1031 Exchange General

Seller Financing and 1031 Exchanges: A Guide for Buyers and Sellers

meredithb@accruit.com — Wed, 21 May 2025 08:00:00 +0000

Seller Financing and 1031 Exchanges: A Guide for Buyers and Sellers

meredithb@accr… Wed, 05/21/2025 - 08:00

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Seller Financing and 1031 Exchanges: A Guide for Buyers and Sellers

What is Seller Financing?

Seller Financing is a real estate arrangement in which the Seller acts as the lender, offering a loan directly to the Buyer. Instead of going through a traditional bank or mortgage company, the Buyer repays the Seller over time, typically in regular installments including interest.

How Seller Financing Differs from Traditional Bank Loans

Seller Financing tends to offer more flexibility than traditional bank loans, which often require rigorous inspections, formal appraisals, lower loans to value and a stronger credit rating. Seller Financing allows both the Seller and the Buyer to bypass these requirements, expediting the closing process and saving costs. Also, while the title usually transfers to the Buyer at closing in most real estate transactions, some Seller-Financed deals, specifically land contracts, may delay this transfer until the Buyer has fully repaid the Seller’s loan.

Additionally, instead of standard bank-issued documents, Seller-Financed transactions involve customized agreements between the Buyer and Seller, either by promissory note and a deed of trust/mortgage or land contract, typically drafted with the help of an experienced real estate attorney and without the involvement of an institutional third party.

Seller Financing: A Timely Strategy for All

Since mid-2021, mortgage rates have risen sharply, nearly 5% on average for a 30-year fixed-rate mortgage with 20% down and a credit score of 630, making it significantly harder for Buyers to qualify for traditional financing. In this high-interest-rate environment, seller financing has emerged as a strategic and flexible option for both Buyers and Sellers. With institutional lending more restrictive and borrowing costs increased, Seller Financing helps Buyers access more opportunities while allowing Sellers to stay competitive in a slower, more selective market.

Motivations of Seller Financing for Sellers

Sellers have many motivations to utilize seller financing in their transaction. By offering seller financing under more flexible terms, Sellers can reach a larger pool of prospective Buyers, including those who would otherwise find themselves barred from purchasing property with a traditional mortgage. Secondly, bypassing institutional steps like bank processing, underwriting, and loan approvals expedites the sales process significantly. Also, instead of receiving a single, lump-sum payment from the sale of their property(ies), Sellers can earn interest on their loan over time and report it annually as ordinary income. In the long run, this can lead to a higher overall return compared to a traditional sale. Through a loan with regular installment payments, this may allow Sellers to defer capital gains taxes over several years, rather than paying the full tax liability in the year of the sale.

Motivations of Seller Financing for Buyers

Buyers can also benefit greatly from Seller Financing making those properties more attractive than others on the market. In a market facing high mortgage rates, many prospective Buyers struggle to meet traditional lending requirements, whether that be due to low credit scores, irregular income, or coming up short on a down payment. Seller Financing allows the property owner to set their own qualifying criteria for Buyers, attracting a larger group of potential Buyers.

Because the Seller acts as the lender, the closing timeline can be significantly shortened. Without the strain of traditional delays such as appraisals, bank underwriting, and other lender requirements, Buyers can often close and receive their keys in a fraction of the standard 30 to 60-day window. Without traditional lender involvement, the streamlined process not only speeds up the closing timeline but can reduce costs for Buyers. Fees that would typically be involved in a standard loan, such as origination, processing, etc. can be avoided. Moreover, properties that may not meet traditional lender criteria, such as property that require significant improvements, including structural issues (foundational problems, leaks, mold), code violations (zoning violations, unpermitted construction), and environmental factors (flood zones, landfill proximity) can still be purchased under Seller-Financed terms, allowing Buyers access to a broader and more diverse selection of real estate.

Seller Financing in a 1031 Exchange

Seller Financing can play a strategic role in structuring a 1031 Exchange. To illustrate this, let’s walk through a real-world scenario where Seller Financing is successfully utilized in a 1031 Exchange transaction.

A property owner is selling an investment property for $300,000 as part of a 1031 Exchange and agrees to finance $200,000 of the purchase price for the Buyer. This allows the Buyer to avoid traditional bank financing and makes the deal more attractive or feasible. At closing, the Seller/Exchanger receives only $100,000 in cash, with the remaining $200,000 secured as a promissory note from the Buyer. For the purposes of the 1031 Exchange, only the $100,000 in cash can be transferred into the exchange account. The $200,000 in seller-financed proceeds is not immediately eligible for reinvestment and would generally be treated as "boot".

To avoid immediate taxation on the financed amount and qualify for full tax deferral, the Exchanger must “buy back” the $200,000 note by contributing that same amount in new cash to the exchange account. This step ensures that the entire $300,000 is reinvested, satisfying IRC §1031 requirements. In essence, the Exchanger must advance the value of the property being sold into the new property, while receiving the purchase price itself over time.

While this structure requires the Exchanger to have additional cash available up front, it offers several potential benefits. The Seller can maintain control over the financing terms and collect income on interest from the Buyer, often at a rate higher than standard fixed-income investments would earn. At the same time, by reinvesting the full proceeds, including the portion originally financed, the Exchanger preserves their ability to defer associated taxes and achieves a successful 1031 Exchange. Once the 1031 Exchange is complete there is no further reporting necessary for the Seller Financing repayment in relation to the 1031 transaction.

In conclusion, Seller Financing stands out as a versatile and mutually beneficial tool in real estate transactions, addressing challenges for both Sellers and Buyers while enhancing transactional efficiency. Whether simplifying the path to ownership, unlocking tax advantages in when used within a 1031 Exchange, or broadening the scope of eligible properties, Seller Financing adds unparalleled flexibility. With careful planning and professional guidance from a Qualified Intermediary like Accruit and tax advisors, it has the potential to transform real estate strategies and deliver substantial financial and operational benefits to all parties involved.

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 solely of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.  

1031 Exchanges of Multiple Relinquished or Replacement Properties

meredithb@accruit.com — Tue, 13 May 2025 09:00:00 +0000

1031 Exchanges of Multiple Relinquished or Replacement Properties

meredithb@accr… Tue, 05/13/2025 - 09:00

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1031 Exchanges of Multiple Relinquished or Replacement Properties

Consolidation of Properties with a 1031 Exchange

It is not uncommon for Exchangers to own more than one Relinquished Property. Oftentimes, multiple properties have been held for a long period of time and as the property owner gets older, the management headaches associated with the properties become more challenging. Selling those properties and exchanging them for a single property can make the management much simpler. On occasion, an Exchanger might have a job transfer to somewhere far from the properties. Others might wish to retire and move to another state. There may be additional benefits as well to exchanging multiple properties for a single property, such as a higher basis for depreciation, more cash flow, and upgrading the neighborhoods between the old and new property.

Diversification of Properties

On the other hand, investors might not want to have “all their eggs” in one basket and believe they’ll be better served with trading one property for multiple properties. Just as most people would not have all their investments in a single stock or fund, diversification can protect against some adverse conditions affecting a single property, such as gradual neighborhood degradation negatively affecting the quality of tenants. Additional considerations include the ability to have multiple property types and the chance of realizing more income from multiple properties of the same value as the Relinquished Property. Similarly, multiple properties might provide the opportunity for greater combined appreciation.

Timing is Everything

One of the main logistical challenges when dealing with multi-property exchanges, are the time constraints imposed by the exchange regulations. Specifically, the requirements to identify Replacement Property within 45 days of the sale of the Relinquished Property in a new exchange account and close on the purchase of an identified property within 180 days of the original sale date.

When attempting to sell multiple properties to consolidate into one, it is difficult to control the timing on the sales. The 45 and 180-day requirements are based on the date of the sale of the earliest Relinquished Property sold as part of the exchange. So, for example, if one of three properties is sold and funds the exchange account, the Replacement Property needs to be identified within 45 days, regardless of the timing of the sale for the other two properties. Those sales could take place beyond the 45th day or not at all. To increase the likelihood of selling the second two properties within close proximity, the Exchanger may try and negotiate an extended closing date, or a lease with a Buyer purchase option. Sometimes it might be worth trying to sell the properties at a slightly less-than market value to induce a sale.

Another option is to set up an exchange for each Relinquished Property in order to have the 45 and 180-day time limits specific to each properties close date. If that is the case, the identification of the single Replacement Property should be coordinated between the separate exchanges with the percentage of the Replacement Property which would be acquired via the funds in each account. The 3-Property and/or the 200% Rule would provide the opportunity to identify varying percentages within each exchange. For example, the first exchange with Relinquished Property # 1 identifies 45% of the Replacement Property and then the second exchange identifies the remaining 55% of the Replacement Property, once both exchanges close the Exchanger has acquired the full 100% of Replacement Property.

