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Including Your Primary Residence In a 1031 Exchange

If you’re a lucky homeowner who has accumulated extensive appreciation in your primary home, you may be wondering how to minimize taxes when it comes time to sell. The idea of a 1031 exchange comes to mind, but then you realize that the IRS code explicitly prohibits private residences from eligibility in Section 1031. Do you have any options to avoid hefty capital gains taxes? One option is, of course, to 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 […]

What’s Happening With 2017 Tax Code Revisions & Section 1031?

Now that the new administration is settled in, Washington legislators are turning their attention to one of the key issues raised during the recent campaign – tax reform. And with House Republicans already busy at work putting together their major tax reform proposal, one specific target remains in their sights – repeal of Section 1031 of the tax code. But is getting rid of 1031 exchanges the panacea that politicians believe it to be? While eliminating this part of the code would theoretically provide an immediate boost to IRS coffers – an estimated $11.7 billion from corporations and $6 billion from individual taxpayers according to a December 2015 study from […]

Extracting Cash From a 1031 Exchange

In the two decades I’ve been working as a qualified intermediary to assist investors with their 1031 exchanges, one question comes up more than any other at our initial meeting. Investors usually want to know whether they can pull some money out of the deal. The short answer is yes, you are absolutely free to take out cash from the deal. However, doing so comes with a caveat. You will be liable for capital gains tax on the cash you receive. Of course, even though the entire point of a 1031 exchange is to defer all capital gains taxes, that doesn’t prohibit you from choosing to incur a tax liability […]

The Basics of NNN Lease Properties

In today’s uncertain economic times, traditional investments provide neither the stability or meaningful returns that investors seek. Perhaps that is why interest in net-leased, single-tenant real estate is skyrocketing. But for the casual investor, these properties – commonly called NNN or STNL in the industry – remain somewhat of a mystery. Before you embark on an investment of this type, it is important to understand the basics surrounding these appealing and flexible investment properties. Defining NNN Properties Typically, the types of real estate considered triple net lease investments are freestanding buildings that are leased out to national tenants on a long-term basis ranging between 10-25 years. These national tenants are […]

The Three Responsibilities of the Qualified Intermediary

If you’re planning a 1031 exchange, you will likely require the services of a Qualified Intermediary. This individual is the one who keeps you on track and fulfills an indispensable role to keep you from violating the strict rules of the tax code. And while the exchange process itself is relatively straightforward (once you understand the basic rules), the QI should be doing three key things for you throughout the process. Advises on rule compliance One of the key elements of any successful exchange is ensuring that the investor meets the stringent timeframes set forth by the IRS. The first is to identify replacement property within 45 days of selling […]

Can You Hold Your Own Cash in a 1031 Exchange?

In my work with 1031 exchange investors (in my roles as either the qualified intermediary or real estate professional), I often encounter investors who are delving into the world of 1031 exchanges for the first time. They understand the basic concept of trading investment property to defer tax liability, but are a little fuzzy on the steps of the process. One of the most important things any investor must know before even starting a 1031 exchange, is how the IRS treats the cash from the sale of the relinquished property. In order for the exchange to be valid, the very first hurdle is making sure the investor never has actual […]

Voiding a 1031 Exchange by Violating the Related Party Prohibition

The end of 2016 saw an interesting case come out of U.S. Tax Court. It had to do with an attempted 1031 exchange that violated a very important provision of the code – the prohibition against related parties engaging in an exchange together. While related parties may conduct exchanges together, the IRS requires that both parties must hold the property they receive at least two years. Failing to do so triggers immediate recognition of any gain. The single exception to this rule occurs if a taxpayer can convince the IRS that the exchange’s principal purpose was not tax avoidance. This is easier said than done. To read the details of […]

How is 2017 Looking for Net Lease Investments?

With the turmoil of 2016 behind us, investors are looking ahead to what the new year might bring. But just because the calendar has flipped to 2017, volatility and uncertainty are still at the forefront of most experts’ minds. The truth is, nobody – no matter their level of expertise – can precisely predict where the markets will go as the year unfolds. That being said, there is a sub-sector of the commercial real estate market that, historically, has achieved an impressively solid performance record. One whose hallmark is stability, no matter what’s happening elsewhere. Net lease investments offers several benefits to investors that aren’t found elsewhere, like minimal basis […]

The Basics of Delaware Statutory Trusts

A Delaware Statutory Trust (commonly referred to as a DST) is, as the name suggests, a legal entity created as a trust under Delaware state law. A DST is created for real estate investment purposes, and is especially useful in a 1031 exchange. Under a DST, investors each own a pro rata share of the DST itself. The DST in turn holds title to various real estate interests, and distributes any income received from the properties (either through rental income or the sale of the property) to the investors in proportion to their ownership share in the DST. The DST, via its signatory trustee, makes all decisions related to any […]

De Facto Ways to Identify Property in a 1031 Exchange

Anyone who has considered a 1031 exchange to defer capital gains taxes on the replacement of business or investment property should already know about the two strict (and concurrently running) deadlines governing these transactions – 45 days to identify replacement property and 180 days to close on it. And for many exchangers, identifying the possible replacement properties will occur in one of three ways: Three-Property Rule – Up to three alternate properties may be identified, regardless of their market values. 200% Rule – Any number of replacement properties may be identified, so long as the aggregate fair market value of the replacement properties does not exceed 200% of the aggregate […]