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IRS Announces Tax Relief for Louisiana Taxpayers Impacted by Hurricane Francine

09/13/24

In response to the destruction caused by Hurricane Francine, the IRS has announced extended tax relief for impacted Taxpayers within ...

Authored by: meredithb@accruit.com

Authored on: Fri, 09/13/2024 - 14:45

Company and Industry News

<h3 paraeid="{89b384a6-5521-41e7-a220-e57e6779373d}{185}" paraid="760886701">Due to Hurricane Francine, the IRS has issued Tax Relief for the entire state of Louisiana. </h3>

Affected Taxpayers have until February 3, 2025, to make tax payments and file for various individual and business tax returns.  <o:p></o:p>

Currently, all individuals and households that reside in or have a business within the entire state of Louisiana qualify for tax relief. Any area added to the disaster area at a later time will also qualify for tax relief.  <o:p></o:p>

An “Affected Taxpayer” includes individuals who live, and businesses whose principal place of business is in the Covered Disaster Area. Affected Taxpayers are entitled to relief regardless of where the relinquished property or replacement property is located. Affected Taxpayers may choose either the General Postponement relief under Section 6 OR the Alternative relief under Section 17 of Rev. Proc. 2018-58. Taxpayers who do not meet the definition of Affected Taxpayers do not qualify for Section 6 General Postponement relief. <o:p></o:p>

Option One: General Postponement under Section 6 of Rev. Proc. 2018-58nt under Section 6 of Rev. Proc. 2018-58 (Affected Taxpayers only). Any 45-day deadline or 180-day deadline (for either a forward or reverse exchange) that falls on or after the Disaster Date above is postponed to the General Postponement Date. The General Postponement applies regardless of the date the Relinquished Property was transferred (or the parked property acquired by the EAT) and is available to Affected Taxpayers regardless of whether their exchange began before or after the Disaster Date. <o:p></o:p>

Option Two: Section 17 Alternative (Available to (1) Affected Taxpayers and (2) other Taxpayers who have difficulty meeting the exchange deadlines because of the disaster. See Rev. Proc. 2018-58, Section 17 for conditions constituting “difficulty”). Option Two is only available if the relinquished property was transferred (or the parked property was acquired by the EAT) on or before the Disaster Date. Any 45-day or 180-day deadline that falls on or after the Disaster Date is extended to THE LONGER OF: (1) 120 days from such deadline; OR (2) the General Postponement Date. Note the date may not be extended beyond one year or the due date (including extensions) of the tax return for the year of the disposition of the Relinquished Property (typically, if an extension was filed, 9/15 for corporations and partnerships and 10/15 for other Taxpayers).

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Fri, 09/13/2024 - 15:43

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Accruit Launches Private Client Group

09/12/24

Accruit introduces Private Client Group; the first of its kind, boutique 1031 exchange Qualified Intermediary offering.

Authored by: meredithb@accruit.com

Authored on: Thu, 09/12/2024 - 18:13

Press Releases

Accruit, a leading national 1031 exchange Qualified Intermediary, is proud to announce the launch of Private Client Group, a boutique 1031 exchange offering within Accruit. Private Client Group is composed of experts in the field focused on providing tailored 1031 Qualified Intermediary solutions that align with the client's goals and objectives.

Private Client Group focuses on providing high-touch service and strategic planning to clients and their advisory teams. By providing comprehensive analysis and proactive solutions to complex issues, the group fills a void within the Qualified Intermediary industry. As such, Private Client Group delivers unrivaled service for high-net worth individuals, family offices, specialized law practices, wealth managers, and institutional investors. With highly knowledgeable attorneys engaged in each transaction, the group delivers tailored solutions that meet the unique needs and goals of each client.

"We are thrilled to introduce the Private Client Group to our clients," said Steve Holtkamp, Senior Managing Director, and Chief Revenue Officer at Accruit. "Our goal is to offer a more proactive and personalized approach to 1031 exchange tax deferrals, ensuring that our clients receive the highest level of service and expertise."

According to Accruit Senior Director Jonathan Barge, "the Private Client Group was developed in response to the demand from high-net-worth clients for a 1031 service that wasn't 'off the shelf.' Trust and strong relationships are cornerstones for the group's delivery of expert solutions, ethical practices, and utmost discretion required by these clients."

The launch of the Private Client Group is part of Accruit's ongoing commitment to revolutionizing the 1031 exchange industry by providing innovative solutions to its clients.

Thu, 09/12/2024 - 19:08

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Differences Between Tenant-In-Common Investment of the 2000s and Delaware Statutory Investments of Today

09/05/24

This blog explores the differences between Tenant-in-Common (TIC) investments of the early 2000s and today’s Delaware Statutory Trusts (DSTs) ...

Authored by: meredithb@accruit.com

Authored on: Thu, 09/05/2024 - 20:20

1031 Exchange General

<h1 aria-level="2" paraeid="{cd75f74a-4064-4bd7-b8eb-2ac7e288248a}{30}" paraid="751799447" role="heading">The Intro of Tenants-In-Common in a 1031 Exchange </h1>

The early 2000s witnessed the advent of the Tenant in Common (TIC) investment in real estate, particularly geared for Replacement Property in a 1031 Exchange.  The use of a TIC ownership itself was nothing new, rather the use of it in this context exploded onto the scene.  Anyone who wanted some real estate in their investment portfolio could enter into such an investment but, for all intents and purposes, TIC investments were utilized by 1031 Exchange investors.