A similar challenge can arise when the Exchanger may hold title to the Relinquished Properties under different tax identities. One property may be held by a spouse in his or her own name from prior to marriage and another in a two-member LLC, which is treated at a tax partnership. An exchange account can only serve one tax entity, except for a husband and wife holding personally and filing a joint tax return so an Exchanger would have to open separate exchanges for each entity trading into a single property. Similar to the above, this could be accommodated by the two exchanges identifying and acquiring as co-tenants in the percentage of equity each account would be contributing to the purchase. Exchangers residing in a community property state allows a bit more flexibility for properties owned in different entities by spouses.

When attempting to diversify a portfolio from a single property to multiple ones, similar timing challenges can occur. The 45 and 180-day clock is going to begin upon sale. It may be difficult to identify the Replacement Properties within 45 days. Again, there may be some relief afforded by the 3-Property and/or the 200% Rule, but it can be stressful. To alleviate potential timing issues, most investors begin looking for Replacement Properties before the sale date of the Relinquished Property.

Reverse Exchange as an Option

Some of the time constraints inherent in a multiple property exchange can be made easier by using a reverse exchange.

For example, an Exchanger sells the first property as part of an exchange and subsequently goes under contract and has to close on the Replacement Property, but the second Relinquished Property has not closed by that time. Since an Exchanger cannot buy before selling, a Reverse Exchange can be used to preserve the ability to exchange for it once the second Relinquished Property closes through the exchange. This is sometimes referred to as a part forward and part Reverse Exchange. The forward exchange sells the Relinquished Property first and acquires a percentage of the Replacement Property, the remaining percentage of the Replacement Property is “parked” with the Exchange Accommodation Titleholder initiating the Reverse Exchange and then once the second Relinquished Property is sold, a Reverse Exchange can be completed with the remaining percentage of the Replacement Property being transferred over to the Exchanger.

Another fact pattern arises frequently where the Exchanger finds the “perfect” Replacement Property but has not sold any of the Relinquished Property at that time. The Exchanger can also solve this through a Reverse Exchange. This keeps the Replacement Property in abatement until the Relinquished Properties are sold. Under the IRS rules, the Replacement Property can be held up to 180 days to give time for the other properties to be sold. That time limit is known as a safe harbor reverse exchange. Although falling into the safe harbor period is highly advantageous, as a result of the Bartell decision in 2017, many exchange companies will allow transactions to go on longer.

1031 Exchanges provide investors with the opportunity to optimize their real estate portfolios without immediate tax consequences. Exchangers are able to either consolidate or diversify their portfolio depending on their specific goals and objectives. When exchanges involved multiple properties, whether on the sale or purchase side, it can increase the level of complexity and it is important for the Exchanger to be aware of all the considerations involved prior to initiating their 1031 Exchange. Awareness of how 1031 Exchange timeframes are treated for multi-property exchanges and knowing how to utilize a Reverse Exchange to combat potential challenges can be prove advantageous for investors looking to conduct a 1031 Exchange with multiple properties.

Preserving Wealth and Key Considerations for Investment Advisors in 1031 Exchanges

meredithb@accruit.com — Tue, 29 Apr 2025 08:00:00 +0000

Preserving Wealth and Key Considerations for Investment Advisors in 1031 Exchanges

meredithb@accr… Tue, 04/29/2025 - 08:00

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Preserving Wealth and Key Considerations for Investment Advisors in 1031 Exchanges

A 1031 Exchange is a powerful tax-deferral strategy that allows real estate investors to reinvest proceeds from the sale of an investment property into another qualifying property, deferring associated taxes and preserving wealth. While many investors are familiar with the basic benefits of 1031 Exchanges, fewer fully understand their role in estate planning and passive investment opportunities like Delaware Statutory Trusts (DSTs). In this blog, we’ll explore how 1031 Exchanges can be strategically used to build and preserve wealth across generations, optimize estate planning, and provide investors with passive real estate options. Additionally, we’ll cover key considerations for Registered Investment Advisors guiding clients through the 1031 Exchange process, including tax implications, compliance requirements, and investment alternatives.

Estate Planning

Estate planning is an essential consideration for many, particularly those with large real estate holdings. One of the key benefits of a 1031 Exchange in this context is its potential to help preserve wealth across generations.

Stepped-Up Basis Upon Inheritance

By using a 1031 Exchange during their lifetime, individuals can continue to defer taxes, thereby allowing them to build a larger estate that will benefit from a stepped-up basis when transferred to heirs upon death. Essentially, the exchange allows Exchangers to grow their wealth, pass it down, and defer taxes on gains, sometimes indefinitely, that they would have incurred by selling the property outright. It is important to note that the stepped-up basis applies to property acquired through a 1031 Exchange that is still held at the time of the property owner’s death.

When an individual passes away, their heirs receive inherited real estate at the fair market value as of the date of the prior owner’s death. Typically, this means that the heirs received the property with a stepped-up basis, rather than the basis of the previous owner. For individuals who have held property for many years, this adjustment can significantly reduce tax liabilities if the property is later sold by the heirs.

Wealth Preservation

For individuals with significant real estate investments, a 1031 Exchange provides a powerful tool for preserving wealth without having to liquidate assets and pay taxes on gains and depreciation recapture. Exchangers have the ability to reinvest the full proceeds from the sale of their Relinquished Property into other qualifying property, deferring tax liabilities that would otherwise reduce the amount of capital available for reinvestment.

Without a 1031 Exchange, investors face a combination of taxes that could significantly devalue their proceeds:

Federal Capital Gains Tax: 15-20%
Depreciation Recapture Tax: 25%
State Income Tax: If applicable, up to 13.3%
Net Investment Income Tax: If applicable, 3.8%

These taxes typically total between 25 – 35% of the proceeds, depending on an individual’s situation. For example, if the Relinquished Property is sold for $1,000,000 with an adjusted basis of $400,000 and $200,000 in prior depreciation, their total gain is $600,000. Without a 1031 Exchange, the investor could lose nearly $200,000 of their proceeds to the aforementioned taxes. In contrast, utilizing an exchange allows the full $1,000,000 to be reinvested, preserving a significantly larger portion of wealth.

Strategic Use for Family Trusts

For individuals looking to pass their real estate holdings to future generations through family trusts, 1031 Exchanges can help optimize the timing of asset transfers that are deemed necessary due to market issues or other circumstances that arise over time. As opposed to a taxable sale of a property no longer wanted, trusts can use 1031 Exchanges to reposition or diversify their holdings as often as necessary, thus deferring taxes, enhancing the real estate portfolio and possibly allow the estate to receive a stepped-up basis when the estate is passed down to beneficiaries.

Exploring Passive Investment Opportunities

While 1031 Exchanges are often associated with active real estate management, passive real estate investments are becoming increasingly popular among many investors. This is where Delaware Statutory Trusts (DSTs) come in as a powerful option. DSTs allow investors to participate in the ownership of professionally managed, commercial grade property without the need for active management.

Delaware Statutory Trusts

A Delaware Statutory Trust is a legally recognized trust that holds title to investment property. Investors in a DST receive beneficial ownership interests and share in the income and potential appreciation from the property. DSTs are structured to qualify as like-kind properties for a 1031 Exchange, making them an attractive option for clients looking for a more hands-off approach to real estate investment. (

Benefits for Investors

DSTs offer several benefits that can align with investor goals:

Passive Management: Since DSTs are managed by professional real estate operators, investors don’t have to worry about the day-to-day management of the property. This is ideal for those who want the benefits of real estate investment without the time commitment.
Diversification: DSTs allow investors to pool their capital with others to invest in larger, institutional-grade properties, such as commercial real estate or apartment complexes, which may be out of reach for individual investors.
Stable Income: Many DSTs invest in income-producing properties, offering potential for regular cash flow through rental income. This can be a stable, predictable addition to an investment portfolio.

Key Considerations for Registered Investment Advisors When Advising Clients on 1031 Exchanges

Registered Investment Advisors (RIAs) and other financial advisors help individuals and companies manage their finances and make investments based on their financial goals including stocks, bonds, retirement accounts, etc. Their responsibilities include providing investment strategies, asset management, and comprehensive financial planning.

Real estate holdings represent a largely untapped area of overall wealth with over $6.4 Trillion held within investment property by US households age 55 and over. Furthermore, 90% of these investors identify as unadvised or under-advised on tax deferral strategies for their real estate investments, such as 1031 Exchanges.

Many real estate investors fail to utilize 1031 Exchanges for tax deferral because they lack awareness of reinvestment options including passive real estate investments such as Delaware Statutory Trusts (DSTs). This creates an opportunity for advisors to establish themselves as a total wealth solution discussing not just traditional investment options, but alternative investment options including real estate.

Discussing real estate and incorporating 1031 Exchanges into a client’s wealth strategy can greatly enhance their portfolio, helping clients preserve and grow their wealth while offering advisors the chance to serve as a comprehensive financial guide.

