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Category Archives: 1031 Exchange Replacement Property

Reviewing 1031 Basics: What is Boot?

Even though you will not find the word “boot” anywhere in Section 1031 of the IRS tax code, it is something you must understand if you are contemplating a 1031 exchange. Why? Because it has the potential to negatively influence the tax deferred nature of your transactions. “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 the investor in an exchange. Money – This includes any cash (or cash equivalents) received by the investor. Debt […]

Is it All or Nothing with a 1031 Exchange?

One question I’m often asked is whether an investor can conduct a partial 1031 exchange. I am happy to answer with a definitive yes. After all, a 1031 exchange offers a very flexible approach to trading investments to maximize long-term growth, and this includes opting to complete a full or partial exchange. Allowing for a partial exchange permits the investor flexibility to address current needs. A partial exchange allows the investor to choose whether to defer some capital gains tax and pay tax on either (a) cash proceeds received or (b) debt reduction. Either of these scenarios result in boot being received by the investor. Boot – defined as any […]

Which Type of 1031 Exchange is Right for You?

The phrase “1031 Exchange” is often thrown about as a catch-all for any property exchange that qualifies under section 1031 of the IRS tax code. However, there are actually several different types of 1031 exchanges, each of which brings with it a unique set of IRS rules and requirements. Simultaneous Exchange As the name implies, a Simultaneous Exchange is an exchange where the closing of both the Relinquished Property and the Replacement Property occur on the same day. With this exchange type, the two closings usually occur back-to-back. IRS safe harbor regulations impact this type of exchange. Delayed Exchange When the Replacement Property is acquired sometime after the Relinquished Property […]

Will Your 1031 Exchange Impact Your State Income Taxes?

As a qualified intermediary and licensed real estate professional, I’ve personally seen the surge in taxpayers leveraging the power of a 1031 exchange. It is a great way to defer capital gains taxes and more quickly build a portfolio of business or investment properties. Yet one area where more than one taxpayer has been caught out involves the impact of state income tax liability on the transactions, particularly when it comes to interstate exchanges. Since broadening geographic scope of investments is a key driver in many 1031 exchanges, the ramifications of interstate transactions should not be overlooked. While federal law makes no distinction for exchanges conducted across state lines, some […]

Triple Net Lease (NNN) Essentials

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 […]

Understanding 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, […]

Pros & Cons of a Tenancy in Common 1031 Investment

Recently we introduced an innovative new way to join the Tenancy in Common real estate investment movement. With self-storage TICs, individual owners can join the lucrative world of self-storage facility ownership – without the individual ownership price tag. But perhaps you aren’t up to speed on the world of TIC investments. Because there are always pros and cons to every type of investment, I want to briefly discuss the benefits and risks of this type of real estate investment opportunity. Benefits One of the advantage of Tenancy in Common ownership of investment property is that the individual investors each maintain the ability to have a say in the day-to-day operation […]

When Does the 2-Year Holding Rule Apply to 1031 Exchanges?

In a typical, arm’s length 1031 exchange, the parties to the process only come together because one is selling something the other one wants. They don’t likely know each other, and, in many cases, may never meet at all. For those transactions, the two-year holding rule never comes into play. However, when related parties want to use section 1031 to exchange property, this nuanced rule is applicable. Both sides must be clear on this part of IRS code. When related parties exchange property and want to qualify for tax-deferred treatment under section 1031, special rules apply to the transaction. These special rules were implemented by the IRS to try and […]

Can Closing Costs be Paid with 1031 Exchange Funds?

When it comes to determining “boot” (any value you derive from the 1031 exchange which is immediately taxed), exchangers often wonder how various closing costs are treated. The IRS does address this topic. Their position is that in order for closing costs to be paid with exchange funds (and not taxed as boot), the costs must be considered a Normal Transactional Cost. These are classified as a reduction of boot and an increase in basis. However if the cost is a Non-Exchange Expense, it will be considered taxable boot. There are a few expenses that may – or may not – be treated as taxable boot. Things like appraisal fees […]

1031 Exchange Basics: Property Held for Sale or Investment

One of the key requirements for a real estate exchange to qualify for capital gains tax deferral under section 1031 is that the property involved was held for either investment purposes or for productive use in trade or business. In many cases, this is a straightforward proposition to prove. However, in some exchanges, questions may arise as to whether this strict requirement has been met. For example, if you are an investor who regularly buys and sells real estate or flips properties for profit, the IRS will scrutinize your 1031 exchange differently than if you were a casual real estate investor. That doesn’t mean that a broker is prohibited from […]