Basically, a TIC investment was simply a deeded percentage of ownership in a piece of investment property.  Think of it as a slice of pie.  If one investor put in a certain amount of equity, that person would be allocated an applicable percentage ownership in the property.  If another investor put in twice the investment, that investor would get double the percentage ownership.  The co-owners were independent of each other and didn’t necessarily know who the others were.

<h2 aria-level="3" paraeid="{cd75f74a-4064-4bd7-b8eb-2ac7e288248a}{48}" paraid="764918084" role="heading">Benefits of TIC Investments </h2>

TIC investments were attractive because they allowed investors to invest in a property that they alone could not afford; while investors had no management responsibility, they could direct a manager to take the agreed upon actions; investors generally had a known income stream to count on; property structured as TICs were eligible for 1031 exchange Replacement Property; and the 45-day property identification requirement for an exchange became easier to comply with.

<h2 aria-level="3" paraeid="{cd75f74a-4064-4bd7-b8eb-2ac7e288248a}{66}" paraid="284516990" role="heading">Challenges of TIC Investments  </h2>

In 2002, the IRS published rules as to what constituted a valid TIC investment to pass <a href="https://www.irs.gov/pub/irs-drop/rp-02-22.pdf">IRS muster</a>. Rev. Proc. 2002-22 provides the specific requirements (or prohibitions) but include such things as:

<ul role="list">
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Right of first refusal for sale and options to buy only at fair market value 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
Other than the rental of the property, no ability to run a business activity on the real estate 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="6" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
No loans to the property from related parties to the investors 
</li>
</ul>

<h2 aria-level="3" paraeid="{cd75f74a-4064-4bd7-b8eb-2ac7e288248a}{133}" paraid="320942308" role="heading">The Tenants-In-Common Investment Dilemma of the 2000s </h2>

The IRS rules regarding TIC investments coupled with the rush to market of this newly available investment vehicle, culminated into a less-than-ideal scenario for many TIC investors. Strong demand for the product caused different deals and the agreements that supported them to have different levels of true adherence to the IRS Revenue Procedure.  Added to that, due to bringing property to the market quickly, not all properties had strong fundamentals. By far the largest issue TIC investors faced was the requirement for all investors to be unanimous in a decision, whether that be a decision to renovate the property, sell it, etc. It was often difficult to get 100% of the investors, to agree on a decision. This fact resulted in many investors being stuck in a property with no way out. The “Great Recession” of 2008 brought these issues to the forefront for TIC investments. Some TIC investments began to fail, and investors, and lenders, got left with properties with little or no value.  Between the stringent requirements for a valid TIC and the number of failed investments, right or wrong, TICs developed a negative connotation.

<h1 aria-level="2" paraeid="{cd75f74a-4064-4bd7-b8eb-2ac7e288248a}{146}" paraid="1689427554" role="heading">Delaware Statutory Trusts (DSTs) Enter the 1031 Scene </h1>

Shortly after TIC investments burst onto the 1031 Exchange Replacement Property scene Delaware Statutory Trusts (DSTs) became available to 1031 exchange investors, due to a favorable IRS ruling in 2004. In a DST, a Trustee was able to hold title to the property and manage it, and individuals could invest in the property by becoming beneficiaries of the Trust.  Despite the unusual structure, the investor was still deemed to have acquired a real property interest, critical to qualify for a 1031 Exchange.

<h2 aria-level="3" paraeid="{cd75f74a-4064-4bd7-b8eb-2ac7e288248a}{158}" paraid="283608575" role="heading">Overview of Delaware Statutory Trusts (DSTs)  </h2>

A DST is particularly attractive to an investor who does not want any management responsibility and desires access to a single property or portfolio of high value, high quality real estate asset(s) that may not otherwise be directly available to them due to size, high underlying borrowings or other factors.

DST investments generally pay investors quarterly, the amount is based upon the excess rent over the property expenses, including any mortgage payments. The rate of return varies from deal to deal based on the specifics of the property and financing. Typically, the DST sponsor knows the net rent that can be expected and can give the investor the anticipated return for the term of the investment. The holding period of the asset is usually 5-7 years and with most DST deals, and the investor shares in the same investment percentage of appreciation in value upon sale of the property. DSTs are not all the same; some DSTs are structured to pay out net income only and do not share appreciation upon sale of the asset.

Similar to TIC investments, 1031 investors faced with the need to identify potential Replacement Property within 45 days of sale of Relinquished Property found the DST to greatly simplify meeting this identification requirement.

<h1 aria-level="2" paraeid="{cd75f74a-4064-4bd7-b8eb-2ac7e288248a}{190}" paraid="2046551397" role="heading">Differences between TIC Investments and DSTs  </h1>

While both are passive real estate investments tailored for investors looking for Replacement Property in their 1031 Exchanges, TIC investments and DSTs have numerous differences including:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
The minimum investment for DSTs was generally much less than the typical TIC and the sponsor had some further discretion in that regard. Although the DSTs also suffered from the effects of the recession, they continue to be the preferred co-ownership investment offered to investors participating in a 1031 exchange. 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
DSTs are not subject to the limit of 35 investors 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
The investors do not have to be on the loan for the underlying property 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="6" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Investors who have sold property with debt on it can offset that with debt picked up via the DST purchase, but the debt is non-recourse to the investor 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="7" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
While there are never guaranties, the quarterly income is usually predicable 
</li>
</ul>

The manner in which DSTs are marketed to the public have a lot of characteristics of sales of securities. Early on the SEC decided to regulate them as actual sales of securities. So, although a DST interest retains the nature of real estate ownership, with some exceptions, they are regulated. They are typically brought to market for syndication by large well-known sponsors, although they have to be acquired through an individual Broker, Registered Investment Advisor or a licensed Financial Advisor. These persons, in turn, are licensed through a broker/dealer and it must have an agreement in place with the individual property sponsor.  Not all brokers or advisors have agreements with all sponsors. Typically, the broker/dealer will vet to some degree the particular property offering of the sponsors and that level of due diligence is a benefit to the investor who is unlikely to have the wherewithal to review the investment as closely. All fees are paid by the sponsor and not the investor, although the fees are “baked into” the investor’s purchase price.

