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Calculating Adjusted Cost Basis for a 1031 Exchange

Before you begin any 1031 exchange, you must understand your capital gain (or loss) from the sale or disposition of your relinquished property. This value is your Adjusted Cost Basis. To determine this value, you start with your original purchase cost then add in any purchase expenses, your cost for capital improvements and principal payments of special assessments (if any). Once you have that total amount, you then subtract any depreciation you’ve taken or were allowed to take and any casualty or demolition losses you’ve claimed. The resulting figure is your Adjusted Cost Basis. Knowing this number will help you evaluate the best way to proceed with the disposition of […]

Where does “Good Faith” Fit in a 1031 Exchange?

Even investors with the best intentions sometimes hit a roadblock that threatens to derail their carefully planned 1031 exchange. So how forgiving is the IRS when it comes to extenuating circumstances? Not very. Countless cases exist where taxpayers missed deadlines by just a few days and saw the IRS deny their exchange. For example, take the 1998 case of Knight v. Comm. In it, the Knights were supposed to close on their replacement property on the 179th day; however the deal unexpectedly fell through. The Knights went on to acquire another replacement property shortly after the 180 days expired, and argued to the IRS that they had made a “good […]

What Makes a Self-Storage TIC Such a Great Investment?

For the real estate investor looking to move up in terms of the value and ROI of their real estate investment property, considering a co-ownership arrangement can be a very lucrative decision. After all, when multiple investors go in, they can buy a bigger and better property than would be possible on their own. So what if you could leverage the power of fractional ownership and buy in to a rental property that delivers corporate level returns (including monthly cashflow) without the corporate level investment requirement? You can with a unique new Tenancy in Common offering that harnesses the power of self-storage facilities with TIC ownership. What makes a self-storage […]

Rising Real Estate Prices are Fueling 1031 Exchange Popularity

A few years ago, when real estate prices took a plunge and many investors took a significant equity hit, section 1031 of the tax code seemed like an unnecessary thing. After all, if you were under water on your investment properties, worrying about capital gains taxes was the last thing on your mind. But now that prices have rebounded, investors are once again faced with the dilemma of how to handle potentially significant tax obligations in the form of capital gains exposure. These rising prices explain the renewed popularity of 1031 exchanges. This recent article in Financial Planning magazine, captures the essence of why section 1031 is enjoying its moment […]

What Happens When You Go Down in Value with Your 1031 Exchange?

Some investors new to the benefits of section 1031 often believe that “like-kind” means that both the relinquished and replacement properties must be identical in every way. This is, of course, not true. The “like-kind” requirement, in a nutshell, simply means that both properties must be similar in nature or use. There is no requirement that both properties share identical values. In fact, many 1031 exchanges are conducted where there is a significant difference in the price of the two properties. The only caveat to be aware of is that if the value of your replacement property is lower than the value of your relinquished property, the difference will be […]

How Many 1031 Exchanges is Too Many?

Investors love the flexibility of section 1031 of the tax code. It allows for the exchange of business or investment property to avoid immediate taxation on capital gains. This lets investors re-invest more capital into newly acquired properties, thus growing their investment portfolio more quickly. But is there a downside to a love of 1031 exchanges? Sometimes. If an investor exchanges too many properties during the year (or executes an exchange too quickly after acquiring a property), the IRS may deem the investor a dealer. This presents a problem, because dealers are not allowed to exchange real estate absent proof that the property was held exclusively and strictly for investment. […]

Reviewing the 1031 Basics: The Concept of Boot

The word “boot” is not defined anywhere in Section 1031 of the IRS tax code. Which is surprising, since this is a key component of any 1031 exchange. It is also a term you must be familiar with when considering a 1031 exchange. Boot is an important concept to understand, because it has the potential to negatively influence the tax deferred nature of a 1031 exchange. “Boot” is any value the investor receives that is over and above the value of the relinquished property once the 1031 transactions are completed. Boot can come in the form of money, debt relief or the fair market value of other property received by […]

How to Ensure Full Tax Deferral in Your 1031 Exchange

The whole point of a 1031 exchange is to defer tax liability on the transaction and free up equity to purchase more valuable property and grow investments. So you wouldn’t knowingly make a mis-step that jeopardizes full tax deferral. Unfortunately, at least a quarter of all intended 1031 exchanges end up generating at least partial tax liability. As an investor, it is imperative that you fully understand the requirements for full tax deferral, and avoid the common mistakes that lead to unintended immediate tax liability on your investment transactions. To qualify for full tax deferral, an investor must meet two basic requirements in a 1031 exchange: Reinvest the entire net […]

Can I Exchange My Easement Interest in a 1031 Exchange?

Since section 1031’s introduction back in 1921, the concept of an exchange has continued 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 real estate. Of course, […]

Protecting Funds During a 1031 Exchange

One of the biggest questions any investor should be asking before they settle on a Qualified Intermediary to assist them with their 1031 exchange is “how will my funds be protected?” After all, the QI will take custody and control of the sale proceeds from the relinquished property and hold them in escrow until closing on the replacement property. So it makes sense that a responsible investor would want to know what safeguards are in place to protect their investment resources. (And if you are an investor NOT asking that question, you SHOULD be!) Before picking your QI, be sure to ask them for proof of the following: How much […]