For RIAs advising clients on 1031 Exchanges, understanding the rules, deadlines, and tax implications is essential to facilitating a seamless transaction. Below are critical points to keep in mind:

Strict Deadlines and Timelines

For a 1031 Exchange to qualify, clients must identify Replacement Property(ies) within 45 days of selling the Relinquished Property and close the purchase within a total of 180 days after the sale. Keeping track of these strict deadlines is crucial to ensuring the exchange goes smoothly and tax benefits are preserved.

The Role of a Qualified Intermediary (QI)

A Qualified Intermediary (QI) is required to facilitate the 1031 Exchange process. The QI holds the proceeds from the sale of the Relinquished Property and ensures that the exchange is conducted according to IRS rules. It’s important to work with a reputable QI, such as Accruit, who has experience in handling these types of transactions.

State Taxes

While the IRS allows 1031 Exchanges, some states, such as California, have their own rules and tax treatments for such exchanges. Be sure to consider any state-level tax implications when advising clients, as these can vary.

Depreciation and Recapture

While 1031 Exchanges allow tax deferral, they do not eliminate depreciation recapture taxes. Clients who have depreciated the property over time may face recapture taxes on the depreciation deductions they’ve taken when they sell the property. Understanding the impact of depreciation and recapture is key to providing sound advice.

Utilizing 1031 Exchanges in investment strategies can offer significant benefits for estate planning, wealth preservation, and passive investing. By understanding tax implications, timelines, and the role of QIs, investment advisors can help clients make informed decisions that align with their financial goals. Whether aiming to defer taxes, diversify investments, or secure a legacy for future generations, leveraging 1031 Exchanges can be a powerful tool in a well-rounded investment approach.

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.

Land Trusts and 1031 Tax Deferred Exchanges

meredithb@accruit.com — Tue, 22 Apr 2025 08:00:00 +0000

Land Trusts and 1031 Tax Deferred Exchanges

meredithb@accr… Tue, 04/22/2025 - 08:00

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Land Trusts and 1031 Tax Deferred Exchanges

What is a Land Trust?

The term “Land Trust” is generally used in several different contexts, including in connection with open land conservation. However, this blog pertains to the type of land trust that is often used by people, or other legal entities, to separate the title to real estate from the beneficial ownership of the property. This separation is created by the property being deeded at the time of acquisition, or sometime thereafter, by placing title in the name of the Trustee and creating a trust instrument, a Land Trust Agreement, naming the trust beneficial owner, otherwise known as the Beneficiary. In most cases, the Trustee is a corporate trustee who is in the business of acting in this capacity and receives an annual fee for its services. In some cases, an individual is named as the Trustee. The land trust is disregarded for tax purposes, and the beneficiary of the trust receives the economic benefits and burdens of the ownership. The land trust provides certain liability protection, confidentiality of actual ownership, succession of ownership, as well as certain other benefits that users are sometimes seeking.

Land Trust Origins

The origins of land trusts date back to medieval times when all real estate was owned by the King but granted to noblemen who fought on behalf of the King. But when the nobleman died fighting in wars in his service to the King, the land reverted back to the King, who could dole it out to a new loyalist. Creative thinking at the time, lawyers (likely) came up with this idea of taking the land handed out and putting title under the name of a Trustee for the benefit of the nobleman. Therefore, the nobleman’s death in support of the King would not cause the property to revert since the title would not be affected by the death. The land would remain in the trust for the benefit of the named successor beneficiary(ies). Separating title from the use and benefit of the property also solved another problem in those times. When a property owner holding title did not wish the property to transfer to his first-born son up his death, which was the law at the time, the land trust allowed the initial beneficiary to name others in the family to succeed him in beneficial ownership.

Eventually the State (the King) realized that this legal arrangement limited its important control over property ownership. In 1535, a new law was passed known as the “Statute of Uses”. Essentially, it provided that regardless of how title was held, whomever had the “use and benefit” of the property ownership was deemed the legal owner. The law applied only to passive trusts where the actual duties of the Trustee were negligible or non-existent, versus an active trust where the Trustee had true duties, decision making, etc. The passive trust was no longer legally recognized, and the Statute of Uses became part of the Common Law in England.

The Evolution of Land Trusts in U.S. Law

Fast forwarding to the early days of the United States, as a core body of law to follow, most states adopted the Common Law of England. In the late 1800s and again in the 1920’s, the Illinois Supreme Court reviewed a couple of trust arrangements that would in time become land trusts as we known them today. Essentially, the trust agreement before the court provided that the Trustee held legal title to the property and would take direction from the beneficiary. For all intents and purposes, the Trustee had no independence nor active responsibility. The court examined the land trust document and found the following:

The Trustee had duty to take action upon direction from the beneficiary
The Trustee had duty to apprise the Beneficiary of anything it received as record titleholder
The trust term was limited to 20 years
If the trust was still in place after 20 years, the Trustee had to hold a public sale of the property and distribute the proceeds to the Beneficiary(ies)

Review of the facts and circumstances might lead to the conclusion that this was a passive trust, and therefore not valid. However, the Illinois Supreme Court found that these very limited duties were still enough to cause the trust to be active and, as such, valid. Over the years, many other state courts had occasion to rule on the same type of trust arrangement and for the most part found them to be passive and violated the Statute of Uses. As a result, the land trust flourished particularly in Illinois. Today, some states allow them due to case law and some under statutory authority. Below is a list of states that recognize the conventional land trust:

Illinois
Indiana
Florida
Hawaii
Virginia
South Dakota

Impact of 2017 Tax Law on Land Trusts and Like-Kind Exchanges

Prior to 2018, a like-kind exchange could take place not only for real estate, but also such things as personal property and intangibles. This included a broad range of assets, personal property included such things as machinery, equipment, aircraft and railcars, whereas examples of intangibles include fast food and hotel franchise rights and territorial product distribution rights.

Among other things that were not permitted historically under the Code for exchange treatment included interests held under certificates of trust or beneficial interest. A holder of an interest in a land trust is considered to hold the beneficial interest and that interest in considered personal property. After signing into law, The Tax Cuts and Jobs Act (TCJA) effective January 1, 2018, Section 1031 was changed to simply allow real estate exchanges and nothing more. So, while holding a beneficial interest was never allowed, after the start of 2018, neither was a personal property interest.

Holding interest in real estate in land trusts have always been very common. As mentioned above, among many other benefits, they are used as a form of asset protection, similar to the use of a limited liability company. At one time, there was concern by people and their advisors that an exchange might not qualify due to the fact that the Exchanger’s interest was defined as holding the beneficial interest in the trust. This led to a considerable number of people to request some clarity on the part of the IRS. This resulted in the issuance of Rev. Rul. 92-105 which stated that:

“A taxpayer’s beneficiary interest in an Illinois land trust constitutes real property which may be exchanged for other real property without recognition of gain or loss under IRC §1031 provided that the requirements of that section are otherwise satisfied”.

This removed any uncertainty about the qualification under §1031 for an Exchanger selling property that was held under a land trust. In addition, by deeming it “real estate,” in 2018, when “personal property” was dropped from the type of assets capable of being exchanged, this had no effect on selling out of a land trust.

Considerations for Land Trusts in 1031 Exchanges

The presence of a land trust holding title to a property that is being sold as Relinquished Property in the first leg of an exchange can require extra care when administering an exchange. Technically, since the title to the property and the deed to the Buyer is in the name of the Trustee, the Trustee should also be the signer of the PSA, but this is not always the way PSAs are completed and signed in practice.

Some of the variations in the preparation and signature on a PSA involving land trust property are:

The PSA will reference the land trust as Seller, and it will be signed by the Land Trustee
The PSA will reference the land trust as Seller, but it will be signed by the Beneficiary with an express reference to the Beneficiary signing in his capacity as such
The PSA will reference the land trust as Seller and the Beneficiary will just sign on the signature line in his own name with no further reference to his capacity
The PSA will simply show the Beneficiary as the Seller and will be signed as such (with no reference to the land trust)

The manner of execution can pose legal risks, specifically, risks as to the contract enforceability, but that is another topic.

When using the Qualified Intermediary safe harbor under the exchange Regulations, it is required that “…the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment…”. Due to the many ways a PSA may describe the Seller and how it might be signed, the Assignment of Contract Rights and Notice need to correspond to the named party(ies) even if the title to the property is held by a land trust. When in doubt, the other selling party can be added to the documents, as it would be better to have an extra party than to leave out a necessary party.

In summary, in some states, land trusts are a common way for title to real estate to be held. Due to the origin of the land trust concept and the interpretation of various state courts they are not available in every state. Some documents effecting the real estate, like a mortgage/deed of trust, as a legal matter have to be signed by the legal titleholder (i.e. the land trust). Other documents such as contracts and leases are sometimes signed by the land trust Beneficiary directly. Ideally the document references their capacity as Beneficiary. In any event, the exchange Regulations require adherence to form which requires exchange documents to reflect parties to the PSA, notwithstanding how legal title is held.