There are still some TIC structured deals in the marketplace.  Some properties are better suited for them than others. Ideally, they have well drafted TIC agreements.  But, by and large, DST offerings proliferate in today’s passive real investment market.  Despite the somewhat sordid history of the TIC investment, there is no reason to think a DST investment may follow the same fate.  However, it still constitutes a real estate acquisition and due diligence needs to be done to the best ability of the investor and their trusted advisors, if applicable.  Like any other investment, DST investments do still carry some risk.

<h1>Qualified Intermediary Involvement in a DST</h1>

In August of 1989, over a decade before the dramatic growth of TIC investments, a group of 1031 Exchange companies formed the Federation of Exchange Accommodators (FEA) as a national trade association for the industry.  The FEA was formed to bring clarification and standards to a previously unregulated industry. Members of the FEA include exchange companies, known as Qualified Intermediaries (QIs), since the 1991 regulations and affiliates of the 1031 exchange which include Accounting Firms, Attorneys, Financial Institutions, Real Estate Professionals and other Replacement Property Providers, as well as many other service providers.

As people and businesses, such as TIC sponsors, tried to find investors for TIC investments, many became affiliate members of the FEA because TIC Investments were an attractive option for Exchangers looking for Replacement Property.  It was the clients of the exchange companies who had the need for Replacement Property and the TIC sponsors sought to get referrals for this business.  The TIC sponsor field grew so quickly, it eclipsed the exchange industry itself and soon split off and formed the Tenant in Common Association (TICA). TICA has since disbanded.

While TIC investments and DSTs rely upon the 1031 Exchange industry, it is important to note that Qualified Intermediaries are not directly involved in the selection of Replacement Property within a 1031 Exchange. In regard to Replacement Property, the QI’s duty is to ensure the Exchanger is aware of their 45-day deadline to identify Replacement Property and to ensure the Exchanger identifies Replacement Property in accordance with the rules and regulations for identification set forth in the Regulations.

In conclusion, both TIC investments and Delaware Statutory Trust (DST) investments serve as viable passive real estate investment options for Replacement Property within a 1031 Exchange, though they are distinct in their structures and regulatory environments. TIC investments, which were once a popular choice, require co-ownership agreements and often involve more complex management arrangements, and their troubled past has made them less a popular option for many of today’s investors. On the other hand, DST investments are mostly regulated as securities by the SEC, offering a more streamlined approach through syndications managed by reputable sponsors, brokers, and advisors. The passive nature of DST investments, combined with their inherent regulatory oversight, provides a level of due diligence beneficial to investors, who may lack the resources to conduct thorough reviews themselves. Despite the differences, both investment types require careful consideration and due diligence to mitigate risks and ensure they align with the investor's financial goals and capabilities.

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Thu, 09/05/2024 - 20:49

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Calculating Tax Benefits in a 1031 Exchange

08/29/24

A 1031 Exchange is a powerful tax deferral tool for qualifying real estate transactions that requires precision in planning to achieve ...

Authored by: meredithb@accruit.com

Authored on: Thu, 08/29/2024 - 14:50

1031 Exchange General

If you find yourself looking to sell a business use or investment property, a 1031 Exchange is a tax deferral strategy worth considering. 1031 Exchanges enable you to defer taxes such as capital gains, depreciation recapture, state, and net investment income tax. It is important to have all the facts in front of you in order to discern whether this investment strategy is right for you and your specific real estate transaction. Understanding key financial figures such as sales prices, property values, adjusted basis, and capital gains are crucial for ensuring a successful and tax-deferred transaction. This blog will break down the essential values and calculations to determine the benefit of a 1031 Exchange.

<h1 aria-level="1" paraeid="{0216579d-43e9-4bf0-b57f-43a788d455fb}{56}" paraid="1003005776" role="heading">What You Need to Know for a 1031 Exchange  </h1>

There are many values to consider when contemplating a 1031 Exchange. Whether you’re a seasoned investor or new to the world of 1031 Exchanges, knowing these figures associated with your real estate transaction will help you navigate the exchange process with confidence. Let’s break down the essentials.

<h2 aria-level="2" paraeid="{0216579d-43e9-4bf0-b57f-43a788d455fb}{68}" paraid="1480550924" role="heading">Key Financial Figures  </h2>

Accumulated Depreciation: Accumulated depreciation is the total amount of depreciation that has been recorded on a real estate property since it was placed in service. It represents the reduction in the property's value over time due to wear and tear, obsolescence, or physical deterioration. Accumulated depreciation is subtracted from the property's original cost to calculate its book value or net carrying value. For example, if a building was purchased for $1,000,000 and has accumulated depreciation of $200,000, its book value is $800,000. <a href="https://www.accruit.com/blog/what-are-1031-exchange-depreciation-option… depreciation</a> is also used to determine the taxable gain or loss when the property is sold or exchanged.

