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Category Archives: 1031 Exchange Replacement Property

Are there refinancing restrictions on replacement property after a 1031 exchange?

I recently discussed the issues surrounding a refinance before selling relinquished property in a 1031 exchange. Another question I often field from my clients is when and how they can refinance their replacement property without triggering IRS attention (and potential tax liabilities). The good news is, that with a bit of pre-planning, you can complete a tax-free 1031 exchange and then refinance immediately afterwards. If done correctly, you can receive those refinancing proceeds tax-free, too. The key to avoiding IRS classification of the proceeds as boot lies in the timing of the refi. You should begin the refinancing process only after you close escrow on the replacement property. You should […]

Tired of actively managing your rental property? A 1031 exchange might be the answer.

Investors go into rental property ownership for all the right reasons. Appreciation of the asset and a steady, monthly income flow are two big ones. And it works beautifully for most. At least for awhile. But eventually the day comes when an investor, likely facing his or her golden years, still desires the cash flow and appreciation, but no longer wants the day-to-day responsibility of rental property ownership. After all, those 3:00 a.m. phone calls get tiresome, even for the heartiest of landlords. The great news is that investors can continue to enjoy the benefits of rental property ownership while eliminating the daily management responsibilities. And, if they structure the […]

Exchanging Real Estate That Includes Personal Property

One of the most basic tenets of every 1031 exchange is that the relinquished property and replacement property must be “like kind.” Unfortunately, when real estate is involved in the exchange, there is a fairly common issue that investors unwittingly run into. It comes up when personal property is included in the deal. This most commonly occurs when an asset like an apartment building (that includes household appliances such as refrigerators, washers or dryers) is exchanged for other real estate that may or may not include like-kind items of personal property. While the real estate itself (both the relinquished and replacement properties) is considered “like kind,” if one or the […]

Can I refinance my relinquished property before conducting a 1031 exchange?

Often times, I encounter investors who want to take advantage of the tax deferral offered by a 1031 exchange, but also want (or need) to receive money from the sale of the relinquished property. Ordinarily, any money received from the sale would be considered taxable boot. Is there a workaround? Yes and no. An investor could refinance the relinquished property immediately before the sale and receive the loan proceeds on a tax-free basis. However, then the investor would have to obtain replacement property that is subject to at least the same amount of debt as what the investor had on the relinquished property at its disposition. But wait…what about the […]

Another Way To Identify Replacement Property In Your 1031 Exchange

Anyone who has tried to complete a successful 1031 exchange knows that there are many rules to follow. Many, many rules. Mess up even a single one and the IRS is likely to deny your exchange and send you a hefty tax bill. One of the areas where investors often get caught out is in naming replacement property. You have 45 days from the date you close the sale on your relinquished property to identify replacement property. Sounds easy, but often times this is where the exchange is most vulnerable. Many investors discover (too late) that they can’t find anything suitable they wish to purchase – at least not with […]

Another Politician Takes Aim At 1031 Exchanges

Even though he lost his bid for the Democratic presidential nomination, Sen. Bernie Sanders has not let up on his declaration to bring egalitarianism to the United States tax code. In an October 4 press release, the former presidential hopeful announced his plans to introduce legislation in the next Congressional session to “fix our rigged tax system and close loopholes Donald Trump used to possibly avoid paying federal income taxes for nearly two decades.” Sanders continued “Special tax breaks and loopholes in a corrupt tax code enable billionaires and powerful corporations to avoid paying their fair share of taxes while sticking the burden on the middle class. It’s time to […]

1031 Exchanges Become Political Fodder…Again

Much like her predecessor in the office she hopes to hold come January, Hillary Clinton has placed 1031 exchange reform in the bulls-eye of her proposed plans for tax reform. While she has been vocal on the campaign trail about her plans to raise taxes on wealthy Americans, one of her lesser-known proposals has investors and the real estate industry at attention. Clinton is proposing to put limits on 1031 exchanges, although unlike the Obama administration who targeted $1,000,000 as the threshold, she has not (yet) spelled out to what extent she would limit deferrals. This continued focus on 1031 exchanges by Democrats has led market analysts to presume she […]

Do you know about the 95% Rule for 1031 exchanges?

If you’re considering a 1031 exchange, then understanding the rules of the game is not an option – it is required. The IRS is very strict about applying the rules it has set forth that govern these amazing tax-deferral transactions. No surprise there. But what does catch investors off guard is the nuances of time deadlines for these transactions. One of the most common pitfalls that I see in my work with clients on these type of real estate transactions? Missing the deadline to name possible replacement properties. You may know that you have 45 days from the date you sell your relinquished property to identify possible replacement property. But […]

What happens to the cash during a 1031 exchange?

In my work with 1031 exchanges (as both a qualified intermediary and a real estate professional), I often encounter investors who are delving into the world of deferred capital gains for the first time. They understand the basic concept of trading investment property to avoid taxes, but are a little fuzzy on the steps of the process. One of the biggest things any investor must know before beginning any 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 or constructive access to the […]

Six Myths About 1031 Exchanges – Part 3

If you’ve been thinking about a 1031 exchange, but are confused by the seemingly continuous flow of misinformation out there, struggle no more. We’ve compiled some of the most common myths surrounding these great tax deferral transactions here and here. Today we offer some final thoughts. Residential property can never be for personal use. FALSE! As long as an investor follows certain guidelines, properties like second homes or vacation homes can qualify for a 1031 exchange and be personally used by the investor. An investor must offer the property for rent at fair market rate and can then use the property him or herself for up to 14 days per […]