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.  

Considerations for No Fee 1031 Exchanges

meredithb@accruit.com — Tue, 08 Apr 2025 08:00:21 +0000

Considerations for No Fee 1031 Exchanges

meredithb@accr… Tue, 04/08/2025 - 08:00

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Considerations for No Fee 1031 Exchanges

While the prospect of getting something for nothing is appealing, it isn’t reality in most situations - there is no exception when it comes to 1031 Exchanges. A 1031 Exchange by design is a tax deferral strategy, not an investment vehicle. The goal of a 1031 Exchange is to achieve tax deferral on qualifying real estate transactions, in turn increasing cash flow and reinvestment potential, which, over time, compounds into greater returns on investments.

While the traditional 1031 Exchange Qualified Intermediary model calls for an initial 1031 Exchange fee, there are good reasons, as we will address in this article.

Role of a Qualified Intermediary

The role of a Qualified Intermediary (QI) is to facilitate an exchange by stepping into the shoes of the parties, so the transaction is not merely a sale followed in time with a purchase, but an actual exchange of one property for the other. As such, the main goal of a Qualified Intermediary is to help an Exchanger achieve tax deferral with a successful exchange by adhering to the rules and regulations set forth in the subject Treasury Regulations. These rules are detailed and complicated to navigate. Therefore, it should be of no importance to the QI how long it takes an Exchanger to identify and acquired the Replacement Property, so long as it falls within the allowed time frame. However, a Qualified Intermediary with no initial exchange fee is reliant on exchange funds sitting as close to the 180-day exchange period deadline or past, as they only revenue from during the time they hold an Exchanger’s exchange funds.

For a QI to only receive monetary compensation based upon the time they are holding Exchange Funds, poses the question of whether that sole revenue stream is enough to maintain operational controls to protect your investment. And is there the right economic incentive to ensure you receive the ongoing service post exchange if funds were only held for a very short duration.

The Cost of a 1031 Exchange

As with most other professional services, there is a fee for services rendered. For a 1031 Exchange, the initial fee to start your 1031 Exchange covers a multitude of aspects including:

Specialized 1031 Experts

“You get what you pay for,” is a widely known saying for a reason – it is true. As a QI looking to provide the utmost service to its clients, there is often staff consisting of highly credentialed personnel including specialized 1031 attorneys, CPAs, and Certified Exchange Specialists®. While these persons do not provide legal or tax advice their depth of experience can be invaluable.

Segregation of Duties

Reputable QIs are staffed to scale, they have numerous team members that specialize in specific areas of a 1031 Exchange to ensure accuracy, prevent mistakes, and maintain accountability. Internal controls are set up to protect the Exchanger’s Personal Identifiable Information (PII), as well as create efficient processes that are not dependent on any one specific team member.

Industry Leading Technology

There is software available within the industry including patented 1031 Exchange workflow technology, Exchange Manager Pro^SM, utilized to date by over 30 national QIs, including the nation’s third largest publicly traded QI. Exchange Manager Pro^SM includes SOC 2 Type II compliance, secure data storage through Microsoft Azure, and automated document creation and deadline notifications reducing potential for human error and helping maintain compliance with IRC §1031. These technologies are costly but provide benefit to the Exchanger and the QI.

While the prospect of a no cost 1031 Exchange, might be seem appealing at first glance, decades of experience has taught us that when a significant portion of someone’s wealth is at play, they prefer to pay a nominal fee for security and confidence in the QI.

Security and Liquidity of Exchange Funds

A secondary role of the QI is to hold exchange funds to avoid actual or constructive receipt by the Exchanger. It is important for the QI to maintain coverages and follows specific guidelines to ensure the safety and security of Exchange Funds. Some of the standard guidelines followed by trustworthy QIs include:

Holding funds in segregated banks accounts
Maintaining adequate coverages for a fidelity bond, errors & omissions policy, and cyber liability policy

Some additional measures taken by only the leading QIs, that are of absolutely importance to the integrity of the exchange and safety of the exchange funds include:

Utilizing only 4- and 5-star Bauer rated depository banks
Segregated accounts opened under the Exchanger’s SSN or EIN to ensure that should the QI file for bankruptcy it is abundantly clear the funds are not that of the company, but of the individual Exchanger
Exchange funds held in liquid, demand deposit accounts, available for client direction of acquisition for Replacement Property at any time
Controls against Exchange disbursement directions being submitted fraudulently
Dual authorization and verbally confirmed wire instructions

Following a traditional fee for service model, the QI is motivated only to focus on facilitating a successful tax deferral, with little regard for the duration they are holding your exchange funds. In this model, an Exchanger can rest assured their exchange funds are being held in their best interest with less of an incentive to reach for revenue by potentially putting Exchanger funds at risk.

For over 100 years, since 1921, 1031 Exchange have been in the US Tax Code with the role of the QI being introduced in the 1991 Regulations. Since that time, the general business model has included an initial fee to start a 1031 Exchange with the ultimate goal of the QI helping achieve tax deferral for the Exchanger.

Aggregated industry data for 2024 shows that for a standard forward exchange, the exchange fee is nominal, roughly just .05% of the average Relinquished Property Contract Price per exchange. For real estate investors that may have anywhere from 10-50% of their total wealth tied up in real estate investment, that exchange fee is well worth the assurance that their 1031 Exchange is in capable hands, with measures to protect the overall integrity of the exchange, and their exchange funds.

Accruit, as a Fiduciary for exchange funds, has an obligation, above all, to maintain the safety and liquidity of funds held for the benefit of an Exchanger. As mentioned above, a 1031 Exchange is a valuable long-term tax deferral vehicle and not an investment vehicle for the funds being held by the QI during the exchange transaction. As such, Accruit encourages all Exchangers to complete their own due diligence, ask questions, and ensure they are comfortable with all of the answers before they engage the services of any QI.

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.     

Partial 1031 Exchanges: Cashing Out a Portion of the Sale Proceeds

meredithb@accruit.com — Tue, 01 Apr 2025 12:00:00 +0000

Partial 1031 Exchanges: Cashing Out a Portion of the Sale Proceeds

meredithb@accr… Tue, 04/01/2025 - 12:00

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Partial 1031 Exchanges: Cashing Out a Portion of the Sale Proceeds

It is a fundamental principle that Exchangers should exchange equal or up in value to fully defer the relevant taxes in a 1031 Exchange. To put it another way, an Exchanger needs to reinvest the net equity and incur equal or greater debt, if any, compared to what was paid off at closing. What happens when an Exchanger wishes to cash out a portion of their proceeds instead? This blog will explore the implications of retaining some cash and not reinvesting that portion of the exchange proceeds, and a potential alternative.

1031 Exchange Basics

A key requirement for Exchangers is that they must adhere to the 45-day identification and 180-day exchange timelines. Second, all property must fit the qualified use requirements of IRC §1031, in that property must be “held for productive use in a trade or business or for investment”. Third, as per above, to fully defer all of the applicable taxes, the Exchanger must exchange into Replacement Property(ies) equal or greater in value to the Relinquished Property and utilize all of the equity from the disposition of the Relinquished Property, which is sometimes referenced as ‘trade equal or up in value and equal or up in equity’.

While full deferral requires meeting these reinvestment rules, it is possible to replace debt paid off with fresh cash brought into the replacement property acquisition. However, it is not possible to replace net cash from the sale with excess debt on the purchase.

Exchanging Down

Sometimes, however, an Exchanger may determine that they wish to withhold a portion of the exchange proceeds to pay down other debts, pursue other business opportunities, or to be used for other personal reasons. For example, we have seen Exchangers keep money out of the exchange so that they can buy a new car, a vacation, or for their children’s college education. Alternatively, some Exchangers have difficulty finding property(ies) that meet their investment criteria, coming up short on their reinvestments. Perhaps they were seeking to diversify from the sale of one large property into several smaller ones, and they either couldn’t find enough appropriate properties or one of them fell through.

Additionally, some Exchangers dispose of Relinquished Property that had some debt and choose to acquire Replacement Property with no debt. These Exchangers may be reinvesting all of the exchange proceeds (i.e. equity), but they are not exchanging up in value.

Finally, some Exchangers have been misadvised that they must only reinvest the capital gains only, and that they can withdraw their initial investment at the time of the sale. As discussed above, this is simply not true.

In any of these scenarios, these Exchangers have found themselves in the position where they are not fully reinvesting the exchange value or the exchange funds. The amount that is not being reinvested is commonly referred to as “boot”.

Effects of Exchanging Down

Regardless of the reason, Exchangers who exchange down in value or equity face a likely taxable event at the end of the year. It is a ‘likely taxable’ event because they may have passive activity losses or other offsets that can be applied to the funds that are not reinvested. This is a good reason why a savvy Exchanger will include their tax and legal advisors in the planning and execution of their 1031 Exchange.