Adjusted Basis: The adjusted basis is the original cost of a property modified by certain factors like capital improvements, depreciation, and other adjustments. It reflects the current value of the asset for tax purposes and is used to calculate capital gains or losses when the asset is sold. Adjusted basis is calculated by taking the cost basis, adding the value of improvements or other additions, and subtracting the accumulated depreciation.

Capital Gain: This represents the profit you make from selling your property and is calculated by subtracting your adjusted basis from the sale price. The capital gain is the amount of money that would be taxed if a 1031 Exchange were not utilized. A 1031 Exchange allows those taxes to be deferred by reinvesting in like-kind property.

Capital Improvements: Capital improvements are additions or upgrades to property that enhance its value, extend usage, or adapt it for new use. Capital improvements could include building an extension, installing central air conditioning, or adding a new roof. These improvements are considered long-term investments and can be capitalized, meaning the cost is added to the property’s basis and depreciates over time.

Original Purchase Price: The original purchase price is what was initially paid for the Relinquished Property. Original purchase price is also known as cost basis.

Replacement Property Value: To fully defer taxes under a 1031 Exchange, the Replacement Property(ies) purchased must have a value equal to or greater than the sale price of the Relinquished Property. If the value of the Replacement Property(ies) is less than the sale price, the difference, known as <a href="https://www.accruit.com/blog/what-boot-1031-exchange">"boot,”</a> may be taxable.

Sale Price of the Relinquished Property: This is the price at which you sell your current property, which serves as the foundation for the entire 1031 Exchange. The sale price, along with other factors, determines how much you’ll need to reinvest into a new property to defer taxes fully. If you don’t reinvest an amount equal to or greater than this amount, you might face a taxable event.

<h2 aria-level="2" paraeid="{0216579d-43e9-4bf0-b57f-43a788d455fb}{194}" paraid="996660426" role="heading">Calculations to Determine Your Tax Deferral with a 1031 Exchange  </h2>

Make use of the following calculations to help you determine the financial implications of your 1031 Exchange.

Adjusted Basis:

Adjusted basis is an important figure that helps determine the gain or loss that may be deferred when exchanging like-kind properties.

Formula:

Original purchase price of Relinquished Property

+ Capital Improvements

+ Other additions in value

- Depreciation

= Adjusted Basis

Capital Gains:

This calculation gives you the profit from the sale of your property, which would typically be subject to capital gains tax. In a 1031 Exchange, the goal is to defer this tax.

Formula:

Today’s Gross Sales Price

- Cost of Sale (including commissions, fees, etc.)

- Adjusted Basis

= Total Capital Gains

Taxes Due:

This calculation sums the total tax liability you would face if you chose not to utilize a 1031 Exchange.

Formula:

Depreciation Recapture (Accumulated Depreciation x 25%)

+ Federal Capital Gain Rate (Capital Gains x 15% or 20%, depending on your tax bracket)

+ State Tax (varies by state, up to 13.3%)

+ <a href="https://www.accruit.com/blog/what-net-investment-income-tax">Net Investment Income Tax</a> SF/HE (Net Investment Income x 3.8%)

= Total Tax Due

By using these formulas, you can determine the potential savings to be gained in your 1031 Exchange. Testing formulas can help gauge if preliminary estimates of tax liability, additional equity, etc., make a 1031 Exchange a strategy worth pursuing for your investment goals.

<h1 aria-level="1" paraeid="{d4929010-54cf-40f3-a9cc-9b13ff5d405b}{148}" paraid="1480724757" role="heading">Simplify the Process with Accruit’s 1031 Exchange Calculator </h1>

While understanding individual figures and calculations is important, the process of a 1031 Exchange can become complex. That’s where Accruit’s 1031 Exchange Calculator comes in.

Our calculator is designed to take the guesswork out of determining the potential tax liability or tax deferral with a 1031 Exchange. By entering your property’s original price, improvements, selling expenses, sales price, and other key details, you can quickly estimate your tax liability and the benefit of exchanging versus just selling the property outright. Once you have determined your capital gains, you will also know the Replacement Property value required for full tax deferral. The simple 1031 Exchange calculator simplifies these calculations, making you better informed and able to make better decisions for your real estate transaction.

Try Accruit’s <a href="https://www.accruit.com/capital-gains-calculator">1031 Exchange Calculator</a> and let us do the heavy lifting for you!

Curious about our other calculators? Check them out on our website under "Resources".

Navigating the complexities of a 1031 Exchange requires understanding the key calculations that influence your tax deferral. By determining your key financial values, you can make informed decisions that maximize your tax deferral benefits. Accruit’s 1031 Exchange Calculator takes the guesswork out of these calculations, providing you with accurate estimates for informed decision-making. If you're looking to defer taxes by reinvesting in like-kind properties with a 1031 Exchange, our tools and expertise are here to simplify the process.

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Thu, 08/29/2024 - 15:24

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Practical Application of Identification Rules in a 1031 Exchange

08/15/24

The identification phase in a 1031 Exchange is a critical step that needs careful consideration to maximize investment possibilities and guarantee ...

Authored by: meredithb@accruit.com

Authored on: Thu, 08/15/2024 - 15:03

Rules and Regulations

The identification phase in a 1031 Exchange is a critical step that involves identifying potential Replacement Property(ies) within a strict 45-day timeline, making it essential to understand the rules and strategize effectively. Our case study discusses how and why an Exchanger might use each of the three Identification Rules based on their reinvestment goals. By putting these rules into action, we can examine potential challenges and provide valuable insights for investors aiming to navigate the complexities of a 1031 Exchange successfully.

