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Category Archives: 1031 EXCHANGE

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 […]

Tired of actively managing your rental property? A self-storage TIC 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 most agreeable 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 […]

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 […]

1031 Exchanges – Speak the Language

For an investor new to the world of section 1031 of the IRS Tax Code, the terminology that comes along with these tax-saving exchanges can be confusing. To help you understand the phrases you will undoubtedly hear if you choose to complete a tax-deferred 1031 exchange, here’s a list of the key terms you will come across. Boot: This is the fair market value of any non-qualified property you receive during the exchange. It can be cash, loans, property, reduction in debt or even supplies. Basically, anything of value that you receive during the exchange could be considered boot. Constructive Receipt: Any indirect control you have over the proceeds of […]

Fractional Ownership Real Estate Investments: How Many Owners is Too Many?

For many investors, buying their first investment property is just the beginning. After getting a taste of the benefits of investment real estate, they often wonder “what’s next?” Especially if they’ve harnessed the power of a 1031 exchange to reduce capital gains tax liability and grow their portfolio even faster. As a savvy investor, perhaps you are ready to step up to fractional or co-ownership investments. Vehicles like Delaware Statutory Trusts or Tenancies in Common allow groups of investors to pool their resources and purchase more expensive – and potentially more lucrative – pieces of investment real estate than they could do on their own. But one question any investor […]

Understanding the “Same Taxpayer Rule” in 1031 Exchanges

When it comes to things involving the IRS, it’s all about rules. Knowing them. Understanding them. Following them. After all, it is fairly well-known that the IRS is not a very forgiving entity when it comes to bending rules or even taking a generous rule towards interpreting compliance with their complicated tax code. This is as true as ever when it comes to 1031 exchanges. To maximize your chances of successfully deferring capital gains taxes, it pays to understand all the rules surrounding them. One of the trickier ones has to do with who is the named entity in the sale and purchase of exchange-related property. In the eyes of […]

Not Everything Qualifies for a 1031 Exchange

The IRS is surprisingly generous when it comes to the types of investment or business property that qualify for section 1031 exchange purposes. But their generosity is not limitless. In fact, some things might initially seem to meet the general criteria of “property held for business or investment purposes” still may not qualify for a 1031 exchange. This includes stocks, bonds, notes, securities and interests in partnerships. Other property that is “held primarily for sale,” such as business inventory, is also excluded from qualification. This further extends to things like real estate bought with the intent to flip or vacant land that will be developed with a house. And, of […]

Can You Exchange Your Primary Residence?

I am often approached by homeowners lucky enough to have built up extensive appreciation in their primary home. Trying to avoid excessive capital gains taxes, they often want to explore the option of utilizing section 1031. They are often disappointed when I point out 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 […]

Calculating Adjusted Cost Basis for a 1031 Exchange

Before you begin any 1031 exchange, you must understand your capital gain (or loss) from the sale or disposition of your relinquished property. This value is your Adjusted Cost Basis. To determine this value, you start with your original purchase cost then add in any purchase expenses, your cost for capital improvements and principal payments of special assessments (if any). Once you have that total amount, you then subtract any depreciation you’ve taken or were allowed to take and any casualty or demolition losses you’ve claimed. The resulting figure is your Adjusted Cost Basis. Knowing this number will help you evaluate the best way to proceed with the disposition of […]