property, it is possible to do a […]

Don’t Overfund Your 1031 Replacement Property Loan

The IRS has strict rules for determining the validity of your 1031 exchange in order to completely defer all capital gains taxes. You must: (1) buy replacement property that is equal or greater in value than your relinquished property, (2) use all the cash proceeds from the sale of your relinquished property toward the purchase of your replacement property, and (3) replace the value of your debt on the relinquished property. If, when you take out debt on your replacement property it exceeds the amount of debt you had on your relinquished property, the difference may be considered “boot” and become taxable to you. To avoid this scenario, be sure […]

How Soon Is Too Soon To Look For 1031 Exchange Replacement Property?

The simple answer is NEVER. The truth is, many investors wait until they close on the sale of their relinquished property before starting to think about finding replacement property. Given the strict IRS deadline of 45 days from the date of selling your relinquished property to identify possible replacement properties, you can quickly see why waiting can lead to critical issues down the road. So perhaps you think since you can name multiple properties, what’s the big deal? After all, you still have another 135 days to buy something and still meet the IRS’s other deadline of 180 days to close on the replacement property. And if you can do […]

The “Same Tax Payer” Rule for 1031 Exchanges

When it comes to completing a valid 1031 exchange, it’s all about rules. Knowing them. Understanding them. Following them. The IRS is not a very forgiving entity when it comes to bending rules or even taking a generous rule towards interpreting compliance with their complicated tax code. So to maximize your chances of successfully deferring capital gains taxes, it pays to understand all the rules surrounding them. One of the trickier ones has to do with who is the named entity in the sale and purchase of exchange-related property. In the eyes of the IRS, the tax return and the name on the title of the property being sold must […]

The Greater or Equal Value Rule for 1031 Exchanges

As if there weren’t enough rules to follow when completing a valid 1031 exchange (45 days to identify replacement property, 180 days to close, etc.), the IRS throws another wrench into the works. It has to do with the value of the replacement property. In order for your exchange to be valid and completely avoid paying capital gains taxes on the sale of your relinquished property, the IRS requires the net market value (including equity) of your replacement property to be the same as, or greater than, the property you sold. Otherwise, you are not able to defer 100% of the capital gains taxes that would be due. For example, […]

Can I eliminate capital gains taxes altogether with a 1031 exchange?

This is, by far, one of the most common questions I get asked when working with investors who want to complete a 1031 exchange. They may have only a limited knowledge of how an exchange works, but have heard through the grapevine that it is a great way to keep the tax man at bay when selling investment or business property. I am always hesitant to offer a black and white answer to this question, though. Like so many things related to taxes, the real answer is…it depends. The first thing to understand is that when you complete a valid 1031 exchange (meaning you’ve crossed all the T’s and dotted […]

Can my easement interest qualify for a 1031 exchange?

Although section 1031 of the IRS code has been around since 1921, the concept of 1031 exchanges continues to evolve. And because the code is not crystal clear on some concepts, investors often seek guidance from the IRS – in the form of Private Letter Rulings – about non-traditional exchanges. One issue that comes up with more regularity than you might think is the concept of exchanging easement interests (conservation or agricultural). First, can they be considered as “like-kind” to real estate? Second, do they qualify for an exchange. The IRS issued several private letter rulings finding that certain types of conservation and agricultural easements are, in fact, “like-kind” to […]