Exchangers who have boot in their exchange may be subject to capital gains, depreciation recapture, state, and net investment income taxes on the boot. Capital gains, state, and net investment income (NIIT) taxes vary based on the Exchanger’s federal income tax bracket and state of residency, while depreciation recapture is 25%, regardless of the Exchanger’s tax bracket.

Let’s look at a couple of possible scenarios to further illustrate Exchanging Down in Value:

Scenario 1

Exchanger disposes of a multi-family property for $1 million, on which they have $200,000 in appreciation (i.e. capital gains), and they have taken $100,000 in depreciation during the time they owned the property. This Exchanger now acquires a Replacement Property for $800,000, leaving $300,000 exposed to taxation. The first $100,000 will be treated as depreciation recapture and taxed at 25%. The remaining $200,000 will be treated as capital gains, taxed at 20% for this particular individual. Adding the NIIT and a five percent state tax, the net taxable event for this Exchanger will be $82,600, due when they file their tax return for the year of the sale.

Scenario 2

Exchanger disposes of raw land for $1 million, which they had acquired for $700,000, resulting in $300,000 in capital gains. Exchanger has determined that they would like to retain $100,000 of the proceeds at the closing table to invest in non-real estate investments. That $100,000 will not be part of the 1031 Exchange, it is considered boot and subject to capital gains, state and NIIT taxes.

Possible Solutions

If our first Exchanger was unable to identify suitable property(ies) and they were not interested in a Delaware Statutory Trust (DST) (1031 Exchange and Delaware Statutory Trusts) or other passive real estate investments, there isn’t much that can be done to mitigate the taxable impact of their transaction.

Our second Exchanger has a clear alternative strategy. Rather than withdrawing the $100,000 at the sale of the Relinquished Property, this Exchanger could reinvest the entire amount into a Replacement Property and thereafter refinance the property to withdraw the $100,000. For most Exchangers, as long as the refinancing the Replacement Property is not part of an integrated plan with the purchase of the property, it should be a non-taxable event, allowing the second Exchanger to meet the goals of diversifying their investments while still executing a full 1031 Exchange. However, for partnerships, “debt-financed distributions” can be taxable, so it is essential to consider the specific tax implications before pursuing this strategy

As mentioned previously, Exchangers are encouraged to consult with their tax and legal advisors before and during the 1031 Exchange process, a Qualified Intermediary does not have access to the Exchanger’s full tax situation and, in any event, cannot provide tax or legal advice.

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.  

Considerations for 1031 Exchanges Involving Foreign Property

meredithb@accruit.com — Tue, 18 Mar 2025 08:00:00 +0000

Considerations for 1031 Exchanges Involving Foreign Property

meredithb@accr… Tue, 03/18/2025 - 08:00

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Considerations for 1031 Exchanges Involving Foreign Property

Selling foreign real estate and reinvesting in other foreign real estate through a 1031 Exchange presents unique challenges beyond those of a 1031 Exchange with domestic property. While tax deferral benefits can still apply, factors such as differing tax codes and fluctuations in currency and markets require careful planning. In this blog, we explore important considerations for Exchangers contemplating a 1031 Exchange involving foreign property.

Foreign Property Is Not Like-Kind to U.S. Property

In a 1031 Exchange, both Relinquished and Replacement Properties must be like-kind, meaning real estate held for business or investment can be exchanged for another, regardless of type (ex. a multi-family property for an office building). For U.S. exchanges, properties must be within the continental U.S. Puerto Rico is excluded, but the U.S. Virgin Islands may qualify. In the context of 1031, foreign properties can only be exchanged for other foreign properties, regardless of location. Domestic and foreign properties cannot be exchanged with each other.

Tax Treatment in Foreign Jurisdictions

When conducting a 1031 Exchange with foreign property, it’s crucial to understand how the tax laws of the foreign country may impact the transaction. While the U.S. allows tax deferral under IRC §1031, most other countries do not recognize this provision, potentially resulting in immediate tax liabilities. In some cases, foreign countries impose higher capital gains tax rates than the U.S. (as high as 50%), reducing the benefits of deferral.

Another consideration is how foreign taxes interact with U.S. tax rules. If you pay capital gains tax in another country, you might be able to claim a foreign tax credit (FTC) or a deduction on your U.S. tax return. However, timing differences can create problems. If the foreign country taxes the gain right away but the U.S. delays recognition, you may not be able to fully use the FTC, which could lead to double taxation. Some tax treaties help by providing credits, but they don’t override the basic rules of §1031.

Besides capital gains taxes, Exchangers may face extra costs like stamp duties, value-added tax (VAT), or other transaction fees, making exchanges more complicated and expensive. These taxes usually can’t be recovered or deducted on a U.S. tax return, so it’s important to consider their impact. Another factor is estate and inheritance taxes, as some countries impose high taxes on property owned by non-residents. Using a foreign entity or trust to hold real estate might help reduce these risks, but it’s critical to properly structure a 1031 Exchange to follow both U.S. and foreign tax laws.

Foreign Currency Factors

Investing in foreign real estate comes with financial risks due to currency fluctuations, local market conditions, and regulatory factors. For a 1031 Exchange of foreign property, the Exchanger has two potential options for exchange funds to be held with the Qualified Intermediary (QI) in a United States bank. The first option is for the exchange funds to be held in the foreign currency within a foreign currency bank account; however not all banks can accommodate these types of accounts and there is additional documentation and security measures in place for holders of these accounts to reduce the banks associated risk with foreign money movements. The second option is to exchange the foreign currency into U.S. dollars. In this situation, the funds from the sale of the Relinquished Property are sent to the QI in the U.S. where they are converted to U.S. dollars prior to being converted back to the foreign currency to be wired internationally for the purchase of the Replacement Property(ies). During this process, exchange rates and additional transaction fees come into play, as the sale proceeds must be converted from U.S. dollars to the local currency for Replacement Property acquisition, requiring additional work for the QI to coordinate with banks.

Since property values are based on the local currency, changes in exchange rates can significantly impact both the purchase and sale price when converted to U.S. dollars at the time of the Relinquished Property sale. If said foreign currency weakens against the U.S. dollar, the investment's value may decline upon conversion. Currency shifts can also have tax consequences, as the IRS may treat significant exchange rate differences between sale and purchase as a foreign exchange gain or loss, potentially leading to extra tax liabilities.

Market Risks

In addition to currency fluctuations, inflation and interest rates in other countries can affect property values and loan costs. High inflation can reduce buying power, while changes in interest rates can make mortgages more expensive and impact demand for real estate. Additionally, some countries impose foreign exchange restrictions that limit the transfer of money across borders. If these restrictions tighten, it could become difficult for funds to be sent to the QI upon the sale of the Relinquished Property.

Political and economic instability is another factor to consider. Changes in government policies, real estate regulations, or foreign ownership laws can lower property values and limit an Exchanger’s ability to buy, sell, or manage properties. In uncertain regulatory climates, unexpected restrictions on foreign real estate transactions can add even more unpredictability.

Given the complexities of 1031 Exchanges involving foreign property, Exchangers should carefully evaluate any risks before proceeding and understand that due to the increased complexities involving foreign currency and the additional steps and scrutiny involved, the cost for a 1031 Exchange involving foreign property is significantly higher than a 1031 Exchange with domestic property. Working with experienced legal and tax professionals, as well as a Qualified Intermediary such as Accruit, can help navigate the challenges and maximize the benefits of a foreign property exchange.

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.      

Disaster Extensions and 1031 Exchanges

meredithb@accruit.com — Wed, 12 Mar 2025 20:12:39 +0000

Disaster Extensions and 1031 Exchanges

meredithb@accr… Wed, 03/12/2025 - 20:12

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Disaster Extensions and 1031 Exchanges

Large scale disasters caused by wildfires, tornadoes, tropical storms, flooding, and other natural events impacted Exchangers in more than two dozen states in 2024.¹ For those impacted, various forms of assistance were available from a variety of government and non-government organizations including Federal Emergency Management Agency, Small Business Administration, United States Department of Agriculture, and others. The Internal Revenue Service provided relief by allowing those defined as “Affected Taxpayers” to deduct casualty losses and extend certain time sensitive deadlines. But how do declared disasters impact IRC Section 1031 Tax Deferred Exchanges specifically?

Section 1031 Background

Under IRC Section 1031(a)(1), “no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchange solely for property of like kind that is to be held for productive use in a trade or business or for investment.” The Code section goes on to provide the Replacement Property is deemed to be not like-kind property if it is not identified on or before the 45th day after the transfer of the Relinquished Property, or if the property isn’t acquired by the earlier of (i) the 180th day after the transfer of the Relinquished Property, or (ii) the due date for the Taxpayer’s return for the tax year in which the transfer of the Relinquished Property occurs, including extensions.²

For example, in a forward exchange, if the Exchanger transferred the Relinquished Property on November 1, 2024, the 45-day identification deadline would be December 16, 2024, and the 180-day exchange deadline would be April 30, 2025. However, the Exchanger’s tax return deadline is April 15, 2025, which effectively shortens their exchange period unless they file Form 4868 to extend the deadline. Note, these deadlines and Form 4868 apply to individuals and married couples. Other deadlines and forms are to be used for other Exchangers including Farmers and Ranchers, Corporations, and Partnerships.