<h2 aria-level="1" paraeid="{26581a98-dedb-490d-a4db-aed279beed95}{209}" paraid="2014018441" role="heading">What are Identification Rules? </h2>

In a 1031 Exchange, an Exchanger has 45 days from the date of sale of a Relinquished Property to identify potential Replacement Property(ies). This period is known as the identification period and entails adherence to specific requirements to ensure the validity of the exchange. There are three distinct Identification Rules that an Exchanger can utilize when identifying Replacement Property in a 1031 Exchange, including the 3-property rule, 200% rule, and 95% rule. These rules were put into place as a part of the <a href="https://www.accruit.com/resources/internal-revenue-service-regulations-… Treasury Regulations</a> to provide clarity and instruction on the timing and identification of Replacement Property(ies) in 1031 Exchanges. Prior the 1991 Regulations, Exchangers were still required to identify potential Replacement Property(ies), but did not have restrictions on the number they could identify. However, Exchangers were obligated to rank properties and were only allowed to acquire properties further down their list if the sale of the prior property fell through for reasons outside of their control. The 1991 Regulations offered more flexibility and guidance in the identification process of 1031 Exchanges.

<h3 aria-level="2" paraeid="{b2e2ce19-8ccd-4587-8523-6950611853d1}{85}" paraid="755483835" role="heading">The 3-Property Rule: </h3>

The most commonly used rule is the 3-property rule. This rule permits the identification of up to three Replacement Properties regardless of their fair market values. When Section 1031 was amended in 1984 to impose the 45-day identification period, Congress was concerned that too much flexibility in varying the Replacement Property(ies) would make the transaction appear to be more of a sale than an exchange. This concern influenced the 1991 Treasury Regulations, where the 3-Property Rule was established.

The 200% rule allows Exchangers to identify any number of properties, so long as their total fair market value at the end of the identification period does not exceed 200% of the aggregate fair market value of the Relinquished Property(ies) at the time they were transferred. Simply put, Exchangers can identify any number of properties if their combined market value does not exceed twice the market value of the Relinquished Property(ies). There is some uncertainty regarding how the market value is determined - whether it's based on the listing price, the seller's acceptable price, or the agreed-upon purchase price. Using the listing price is generally considered a safe choice.

The final identification rule, which is seldom utilized due to the complexity of meeting the requirements, is the 95% rule. The 95% rule allows Exchangers to identify any number of Replacement Property(ies) regardless of fair market value in relation to the Relinquished Property values, but they must acquire at minimum 95% of the fair market value of all identified properties.  Essentially, if an Exchanger has over-identified properties for the first two rules, the identification can still be considered valid if the Exchanger receives at least 95% of the total value of all of the identified properties. For instance, if an Exchanger sold one property for $100,000 and identified five properties of various values totaling $300,000, they would need to acquire at least $285,000 of identified value. In practice, this usually means that the Exchanger must buy all of the identified property. In practice, this rule is very challenging to adhere to and carries the most risk of the Exchanger being unable to satisfy the identification requirement potentially resulting in a nullified Exchange and taxable event.

<h2 aria-level="2" paraeid="{b2e2ce19-8ccd-4587-8523-6950611853d1}{217}" paraid="129312130" role="heading">Identification Rules Employed in a 1031 Exchange </h2>

We will now look at a hypothetical case study of an Exchanger in the identification phase of their exchange, testing different identification strategies to figure out which is the right fit for their exchange.

Our Exchanger is a real estate investor looking to defer capital gains taxes by utilizing a 1031 Exchange. They engaged Accruit as the Qualified Intermediary for their 1031 Exchange prior to the sale of their multi-family rental property for $1,000,000. Now, they need to identify potential Replacement Property(ies) within 45 days. We will review how they might use each of the identification rules: the 3-Property Rule, 200% rule, and 95% Rule in their 1031 Exchange.

<h3 aria-level="2" paraeid="{b2e2ce19-8ccd-4587-8523-6950611853d1}{247}" paraid="2068806564" role="heading">The 3-Property Rule Attempt: </h3>

Our Exchanger aims to leverage the 3-Property Rule, which allows them to identify up to three potential Replacement Property(ies) without considering their total value relative to the Relinquished Property.

The Exchanger identifies the following properties:

The Exchanger successfully identifies these three properties within the 45-day identification period and has the option to acquire one or more of the three properties for a successful exchange.

For the sake of demonstration, let’s say our Exchanger wants to identify not three individual properties, but one individual property and then a <a href="https://www.accruit.com/blog/delaware-statutory-trusts-1031-exchange-in… Statutory Trust (DST)</a> portfolio of properties. If more than three properties are to be identified, our Exchanger is unable to use the 3-Property Rule and therefore the Exchanger must look to the 200% rule instead.

<h3 aria-level="2" paraeid="{11656b2d-be35-43e0-a23b-2621400c464f}{77}" paraid="1785927276" role="heading">The 200% Rule Attempt: </h3>

Our Exchanger will try to utilize the 200% Rule, which allows them to identify any number of properties (greater than three) so long as their combined fair market value does not exceed 200% of the value of the Relinquished Property. In this example, the allowed combined market value of the identified properties would be $2,000,000 since the Relinquished Property sold for $1,000,000.

