1031 exchange

What Happens if a 1031 Exchange Spans Two Tax Years?

Anonymous — Fri, 29 Dec 2023 11:47:59 +0000

What Happens if a 1031 Exchange Spans Two Tax Years?

Anonymous (not verified) Fri, 12/29/2023 - 11:47

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What Happens if a 1031 Exchange Spans Two Tax Years?

Most taxpayers who are considering a Section 1031 exchange are familiar with the 45-day Identification period, and the 180-day Exchange period. As a reminder, the taxpayer must identify the Replacement Property (or Properties) to be acquired within 45 days after the sale of the Relinquished Property. Section 1031(a)(3)(b) says that taxpayers must complete their 1031 exchanges within 180 days after the sale of their Relinquished Property, or the due date of their tax return, whichever is earlier. For most taxpayers, and in most years, the tax return due date is April 15 of the following year.

But for taxpayers who sell investment real estate in the fourth quarter as part of a 1031 exchange, it is imperative to pay particularly close attention to the exchange deadlines, specifically the rules and regulations around the 180 day exchange period.

Realize Full Exchange Timeline by Filing for an Extension on Taxes

For example, if you sold your relinquished property after October 17, 2023, you must complete your 1031 exchange by April 15, 2024, or you must file for an extension on your 2023 taxes. This means that if you sold your investment property on November 30, 2023, for example, you would have an exchange deadline of April 15, 2024 – which is only 136 days later. To have the benefit of the full 180-day exchange period, you would have to file for an extension.

Filing for an extension on your tax return requires submission of Form 4868 and will provide you with a six-month extension on your income taxes. This does not, however, provide you with an additional six months to complete your 1031 exchange, but rather, the balance of your 180 days, which in November 30 example above, moves the deadline to May 29, 2024.

Convert Failed 1031 Exchange to Installment Sale

Alternatively, you could opt to let your exchange fail. Our November 30 example above has a 45-day identification deadline of January 14, 2024, and a 180-day exchange deadline of May 29, 2024. Whether the 1031 exchange fails by non-identification or by failure to acquire replacement property, you are not entitled to obtain the exchange proceeds until the subsequent tax year. In this example, the IRS allows you to either report the gain in the year of the sale, or in the year the proceeds were received under Section 453 installment sale rules. Choosing the installment sale rules would require you to file Form 6252, but effectively provides a one-year deferral on the gains from the sale of the property. Deciding to convert from a failed 1031 exchange to an installment sale does not result in any IRS penalties, and provides you with additional flexibility. Indeed, the default reporting of an unsuccessful exchange that crosses tax years is the installment sale method unless you affirmatively choose to report it in the prior year.

Keep in mind that the rules for Section 453 installment sales are quite specific. Installment sales do not necessarily apply to all sales, and do not defer any gain that was attributable to debt relief. Taxpayers are strongly encouraged to discuss the concepts covered here with their tax and/or legal advisors.

Implications of a Partial Exchange

There is yet another possible scenario. Assume that you sold your relinquished property on November 30, 2023 for $500,000 as part of a properly structured 1031 exchange. Your 45-day identification deadline is January 14, 2024 and your 180-day acquisition deadline is May 28, 2024. You properly identify one target replacement property before the deadline, and ultimately acquire that property on January 30, 2024 for $450,000. This results in “boot” – taxable event – of $50,000. Whether this $50,000 is attributable to depreciation recapture or capital gains, the results are the same, you could elect to recognize the taxable event on your 2023 tax return, or you could elect installment sale treatment as discussed above.

Whether you should recognize the taxable event in 2023 or 2024 is a taxpayer specific inquiry that is best resolved by consulting your tax and legal advisors.

*Updated 12/29/2023.

The Same Taxpayer Requirement in a 1031 Tax Deferred Exchange

Anonymous — Tue, 26 Apr 2022 19:54:13 +0000

The Same Taxpayer Requirement in a 1031 Tax Deferred Exchange

Anonymous (not verified) Tue, 04/26/2022 - 19:54

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The Same Taxpayer Requirement in a 1031 Tax Deferred Exchange

What is the Same Taxpayer Rule in a 1031 Like-Kind Exchange?

In a 1031 exchange, the taxpayer who owns the relinquished property must be the same taxpayer who takes ownership of the replacement property. Keep in mind that one of the justifications for tax deferral is that a taxpayer has reported all the incidences of ownership and that the taxpayer’s basis will carry over into the new replacement property. The taxpayer is only getting deferral, not permanent tax avoidance, and the sheltered gain will be due ultimately upon a future sale of the property without an exchange. If the taxpayer were to change tax identities within an exchange, there would be no continuity of tax ownership and no reason to afford deferral.

In addition, the exchange regulations provide that the taxpayer must transfer the relinquished property as well as receive the transfer of the replacement property. If, for tax purposes, the taxpayer changes its tax identity between the sale and the purchase, then the same taxpayer will not have disposed of and received property. So, while the same taxpayer requirement will not be found by those words in the regulations, it is very clearly implicit.

When determining what constitutes “the same taxpayer” the tax identity may be different than the legal title. It is the tax identity that must be maintained and follow from the relinquished property ownership to the replacement property ownership. Another way to look at this is whether the selling and buying entities use the same social security number for both properties and does it change to a Federal Tax-Identification Number (FEIN or EIN) from one property to the other. The social security number would typically be used for a single individual’s ownership, including ownership under tax disregarded entities discussed below in more detail. The FEIN number would typically be used for a business or an entity ownership consisting of more than one person or more than one entity, such as a multi-member limited liability company or a partnership.

Can a Taxpayer Change the Ownership but Maintain the Tax Identity?