In a parking exchange, or “reverse” exchange/and or property improvement exchanges, the same calculations would apply. If, through a properly structured parking exchange, the exchange company, technically referred to as the Exchange Accommodation Titleholder, acquired the Exchanger’s Replacement Property on November 1, 2024, the Exchanger would have until December 16, 2024 to identify which property (or properties) in their existing portfolio would be the target for disposition, and until April 15, 2025 to complete that disposition (unless they file Form 4868 for an extension on their tax return).

IRS Disaster Extensions

The Robert T. Stafford Disaster Relief and Emergency Assistance Act (“Stafford Act”) of 1988³ amended the Disaster Relief Act of 1974. Section 401(a) of the Stafford Act provides that the Governor of an affected state must request that the President declare that a ‘major disaster’ exists. Major Disaster is defined as:

“any natural catastrophe (including any hurricane, tornado, storm, high water, wind-driven [sic] water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought), or, regardless of cause, any fire, flood, or explosion, in any part of the United States, which in the determination of the President causes damage of sufficient severity and magnitude to warrant major disaster assistance under this Act to supplement the efforts and available resources of States, local governments, and disaster relief organizations in alleviating the damage, loss, hardship, or suffering caused thereby.”⁴

Further, the Secretary of the Treasury may extend certain time sensitive acts for up to one year for Exchangers affected by a federally declared natural disaster.⁵ Under IRC §7508A(d)(2), “Qualified Taxpayers” are

(A) Any individual whose principal residence (for purposes of section 1033(h)(4)) is located in a disaster area,

(B) Any taxpayer if the taxpayer’s principal place of business (other than the business of performing services as an employee) is located in a disaster area,

(C) Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a disaster area,

(D) Any taxpayer whose records necessary to meet a deadline for an act described in section 7508(a)(1) are maintained in a disaster area,

(E) Any individual visiting a disaster are who was killed or injured as a result of the disaster, and

(F) Solely with respect to a joint return, any spouse of an individual described in any preceding subparagraph of this paragraph.⁶

Exchangers may determine if an event was designated by the President as a federally declared disaster area by searching on FEMA's Disaster & Declarations page. Many, but not all, of these disasters will also be posted to the IRS Newsroom. FEMA can provide assistance in one of three forms – public assistance, individual assistance, or a combination of public and individual assistance. Public assistance is when FEMA provides grants to state and local governments for items like debris removal, repairing roads and bridges, public buildings, and public utilities. Compare this to individual assistance, which is when FEMA provides grants to individuals for items like temporary housing, housing repair and replacement, as well as funeral expenses, just to name a few.

When the President declares a federal disaster, FEMA will designate what counties, or parishes, are entitled to relief and what types of relief. This information is shared with the public and a map is generated to facilitate the sharing of this information. As an example, below is the map that was published in the wake of severe storms, straight-line winds, flooding and tornadoes affecting Kentucky in 2022.

After the President declared that a major disaster existed in Kentucky, FEMA determined the geographical areas covered by the Declaration. Note that the map is color coded, and that there are five potential designations, by county. The counties indicated in white were not entitled to any FEMA relief. The counties highlighted in gold were entitled to public assistance only, and the counties in pink were entitled to receive both individual and public assistance. Only counties entitled to individual assistance, or public and individual assistance will receive disaster extensions.

Revenue Procedure 2018-58

Revenue Procedure 2018-58 updates Revenue Procedure 2007-56 with the purpose of providing an updated list of time sensitive acts that may be postponed under Sections 7508 and 7508A of the IRC.

Further, Rev. Proc. 2007-56 and 2018-58 extend the definition of Affected Taxpayer to include individuals serving in the Armed Forces of the United States in a combat zone, or serving in support of such Armed Forces, individuals serving with respect to contingency operations, Affected Taxpayers by reason of federally declared disasters within the meaning of § 301.7508A-1(d)(1), or Taxpayers whom the IRS determines are affected by a terroristic⁷ or military action.⁸

The Revenue Procedures also include special rules for Section 1031 Like-Kind Exchanges.⁹ The last day of the 45-day identification period, the last day of the 180-day exchange period, and the last day of any deadlines set forth under Rev. Proc. 2000-37 for parking exchanges, specifically those “that fall on or after the date of a federally declared disaster, are postponed by 120 days or to the last day of the general disaster extension period authorized by an IRS News Release or other guidance announcing tax relief for victims of the specific federally declared disaster, whichever is later.”¹⁰

Affected Taxpayers who meet the terms of the Disaster Relief Notice must choose the relief provided in Section 6 or Section 17 of Rev. Proc. 2018-58. Section 6 applies only to Affected Taxpayers as defined in the Disaster Relief Notice and postpones deadlines falling between the Disaster Date in the Disaster Relief Notice and the last day of the Postponement Period to the last day of the Postponement Period.

Example A: Disaster Date is May 15, and the last day of the Postponement Period is September 15. The Taxpayer is an Affected Taxpayer as defined in the Disaster Relief Notice and disposes of their Relinquished Property on May 16 (after the Disaster Date), the 45th day is June 30, and the 180th day is November 12. Under Section 6, the ID deadline is postponed to September 15, the last day of the Postponement Period. The exchange period deadline is not postponed because it did not fall between the disaster date and the last day of the Postponement Period.

Section 17 applies to both Affected Taxpayers and Non-Affected Taxpayers who otherwise qualify for the disaster relief. It is important to note that for Section 17 to apply, the Relinquished Property must have been transferred (or the parked property must have been parked), on or before the Disaster Date. Section 17 permits both 1031 Exchange deadlines to be postponed for 120 days or until the last day of the Postponement Period, whichever is later. However, under no circumstances may the postponement go beyond (a) the due date, including extensions, of the Exchanger’s tax return for the year of the transfer, or (b) one year.¹¹

Example B: Same basic facts as Example A. The Affected Taxpayer cannot benefit from Section 17 postponements because the transfer of the Relinquished Property occurred after the Disaster Date. This Taxpayer does not obtain the 120-day postponement.

Example C: Same basic facts as Example A, however, the Affected Taxpayer sold the Relinquished Property on May 1, before the May 15 Disaster Date, and has a 45-day deadline of June 15 and a 180-day deadline of October 28. If this Affected Taxpayer chooses Section 17 relief, then they may extend both their 45-day and 180-day deadlines by 120 days or until the last day of the Disaster Period, whichever is later.

How to Obtain Disaster Relief

For Exchangers located in the disaster area, the IRS maintains a list of the ZIP codes located within the disaster area and administratively tags the accounts of those Exchangers. The IRS automatically provides filing relief to these Exchangers, and they do not need to do anything further.

As discussed above, there are categories of Affected Taxpayer who are not physically located within the disaster area. Individuals who qualify for relief but who are not physically located within the disaster area must inform the IRS that they have been impacted by the disaster. These individuals must contact the IRS by calling 866-562-5227. It is important to remember that Affected Taxpayers also includes workers affiliated with recognized government of philanthropic agencies assisting the relief activities.

To qualify for an extension on 1031 Exchange deadlines, the Exchanger must qualify for relief under both the specific Disaster Relief Notice and the terms of Rev. Proc. 2018-58.¹²

Exchangers who believe that they may qualify for disaster related extensions on the 1031 Exchanges must consult with their tax and legal advisors. Upon determining that they qualify for such extensions, they must then promptly notify their Qualified Intermediary so that the Intermediary may properly notate the exchange files.

The material in this blog is presented for informational purposes only. The information presented is not intended as 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.

Sources:

^1.Wildfires in California, Hawaii, and Washington. Tornadoes in Arkansas, Florida, Illinois, Iowa, Kentucky, Missouri, Mississippi, and West Virginia. Tropical storms in Florida, Louisiana, North Carolina, Pennsylvania, Puerto Rico, Tennessee, the U.S. Virgin Islands. Flooding in Alaska, Arizona, Arkansas, California, Connecticut, Illinois, Iowa, Maine, Massachusetts, Minnesota, Mississippi, Missouri, New Mexico, New York, Rhode Island, South Dakota, Texas, and West Virginia.

^2. IRC §1031(a)(3).

^3. 42 USC 5121, et seq.

^4. Strafford Act Section 102(2); 42 USC 5122.

⁵. 26 USC §7508A.

^6. 26 USC §7508A(d)(2).

^7. Notice 2023-71 provided relief to taxpayers who were unable to meet filing or payment deadlines due to the terrorist attacks in Israel in October 2023.