Identification:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Property A: An apartment building valued at $1,000,000. 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Property D: A DST portfolio of 6 properties including multi-family and retail properties valued at $1,000,000 
</li>
</ul>

Total value of identified properties: $2,000,000, satisfying the 200% rule requirements.

For illustrative purposes, let’s say our Exchanger wants to identify all three properties in our example - Property A, Property B, and Property C, in addition to Property D, the DST portfolio.

The Exchanger identifies the following properties:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="6" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Property A: An apartment building valued at $1,000,000 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="7" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Property B: A retail space valued at $1,300,000 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="8" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Property C: A mixed-use property valued at $1,200,000 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="9" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Property D: A DST Portfolio valued at $1,000,000 
</li>
</ul>

The total fair market value of the identified properties of $4,500,000 exceeds 200% of the Relinquished Property value, and therefore the 200% rule cannot be utilized, and the Exchanger must seek to comply with the 95% rule.

<h3 aria-level="2" paraeid="{a56f3a86-643f-4523-8eb7-c01aa8bd208c}{184}" paraid="1416682837" role="heading">The 95% Rule Attempt: </h3>

Our Exchanger identifies three Replacement Property(ies) within the 45-day identification period:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559683":0,"335559684":-2,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="10" role="listitem">
Property D: A DST portfolio valued at $1,000,000 
</li>
</ul>

The total fair market value of the identified Replacement Property(ies) is $4,500,000.

The Exchanger plans to use the 95% Rule, which requires them to acquire at least 95% of the total fair market value of all identified properties. This means they must acquire properties worth at least $4,275,000 (95% of $4,500,000) by the end of the 180-day exchange period.

It should not go without note that this rule is difficult to successfully adhere to and is rarely used as a result.  Our Exchanger is now in the position where they must actually acquire all four of these identified properties for their identification to remain valid and the 1031 Exchange to be successful.

Another example may help to clarify this requirement. Our same Exchanger sold the same $1,000,000 property, but has now identified the following four properties:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559683":0,"335559684":-2,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="8" role="listitem">
Property D for $1,000,000 
</li>
</ul>

These four potential Replacement Properties also total $4,000,000 in aggregate fair market value. For the exchange to be successful, our Exchanger must complete the acquisition of at least $2,375,000. If they acquire Property A, Property B, and Property D ($625,000 + $750,000, + $1,000,000 = $2,375,000), their exchange will succeed.

<h2 aria-level="2" paraeid="{528f06e7-a1bd-4275-81e9-8c765f2c09d1}{49}" paraid="1540118842" role="heading">How to Determine the Proper ID Rule in a 1031 Exchange </h2>

For a 1031 Exchange, the determination of which of the identification rules to utilize really comes down to the goals of the Exchanger and which identification rule will help them achieve that goal.

For example, if an Exchanger’s goal is to sell one property in one real estate market and acquire a single Replacement Property in a different real estate market, the 3-property rule would likely suffice. However, if the Exchanger wants to diversify their real estate portfolio and dispose of one, large asset and reinvest into multiple lower value assets, they will likely be looking to invest in more than three properties and therefore would need to utilize the 200% rule. The 95% rule is generally used if the Exchanger sells one very large asset and seeks to diversify into many smaller assets while increasing their debt-to-equity ratio along the way. In practice, when an Exchanger relies on the 95% rule, they almost always buy everything on their identification list.

In a 1031 Exchange, it is critical to choose the appropriate identification rule based on individual circumstances, such as financial constraints and market dynamics, to maximize the benefits of a 1031 Exchange. By understanding the nuances of each rule, Exchangers can maximize the benefits of an exchange, avoid potential pitfalls such as boot, and successfully defer capital gains (and potentially other) taxes. Strategic planning and a thorough understanding of the 1031 Exchange identification rules with the assistance of a Qualified Intermediary (QI) are essential for real estate investors looking to optimize their investments and ensure compliance.

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Thu, 08/15/2024 - 15:44

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Regulation of Foreign Ownership in U.S. Property and 1031 Exchanges

08/05/24

United States real estate has long been an attractive investment opportunity to foreign investors. When investing in real estate, the ...

Authored by: meredithb@accruit.com

Authored on: Mon, 08/05/2024 - 21:43

1031 Exchange General

<h3 aria-level="2" paraeid="{11fe52c5-108a-4df9-ab36-c8c6cf08c6a1}{87}" paraid="590867357" role="heading">How 1031 Exchanges are Utilized in Real Estate Transactions Involving Foreign Investors </h3>

The Seller of U.S. property to a foreign investor can utilize a 1031 Exchange in the exact same way they would if they were selling property to a domestic investor that is a citizen of the United States. As the Seller they must abide by the standard 1031 Exchange rules and regulations to complete a valid 1031 Exchange for tax deferral.

But can a foreign investor use a 1031 Exchange when investing in U.S. Real Estate? The short answer is yes; foreign investors can use 1031 Exchanges for U.S. real estate investments. The longer answer includes added complexities that foreign investors must abide by to achieve tax deferral status.

