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Category Archives: 1031 Exchange Replacement Property

How to Defer All Capital Gains Taxes in a 1031 Exchange

The whole point of a 1031 exchange is to defer tax liability on the transaction in order to free up equity to purchase more valuable property and grow investments. Unfortunately, some investors don’t fully understand the requirements for full tax deferral, and make common mistakes that lead to unintended “boot” and the resulting immediate tax liability on at least some part of their transactions. To qualify for full tax deferral, an investor must meet two basic requirements in a 1031 exchange: Reinvest the entire net equity in one or more replacement properties, and Acquire one or more replacement properties with the same or greater amount of debt. Alternatively, the investor […]

How to Identify Property in a 1031 Exchange

For many investors, finding suitable replacement property is the biggest challenge in any 1031 exchange. While occasionally the perfect property will come along – sometimes even before the relinquished property is sold – this it not the case in most exchanges. For investors who relinquish before finding a replacement property, there are several important requirements that must be followed with regard to identifying replacement property in order for the 1031 exchange to succeed in the eyes of the IRS. And, no, it is not as simple as finding something you like. These “Rules of Identification” include: Up to three replacement properties may be identified without regard to their fair market […]

Why Should You Consider a 1031 Exchange?

IRS §1031 is commonly referred to as the last available tax shelter for investment real estate. When a 1031 exchange is completed, the seller preserves all capital appreciation by avoiding the tax liability of both state and federal capital gains and recaptured depreciation. The full amount of the seller’s capital appreciation can then be applied toward the acquisition of a new investment or business property. With a 1031 exchange, a seller is often able to afford a more valuable investment property than had the investor followed the traditional sale and purchase route that incurs harsh tax liabilities. A 1031 exchange also allows investors to replace an underperforming property with something […]

What Property Does Not Qualify for a 1031 Exchange?

Although section 1031 has been around since the 1920s, in 1986 the government saw fit to revise the code to exclude certain types of property from exchange qualification. Before you embark on a 1031 exchange, be sure to understand whether your relinquished and replacement properties qualify. Property that does not qualify for a 1031 exchange: A personal residence (although if you use a portion of your home for business or investment use, that portion may qualify) Stock/inventory used in trade Stocks Bonds Notes Securities/Indebtedness Partnership Interests Goodwill in a business Property held primarily for sale (e.g. flips, spec homes, developed lots) Understanding before you begin what property will – and […]

What is an Improvement Exchange?

So you are an investor considering a 1031 exchange. You have existing property you no longer want or need, but are having a hard time finding the perfect replacement property. You’ve seen several possibilities, but each had drawbacks that killed the deal. Are there any options open to you that would still allow you to sell your relinquished property and defer all your capital gains liability Yes. When you want to acquire replacement property that meets your exact criteria, consider conducting an Improvement Exchange. This allows you to construct or renovate the ideal replacement property and still qualify under section 1031. However, an Improvement Exchange is not without its risks. […]

What Does the Qualified Intermediary Do, Anyway?

The role of the Qualified Intermediary is essential to completing a successful 1031 exchange. While the exchange process itself is relatively straightforward (once you understand the basic rules), the QI plays is an indispensable part of almost every exchange. But what does this key player do, exactly? A lot more than you think. Holds exchange funds Since the investor cannot have actual or constructive receipt of sale proceeds from the relinquished property (or even be allowed to benefit from the exchanged funds in any way during the transaction), the QI will be the fiduciary who holds onto the sale proceeds until closing on the replacement property occurs. Given the large […]

What is Constructive Receipt in a 1031 Exchange?

One area that catches potential exchangers off guard (and torpedoes the exchange altogether) is the idea of constructive receipt. While actual receipt is easy to identify – the exchanger directly receives the sale proceeds from the relinquished property. It doesn’t matter what form the funds take – cash or wire transfer into an account – either. The bottom line is if the exchanger has direct access to the funds at any time, the transaction no longer qualifies as a 1031 exchange. But constructive receipt is a slightly more elusive concept. Constructive receipt occurs when the exchanger has the right to receive or control funds, even if he or she does […]

How is 2017 Shaping Up for 1031 Exchange Legislation?

As 2016 draws to the close and the country prepares for a sea change in leadership in Washington, DC, one topic that remains on the radar of investors across the country is the status of section 1031 of the U.S. Tax Code. While limitations to the breadth of 1031 exchanges under the current tax code have been bandied about for several years, to date no limitations have been implemented. So how do things look with a new administration taking the helm? The House Republican Blueprint for Tax Reform is a good place to start. This document, titled “A Better Way” proposes sweeping changes to the tax code. Several key provisions […]

What is the Reinvestment Requirement for Full Tax Deferral in a 1031 Exchange?

Investors flock to 1031 exchanges for the beneficial tax deferral of capital gains. But how, exactly, can you be sure that you will be able to defer 100% of your capital gains tax liability on your transactions? The IRS has two requirements to ensure 100% tax deferral: You must reinvest all the cash that was generated from the sale of your relinquished property. You must purchase property equal or greater in value to the property you sold. Of course, if you are not concerned with deferring 100% of your capital gains tax, you can also conduct a partial exchange. This results in, as you would expect, a partial deferral of […]

Can Oil, Gas and Minerals Rights Qualify for a 1031 Exchange?

While most 1031 exchanges involve real property, there are occasions when investors inquire about more esoteric property rights, like rights to natural resources. The answer to whether these type of rights qualify under section 1031 is both straightforward and complex. It starts by determining how one’s contractual rights are classified. A working interest is considered a real property interest, but a royalty interest is not. The distinction has to do with the investor’s rights and obligations to the property’s access. A working interest provides an exclusive right to enter land to obtain and develop the natural resource. It also includes the obligation to pay for the expenses related to obtaining […]