^8. Rev. Proc. 2007-56, Section 3; Rev. Proc. 2018-58, Section 3.

^9. Rev. Proc. 2007-56, Section 17; Rev. Proc. 2018-58, Section 17.

^10.Rev. Proc. 2018-58, Section 17.02(1).

^11. Rev. Proc. 2018-58, Section 17.02.

^12. Rev. Proc. 2018-58, Section 17.02(2)(b)

The Future of Sustainable Real Estate: Leveraging 1031 Exchanges for Green Investments

meredithb@accruit.com — Wed, 05 Mar 2025 08:00:00 +0000

The Future of Sustainable Real Estate: Leveraging 1031 Exchanges for Green Investments

meredithb@accr… Wed, 03/05/2025 - 08:00

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The Future of Sustainable Real Estate: Leveraging 1031 Exchanges for Green Investments

With buildings responsible for over 1/3 of global CO2 emissions, the shift toward sustainable real estate is growing. Government incentives, stricter regulations, and rising demand make green properties a smart investment. 1031 Exchanges offer investors a tax-efficient way to transition into eco-friendly properties or fund sustainability upgrades, aligning financial growth with green practices. In this blog, we explore key sustainability trends, investment opportunities, and how 1031 Exchanges can support the transition to green real estate.

The Rise of Sustainable Buildings

Cities and companies around the world are setting strong carbon neutrality goals, driving innovation in sustainable building practices. The World Green Building Council estimates that green buildings can cut carbon emissions by up to 50% compared to traditional structures, and hundreds of cities globally have committed to achieving carbon neutrality by 2050. Additionally, green building certifications like LEED (Leadership in Energy and Environmental Design) and BREEAM (Building Research Establishment Environmental Assessment Method) are becoming more important to new construction projects, as organizations place greater emphasis on sustainable decisions.

Investment Potential

Sustainable properties not only contribute positively to the environment, but also present significant investment opportunities. Opportunities include:

Market Stability: Green buildings tend to be more resilient to market fluctuations, due to their lower operational costs and long-term value, offering a more stable income stream.

Higher ROI: Sustainable properties often command higher property values and premium rental rates, leading to a higher return on investment.

Institutional Support: Environmentally conscious investors, including many Real Estate Investment Trusts (REITs) are increasingly drawn to green real estate, recognizing its potential for long-term growth.

Government Regulations and Incentives

In the United States, federal, state, and local governments actively promote sustainable real estate through various policies, regulations, and financial incentives designed to encourage green development.

Key Policies

Stricter Building Codes: Regulations now require higher energy efficiency, water conservation, and use of sustainable materials in construction. For example, the International Green Construction Code (IgCC) provides a comprehensive approach to building design, construction, and operation, establishing mandatory green standards for buildings.

Carbon Emission Regulations and Incentives: Policies are being introduced that penalize high carbon emissions, encouraging businesses and builders to adopt greener practices. The Inflation Reduction Act (IRA) supports these efforts by offering tax credits and rebates to incentivize energy-efficient and renewable energy improvements.

Green Certification Programs: Certifications like LEED provide incentives for meeting sustainability standards, promoting green construction. These certifications provide clear guidelines for sustainable building practices.

Incentives for Builders and Buyers

Tax Credits: Builders and property owners can benefit from tax credits for investing in energy-efficient systems and materials. For example, the 45L Tax Credit offers up to $5,000 per unit for energy-efficient homes, promoting sustainable housing while lowering energy costs for both owners and tenants.

Subsidies: Government subsidies are available to support the installation of renewable energy systems and retrofitting of existing buildings. The IRA allocates funds to clean energy production, including support for renewable energy installations.

Financing: Green construction projects can benefit from financing options, making it easier to invest in sustainable building practices. Various programs are available to assist with energy-efficient purchases and improvements, such as green loans. Green loans are a dedicated type of financing designed for eco-friendly projects, such as solar loans, energy-efficiency loans, and green mortgages. They often require proof that the funds were used for sustainable projects and may offer lower interest rates to encourage sustainable practices.

These policies and incentives are designed to reduce the cost of adopting sustainable real estate, encouraging wider participation and fostering continued growth in the sector.

Green Housing

“Green housing” refers to homes built with energy-efficient resources and environmentally sustainable practices. The goal is to create homes that are not only environmentally responsible but also cost-effective, offering long-term financial benefits to homeowners.

Key Benefits of Green Housing

Preserving the Environment: Green housing minimizes carbon footprints, conserves energy, and uses recyclable materials while reducing costs for homeowners.

Sustainable Upgrades: Upgrades such as solar panels, energy-efficient appliances, and recycled materials make green homes both eco-friendly and more cost-effective for the tenants. In California, sustainability is further prioritized through the state’s solar mandate, which requires all new homes and low-rise multifamily properties to have solar panels installed during construction, ensuring that renewable energy is integrated from the start.

Green Real Estate and 1031 Exchanges

Green real estate represents a shift in how properties are designed, renovated, and managed. As eco-friendly materials and energy-efficient technologies like solar panels and wind energy become more widely adopted, green properties are becoming highly desirable investments.

While tax incentives, such as the 30% federal tax credit for installing solar panels, don’t directly impact 1031 Exchanges, they can play a role in influencing investor decisions. Investors seeking to maximize returns on green properties can benefit from these incentives, as they help offset the costs of installing energy-efficient systems, making the property more financially viable. In some cases, tax credits and rebates can even improve ROI by reducing the upfront costs of making green upgrades and yielding higher rents from tenants.

For example, consider a residential property worth $270,000 generating $2,250/month in rent. Operating costs, such as maintenance and insurance, amount to 3.08% of the gross rental income. After accounting for these expenses, the property has an expected Net Operating Income (NOI) of 5.25%. Operating costs, such as maintenance and insurance, consume 3.08% of that income. If the investor decides to install solar panels at an estimated cost of $15,000, the total investment increases to $285,000. While rental rates might not immediately increase as a result of the solar installation, the 30% tax credit could offset up to $4,500 of the expense, significantly reducing the effective cost of the upgrade. Studies show that LEED-certified multifamily properties command a 9% rental premium, double that of non-certified properties. In the office sector, LEED-certified office buildings achieve an average rent 31% higher than non-certified buildings. For class A, green-certified office properties, there is an average 7.1% rental premium. Studies conducted across 20 major global office markets found that only 34% of the future demand for low-carbon workspace will be met in the coming years. In other words, for every 9 square feet of demand, only 3 square feet is currently in the pipeline. Over time, the combination of energy savings and increasing demand for sustainable properties could further enhance a property’s profitability.

Using 1031 Exchanges for Green Investments

A 1031 Exchange is a powerful tax-deferral strategy that allows real estate investors to reinvest proceeds from the sale of one property into another like-kind property, deferring associated taxes in the process. For investors focused on sustainability, this creates an opportunity to transition into green real estate without the immediate tax burden, while simultaneously benefiting from long-term energy savings and enhanced property value.

An improvement exchange can also be valuable strategy, allowing investors to use a portion of their reinvestment funds to upgrade the Replacement Property(ies). If properly structured, sustainability improvements such as solar panel installations or water-saving fixtures can be included as part of the Replacement Property value. This means investors can reinvest in green real estate while still deferring taxes, effectively combining the benefits of both tax deferral and sustainable property improvements. Additionally, Exchangers installing solar panels as part of a 1031 Exchange can still take advantage of the 30% tax incentive, as this incentive is separate from the exchange and allows the Exchanger to deduct 30% of the cost from their Adjust Gross Income, regardless of the source of the funds.

By leveraging a 1031 Exchange for sustainability upgrades, investors not only maximize tax benefits, but enhance the long-term value and efficiency of their properties.

The future of real estate is going green. Sustainable building practices, government incentives, and growing investor interest are shaping the industry. While tax incentives for environmentally friendly building upgrades don’t directly affect 1031 Exchanges, they make green investments more attractive by reducing upfront costs. Investors seeking strong returns and sustainability should consider green properties, whether through upgrades, improvement exchanges, or utilizing incentives, ensuring both financial growth and positive environmental impact.

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. 

Sources:

Green Homes: The Future of Sustainable Real Estate - The Leaders Globe Media

Green Real Estate: The Key Sustainability Trends for 2025 | GEP Blog

Sustainable Real Estate: Trends, Benefits, and Challenges | Housivity

Sustainability reporting in construction and real estate sector: A conceptualization and a review of existing literature - ScienceDirect

The commercial case for making buildings more sustainable

Why Bother with Certification? LEED-Certified Apartments Earn Higher Rents :: GBIG Insight

Green Is Good: The Enduring Rent Premium of LEED-Certified U.S. Office Buildings | CBRE

Green Loans and Eco-Friendly Lending | Axelrad Capital

Understanding Easements: Types, Uses, and Benefits in 1031 Exchanges

meredithb@accruit.com — Thu, 20 Feb 2025 20:23:25 +0000

Understanding Easements: Types, Uses, and Benefits in 1031 Exchanges

meredithb@accr… Thu, 02/20/2025 - 20:23

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Understanding Easements: Types, Uses, and Benefits in 1031 Exchanges

Easements are generally legally binding agreements allowing property owners to grant specific rights for use of the land within the easement to third parties while retaining overall ownership of the land. Beyond their traditional uses, easements can be Relinquished or Replacement Property in 1031 Exchanges, enabling property owners to utilize the proceeds of the easement to reinvest into more productive like-kind property while deferring traditionally associated taxes with real estate transactions. This blog explores the general concept of easements, their various types and uses, and how they can be utilized in the context of 1031 Exchanges to maximize financial benefits and investment opportunities.

