So you are an investor with a particularly unique set of circumstances. To minimize risk, you’d like IRS guidance on the nuances of a planned investment transaction, before you proceed. The good news is that there is an avenue for asking your question and receiving a cohesive response. As an investor, you should be familiar with Private Letter Rulings (PLR) issued by the Internal Revenue Service. While many investors will never seek a PLR themselves, they will often rely on other rulings for guidance when conducting their own exchange. A Private Letter Ruling is a written statement issued by the IRS in response to a taxpayer’s formal request for guidance. […]
1031 exchanges have enjoyed explosive growth in popularity in recent years. Once the sole domain of professional investors and commercial brokers, today you will find 1031 exchanges being used by professional and casual investors alike. However, along with this popularity has come many misconceptions about this powerful tax-deferral tool. Allow us to debunk some of the most common myths about 1031 exchanges. A taxpayer cannot complete a 1031 exchange with a related party. FALSE! Related parties can buy or sell property in a valid 1031 exchange. When related parties (e.g., parents, spouses, children, siblings, etc.) exchange property, the related party is obligated to own the property for at least two […]
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One area that is carefully reviewed in any 1031 exchange is the identification of replacement property. Did identification occur within approved deadlines? Was the property specifically identified? Does it meet value requirements? All these questions trap the unwary investor. However, you can avoid unnecessary IRS scrutiny by following these tips. 3 Property Rule – This allows an investor to identify up to three replacement properties eventually acquire, one, two or all three of them. 200% Rule – An investor can identify more than three possible replacement properties so long as the total fair market value of all those properties identified does not exceed 200% of the fair market value of […]
If you are at all interested in investing in real estate, you may have heard the acronym “DST” along the way. DST stands for Delaware Statutory Trust and it is a great way to boost the profile of the property you own, while still taking advantage of the tax benefits of section 1031 of the IRS code. A DST is actually a legal entity created for real estate investment purposes as a trust under Delaware state law. DSTs are especially useful in a 1031 exchange. The IRS has determined that any beneficial interest in the DST is treated as identical to a direct interest in real estate. This means that […]
When you’re ready to complete a 1031 exchange, one of the first questions you probably have is how to find and identify replacement property. Failing to properly complete this step will jeopardize the exchange. The good news is that identifying replacement property is a relatively straightforward proposition. (Finding it, on the other hand, is the subject for another discussion.) To properly identify potential replacement property, you must provide an “unambiguous description” of the property on or before the 45th day after closing on your relinquished property. A legal description or full property address is enough to satisfy IRS scrutiny. In some instances, you may want to identify more than one […]
A very common scenario in 1031 exchanges is that the property owner lists his or her relinquished property but does not sell it before they find a great replacement property. The good news is that IRS code does permit you to make an offer on replacement property before closing the sale on your relinquished property. The only caveat is that in order for the exchange to be valid, the closing on the replacement property must take place after closing on the relinquished property, even if only by a few minutes. Ok, great, so your exchange will work in those circumstances. But what if you find the perfect replacement property and […]