Some key considerations for foreign investors regarding 1031 Exchanges include:

<ol role="list" start="1">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="4" role="listitem">
U.S. Property Requirement: Both the property being sold, and the Replacement Property must be in the continental United States, with some exceptions. Learn more about the designation between <a href="https://www.accruit.com/blog/1031-exchanges-involving-foreign-property"… and domestic property</a>.
</li>
</ol>

<ol role="list" start="2">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="4" role="listitem">
Tax Identification Number: Foreign investors must obtain a U.S. Tax Identification Number (TIN) to complete a 1031 Exchange. 
</li>
</ol>

<ol role="list" start="3">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="4" role="listitem">
Withholding Requirements: Under FIRPTA, 15% of the gross sale price must be withheld for foreign Sellers of U.S. real estate. However, foreign investors can potentially avoid this withholding if their 1031 Exchange is properly structured. 
</li>
</ol>

<ol role="list" start="4">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="4" role="listitem">
Compliance with 1031 Exchange Rules: Foreign investors must follow the same rules as domestic investors, including the 45-day identification period and the 180-day completion period. 
</li>
</ol>

<h3 aria-level="2" paraeid="{11fe52c5-108a-4df9-ab36-c8c6cf08c6a1}{208}" paraid="766760711" role="heading">Foreign Investment in Real Property Tax Act (FIRPTA) </h3>

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was enacted by Congress to impose tax on foreign investors selling real estate assets in the United States. <a href="/blog/what-firpta-means-your-1031-exchange" title="FIRPTA and 1031 Exchanges">FIRPTA</a> mandates that anyone purchasing real estate assets from foreign individuals or entities must withhold a specified portion of the purchase price, which would ordinarily be paid to the foreign Seller. Buyers are required to withhold up to 15% of the gross sale price when purchasing from individual Sellers. This mandate ensures the foreign Seller pays the required capital gains taxes. Withholding can be avoided if a property becomes the purchaser’s personal residence and the sales price is no more than $300,000, if the 1031 Exchange is simultaneous i.e. The Seller and Buyer are exchanging properties with one another, or if the IRS has issued a withholding certificate to the foreign Seller.

While foreign investors can utilize a 1031 Exchange it requires advance planning. For a foreign investor to achieve tax deferral with a 1031 Exchange they file a Form 8288-B and successfully obtain a withholding certificate prior to the sale of their property. It is strongly encouraged that foreign investors consult with a professional tax advisor to determine if FIRPTA applies, help them obtain a U.S. Taxpayer Identification Number (TIN), and apply for a withholding certificate. In a 1031 Exchange, the Buyer must be informed in writing that a withholding certificate has been requested.

It is important to contact a reputable 1031 Exchange Qualified Intermediary, such as Accruit, well before the closing date to prepare all necessary exchange documentation, which must then be sent to the closing agent. Once the sale is finalized, the 45-day and 180-day identification deadlines commence.

<h2 aria-level="1" paraeid="{11fe52c5-108a-4df9-ab36-c8c6cf08c6a1}{252}" paraid="554727709" role="heading">Why are Foreign Investors Investing in US Real Estate? </h2>

Foreign Investors, and even countries, are drawn to investing in U.S. Real Estate for a multitude of reasons. Many of the reasons don’t differ from why U.S. citizens choose to invest in real estate. Reasons for foreign investment in U.S. real estate include:

<ol role="list" start="1">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="5" role="listitem">
Stable Economic Environment: The U.S. economy is perceived as stable and resilient with strong legal protections for property rights, making it an attractive investment destination. 
</li>
</ol>

<ol role="list" start="2">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="5" role="listitem">
Diversification: Investing in U.S. real estate allows foreign investors to diversify their portfolios, reducing risk by spreading investments across different geographic regions. 
</li>
</ol>

<ol role="list" start="3">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="5" role="listitem">
High Returns: Historically, U.S. real estate markets, especially in major cities, have provided strong returns on investment through both rental income and property value appreciation. 
</li>
</ol>

<ol role="list" start="4">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="5" role="listitem">
Political Stability: The political stability and transparency in the U.S. attract investors seeking safe and secure investment environments compared to their home countries. 
</li>
</ol>

<ol role="list" start="5">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="5" role="listitem">
Investment Opportunities: The U.S. offers a wide range of real estate investment opportunities, from residential property to commercial real estate, catering to various investment strategies and goals. 
</li>
</ol>

<ol role="list" start="6">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="6" data-font="" data-leveltext="%1." data-list-defn-props="{"335552541":0,"335559685":720,"335559991":360,"469769242":[65533,0],"469777803":"left","469777804":"%1.","469777815":"hybridMultilevel"}" data-listid="5" role="listitem">
Legal and Tax Advantages: The U.S. provides certain legal and tax benefits for real estate investors, such as the ability to use 1031 Exchanges to defer capital gains taxes. 
</li>
</ol>

<h3 aria-level="2" paraeid="{aeadfc80-22f4-489c-b378-a674081b996c}{101}" paraid="1205622584" role="heading">Foreign Investments in U.S. Real Estate  </h3>

As of March 2023, U.S. property sales to foreign Buyers totaled $53 billion. Across the country, 79% of the counties have at least one foreign investor present.

As far as specific sectors within the real estate market, Industrial and Multifamily real estate account for the largest portion of foreign commercial real estate investment. From Quarter 2 in 2020 to 2022, industrial real estate investment had grown from 15% to 30% of all foreign capital invested. Multifamily properties are second to industrial property at just under 30% of all foreign investment. A growing sector of real estate in recent years is agricultural land. Foreign ownership and investment in U.S. agricultural land, which includes farmland, forest land, and pastures, has also seen a significant increase over the last few years. Since 2017, this sector has grown almost 50%. According to the latest AFIDA report from 2021, more than 40 million acres of U.S. agricultural land is owned by foreign investors and companies. This equates to just under 2%of all U.S. land and over 3% of all privately held agricultural land.