What is an Easement?

An easement is a type of real property interest wherein a landowner grants another party specific rights to use the landowner’s real property for a designated purpose, typically in exchange for compensation. These agreements are often created to address needs such as providing access to land, facilitating the installation of utilities, or preserving the land for conservation purposes. For example, a utility easement allows utility companies to install and maintain infrastructure like electrical, water and gas lines. A conservation easement on the other hand, is created when a landowner restricts development on their land to protect natural or historical features. Easements can be either perpetual, lasting indefinitely, or for a fixed term, based on the easement agreement. As recognized real property interests, easements may be sold as part of 1031 Exchange transactions, allowing property owners to defer associated taxes while reinvesting in like-kind properties.

Types of Easements

Easements serve various purposes and can assume different forms depending on the needs of the property owner and the rights granted. Below are examples of easements:

Access Easements: Access easements grant specific rights to the grantee of an easement to use another landowner’s property for purposes like ingress and egress (access) to the property of the person acquiring the easement. Examples are creation of a common driveway, livestock driveways, access roads to irrigation ditches or canals or temporary access rights for construction, access to equipment, etc.

Utility Easements: Utility easements allow utility companies to install and maintain infrastructure such as power lines, water pipes, or telecommunication cables on private property. These easements are typically restricted to specific areas of the property and do not transfer ownership. These easements may involve a small easement area to provide utilities to one parcel or huge multi-state utility transmission lines.

Conservation Easements: Conservation easements are agreements designed to protect land for environmental, recreational, or historical purposes by restricting development or changes that could harm the land’s natural or cultural value. These easements are often used to preserve open spaces, natural habitat, protect endangered or threatened species, create greenbelts, or preserve historic structures. Unlike the other types of easements described herein, the grantor of a typical conservation easement is agreeing to restrict the use of their land. Typically, those purchasing conservation easements are government agencies or conservation organizations.

Ditch, Canal and Water Line Easements: These easements are created when a landowner grants a third party, sometimes a government entity, the right to construct, maintain and repair ditches, canals or waterlines across a landowner’s property to transport water for irrigation, domestic or municipal uses. These easements may also allow the easement owner to access water diversion structures. These easements may involve just one relatively small property parcel but can involve multiple landowners and large water conveyance systems

Gas and Oil Pipeline Easements: These easements typically involve large projects allowing for underground or above ground transport of oil and natural gas across multiple states and multiple landowners.

Cell Tower, Billboard, Wind and Solar Easements: These easements are created when landowners grant rights to others to build and maintain structures like cell towers, billboards, windmills and huge solar panel installations on a landowner’s property. These easements can be granted by private landowners or in some instances by governmental agencies. In some cases, these easements may include long-term lease agreements to the easement holder for the pads or area utilized by the structure, creating an additional revenue stream for the landowner.

Terms of Easements

Easements can be structured with different durations, depending on the needs of the parties involved. The terms of an easement can significantly influence property management, income potential, and long-term planning. Easements are typically written agreements, there is an entire area of the law that deals with prescriptive easements, easements by necessity and the like. For purposes of this article, we will only address written, legally binding easement agreements.

Perpetual Easement: A perpetual easement has no fixed end date and lasts indefinitely. These types of easements are often preferred because of their simplicity and long-term stability. They offer property owners a reliable and consistent income stream, making them especially beneficial in cases where ongoing access or preservation is required, such as with utility or conservation easements. In the 1031 Exchange context, perpetual easements are “like kind” to fee ownership of real estate and the proceeds from the sale of perpetual easements can be used to acquire any other real property interests meeting the like kind standard.

Fixed or Short-Term Easements: Easements that are less than perpetual can be of any length. Some easements may be temporary and very short term in the case of construction easements. Other easements can be of any stated term. The important feature of these less-than perpetual easements in the 1031 Exchange context is that they are not like kind to other fee interests in real property. However, a 1031 Exchange is still possible, as long as the proceeds from the sale of a fixed or short-term easement are used to exchange into another fixed or short-term easement

Ways Property Owners can Achieve Tax Benefits with Easements

Donating an Easement

Donating a conservation easement allows property owners to restrict land use for preservation or conservation without transferring full ownership, offering significant tax benefits. These qualified conservation contributions, often used to protect open spaces, natural habitats, or historic structures, are donated to charitable organizations or government entities. The key to these transactions is that the property owner does not receive any monetary consideration for the easements, choosing instead to avail themselves of the charitable contribution tax deductions. The Exchanger should consult with their CPA or other advisors to determine the various deduction benefits available to them based upon the type of easement being granted.

In 2006, President Bush signed The Pension Protection Act, the first substantial change to the conservation easement tax system in over two decades. Before the Act, Section 170(b) of the Internal Revenue Code imposed stricter limits on the deductibility of a qualified conservation easement. Individuals could typically deduct the value of a conservation easement donation up to 30% of their Adjusted Gross Income (AGI) for the year (50% for qualified farmers and ranchers), with any unused deductions eligible to be carried forward for an additional five years. The Pension Protection Act increased the tax incentives for easement donations, as it allowed individuals who donate an easement to deduct up to 50% of their AGI in a given tax year (100% for qualified farmers and ranchers), with any unused contributions eligible to be carried forward for up to 15 years. Donations of appreciated property remain the same, limited to 30% of income with a 5-year carryover.

Nine years later, the Conservation Easement Incentive Act of 2015 was enacted, permanently amending the Internal Revenue Code to solidify the tax incentives introduced in the Pension Protection Act for charitable contributions of real property interests aimed at conservation purposes.

Conservation Easements as Relinquished Property in a 1031 Exchange

The conveyance, or sale, of a conservation easement may be treated as a Relinquished Property in a 1031 Exchange, allowing Exchangers to defer associated taxes by acquiring like-kind Replacement Property. To qualify under IRC Section 1031, an easement must represent a perpetual interest in the land and most conservation easements are structured in that fashion. Since payments for easements are typically made upfront, utilizing an easement sale as a relinquished real property interest aligns well with the 1031 Exchange process. Temporary easements do not meet the requirements set forth in the Section 1031 regulations

To execute a 1031 Exchange, the transaction must follow specific requirements. A Qualified Intermediary (QI), such as Accruit, must enter into an exchange agreement with the Taxpayer/Seller and manage the sale proceeds and acquisition of qualifying Replacement Property(ies) to ensure compliance with the tax code. Additionally, the transaction must be structured as an exchange rather than a straightforward sale. Improper structuring of the sale of a conservation easement can lead to unintended tax consequences.

Evolution of Conservation Easements for Tax Benefits

Conservation easement donations have been tax-deductible since 1976, when Congress established this incentive. Initially, the tax benefits were limited to deductions for conservation purposes, allowing landowners to donate easements to protect natural resources and claim charitable tax deductions. However, the initial activity in conservation easements was relatively slow because Taxpayers in the agriculture sector who were the natural source of conservation easements didn’t need or want charitable contributions due to harsh economic conditions; many of them were operating at a loss. The incentives for conservation easements changed dramatically when government agencies and conservation groups began offering substantial sums of money to property owners for conservation easements. Landowners now leverage easements not just for land preservation, but for reinvestment in more productive properties or other investment opportunities.

Donating an easement, while still an option, may no longer make as much sense for many property owners as it may have in the past. Charitable contributions of easements can yield tax deductions, but these benefits are typically capped by IRS limits on charitable contributions. However, some landowners are still motivated by a conservation ethic and not the money and the charitable contribution is sufficient incentive. In contrast, selling a conservation easement and redeploying the cash proceeds in an exchange can result in significantly greater financial diversification coupled with tax deferral. By choosing to sell rather than donate, property owners can better optimize the value of their real estate while still contributing to broader land-use or conservation goals.

Easements are more than just legal agreements. They are tools enabling property owners to optimize land use and reinvest proceeds from easement sales into other like-kind property. Whether preserving natural resources through conservation easements, enabling infrastructure development with utility and other energy related easements, or enhancing highway and road systems, easement sales offer significant flexibility and benefits to property owners, third parties involved, and the general public. By leveraging easements effectively, property owners can strike a balance between private rights and public interests while maximizing the value of their real estate assets.

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.

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