While residential real estate remains a popular real estate sector of foreign investment, commercial property investment has grown in recent years. As of 2023, the leading countries in commercial property acquisitions include:

<ul>
<li>Canada – $15.98 billion</li>
<li>Singapore – $10.85 billion </li>
<li paraeid="{aeadfc80-22f4-489c-b378-a674081b996c}{194}" paraid="1133827584">Japan – $2.91 billion </li>
</ul>

<h2 aria-level="1" paraeid="{aeadfc80-22f4-489c-b378-a674081b996c}{207}" paraid="1552594057" role="heading">Regulations on Foreign Investment in U.S. Real Estate </h2>

Various governmental entities and numerous laws are utilized to regulate foreign investment in U.S. real estate. While there has been increased foreign investment in commercial and residential properties over the past few years, agricultural land has seen a significant rise, which has heightened national security concerns including foreign control over food supply and proximity to sensitive U.S. military and government bases. Congress has several committees tasked with addressing these concerns.

The Committee on Foreign Investment in the United States (CFIUS):

The CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States, as well as specific real estate transactions by foreign entities, to determine their impact on U.S. national security.

Members of CFIUS include:

<ul>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{6}" paraid="1339385761">Department of the Treasury (chair) </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{12}" paraid="1795226944">Department of Justice </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{18}" paraid="667805442">Department of Agriculture </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{24}" paraid="531472091">Department of Defense </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{30}" paraid="1833835112">Department of State </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{36}" paraid="2121681050">Department of Energy </li>
</ul>

White House Offices that Observe and Participate in CFIUS Activities:

<ul>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{48}" paraid="1996914236">Office of Management & Budget </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{54}" paraid="1876184897">Council of Economic Advisors </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{60}" paraid="743440026">National Security Council </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{66}" paraid="2023592656">National Economic Council </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{72}" paraid="1176605967">Homeland Security Council </li>
</ul>

Non-Voting, Ex-Officio Members:

<ul>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{84}" paraid="150299416">Director of National Intelligence </li>
<li paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{90}" paraid="1462290253">Secretary of Labor </li>
</ul>

These roles are defined by statute and regulation.

CFIUS operates under Section 721 of the Defense Production Act of 1950, as amended, and follows Executive Orders and the Code of Federal Regulations. The latest amendment was the Foreign Investment Risk Review Modernization Act (FIRRMA) in August 2018. Pursuant to these provisions, CFIUS allows the President to suspend or block certain foreign transactions. There are specific rules for how investigations and self-reporting can lead to these actions or exemptions for some foreign entities.

<h3 aria-level="3" paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{120}" paraid="2132209414" role="heading">Agricultural Foreign Investment Disclosure Act (AFIDA) </h3>

AFIDA provides the framework for the collection and dissemination of information on foreign transactions and ownership of agricultural land in the U.S. Since its enactment in 1978, the law and regulations have been administered by the USDA Farm Service Agency which requires foreign investors who acquire, transfer, or hold interest in U.S. agriculture land to report their holdings and transactions to the Secretary of Agriculture. FSA uses the info to compile and file an annual report with Congress and the data is also included in searchable spreadsheets on a county-by-county basis throughout the United States.

<h3 aria-level="3" paraeid="{99d45e40-17a9-4b85-b3f2-f14242e5a311}{142}" paraid="91074828" role="heading">Current Congressional Measures </h3>

In addition to the long-standing CFIUS and AFIDA regulations, there are measures pending in Congress to improve the current system.

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
The AFIDA Improvements Act of 2024 will use the results from the Government Accountability Office (GAO) study of the AFIDA process to codify the AFIDA requirements and provide more robust data reporting and review. 
</li>
</ul>

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The Promoting Agricultural Safeguards & Security Act of 2023 (PASS) prohibits persons who are acting on behalf of China, Russia, Iran, or North Korea from purchasing or investing in U.S. agricultural land and companies. The President may waive this prohibition on a case-by-case basis if the President determines that the waiver is vital to U.S. national security interests. The bill also places the Secretary of Agriculture on CFIUS and requires CFIUS to review certain transactions involving investments by foreign persons in the U.S. agricultural sector. The Bill also requires the Department of Agriculture to report to Congress on the risks that foreign purchases of U.S. businesses engaged in agriculture pose to the agricultural sector of the United States. 
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The Farmland Act of 2023 (Foreign Agricultural Restrictions to Maintain Local Agriculture and National Defense) was introduced to amend AFIDA to strengthen the oversight and transparency of AFIDA. Notably, the Act amends AFIDA by imposing a requirement that any entity (including a Buyer, Seller, real estate agent, broker, and title company) involved in the purchase or transfer of agricultural land in the United States shall (1) conduct due diligence relating to the agriculture land being purchased or transferred; and (2) certify to the Secretary of Agriculture that, to the best of the knowledge and belief of the entity, the entity is in compliance with all applicable provisions of AFIDA. It also would allow for review of any purchase or lease of U.S. ag land by a foreign entity which exceeds $5,000,000 in value or more than 320 acres that has taken place in the past 3 years. 
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The above measures regulated by legislation and executed by various committees help ensure our country remains diligent and aware of the potential risks that foreign investment in U.S. real estate could post on national security, as well as the US economy.

Foreign investors will continue to find U.S. real estate as an attractive investment opportunity and 1031 Exchanges continue to provide qualifying foreign investors the same tax deferral opportunities as U.S. citizens.

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Thu, 04/17/2025 - 19:08

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