Remember that we are talking about the tax identity, not necessarily the specific name of the title of the property. So let’s look at some various ways in which a taxpayer can hold title that would preserve the tax identity:

Hold title in taxpayer’s own name
Hold title under a single member limited liability company (LLC)
Hold title as the trustee of a Revocable Living Trust
Hold title as beneficiary of an Illinois type land trust
Hold title as a Tenant in Common (TIC)
Hold title under a Delaware Statutory Trust (DST)

Holding Title in the Taxpayer’s Own Name

Using the taxpayer’s own name is the most common form or ownership. This ownership can be as an individual, LLC, partnership, etc. There is always a tax identification number associated with this ownership.

Holding Title as a Single Member LLC, Trustee of a Revocable Living Trust, or TIC

Single member LLCs and Self Declarations of Trust (Living Trust) are known as “tax disregarded entities.” These entities are taxed to the party that is the sole member of the LLC or the grantor/beneficiary of the trust. A TIC is also deemed to be owned by the owner of that Tenant in Common share. The fact that there are other co-owners of the property has no adverse consequences to the taxpayer being the same taxpayer who sold the property individually.

Holding Title under a Delaware Statutory Trust

DSTs themselves are regarded as a trust, however the owner of a DST share is regarded as owning a beneficial interest in the trust. As such, a person selling as an individual but buying through a DST interest is still treated as the same taxpayer assuming the beneficial interest is held in the same individual taxpayer’s name. In 2004, the IRS issued a ruling confirming that the use of a DST for the purchase of replacement property was permissible with certain restrictions.

Holding Title as Beneficiary of an Illinois Type Land Trust

The Illinois land trust is similar to the DST in that the owner of the trust interest is considered to be holding the beneficial interest in the trust that holds title to the property. Since an exchange of a “beneficial interest” was not allowed under Section 1031 in the past, many sellers of property within a land trust faced a lot of uncertainty as to how to proceed. Eventually the IRS issued Private Letter Ruling 92-105 confirming that due to the unique nature of an Illinois land trust, the beneficiary causing sale of land trust property would qualify for a real estate exchange and was not subject to the beneficial interest prohibition.

The Same Taxpayer Rule and Spouses

There are times when only one spouse is on title to the relinquished property and the taxpayer would like to add the spouse to the title to the replacement property. This is not encouraged since the other spouse was not the same taxpayer who sold the relinquished property. When a taxpayer does want to bring the spouse on title, advisors usually suggest waiting until the “exchange is old and cold.” Waiting several years should be sufficient.

Other times, only one spouse will be on title to property but the lender in connection with the replacement property financing will require the additional spouse to go on title as a condition of the loan. If this is a written request from the lender, rather than the taxpayer’s election, it is unlikely that the IRS would find it objectionable. Should someone wish to use an abundance of caution, a document could be drawn up confirming that the additional spouse is holding the interest “in trust” on behalf of the original spouse.

Spouses in Community Property States

In cases where only one spouse is on title to the relinquished property there is an exception to the requirement that only that spouse may be on title to the replacement property. This exception can be found in community property states where if the spouses live in one such state both spouses are deemed to own the property regardless of only one of the spouse holds legal title. While this will apply to most real estate ownership in these states, there are a few exceptions such as the real estate being the subject of a gift or inheritance of one spouse.

These states include:

Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin

Death of a Taxpayer during a 1031 Exchange

There are instances in which a taxpayer passes away at a point in time after the sale of the relinquished property and before the purchase of replacement property. In the absence of continuation of the exchange in these instances, the estate would be taxed on the gain from the sale. However, in spite of the fact that a (deceased) individual and his estate are not the same taxpayer, the regulations do allow the estate to continue the exchange transaction and receive deferral.

Summary

The theory behind like-kind exchange tax deferral is based upon continuity of a taxpayer’s investment. Implicit with this is that if the taxpayer changes between the disposition of an asset and the acquisition, there cannot be continuation of the taxpayer’s investment. However, there are various types of property-holding arrangements, many of which are disregarded for tax purposes, that allow for a taxpayer to hold relinquished property in a different name while meeting the same taxpayer requirement.

Updated 4/26/2022.

1031 Drop and Swap out of a Partnership or LLC

Anonymous — Mon, 04 Apr 2022 21:36:49 +0000

1031 Drop and Swap out of a Partnership or LLC

Anonymous (not verified) Mon, 04/04/2022 - 21:36

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1031 Drop and Swap out of a Partnership or LLC

Can a partner or member trade their share of a property interest upon sale?

One of the most common questions asked of a qualified intermediary involves the situation in which one or more members or partners in a limited liability company (LLC) or partnership wish to do a 1031 exchange and others simply wish to cash out. There are several practical difficulties in this regard starting with Section 1031 itself. The section generally provides

“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged for property of like kind which is held for productive use in trade or business or for investment”.

However the section also provides for several exclusions to the ability to trade any qualified use asset and one of those exclusions states “This subsection shall not apply to any exchange of interests in a partnership." As a result, the challenge here is to allow members to go their separate ways while not deeming them attempting to trade in their capacities as members.

While there are multiple ways to structure transactions allowing various members to effectively trade their interest, by far the most common technique is for the outgoing member to have the LLC redeem the member’s interest and to convey by deed the applicable percentage interest in the property equivalent to the member’s former share. The transfer to the member and the subsequent trade by that person is generally referred to as a “drop and swap.”

How is a 1031 drop and swap done?

A 1031 tax exchange drop and swap can take place in several different ways. As mentioned above, when the majority of members wish to cash out, the taxpayer can transfer his membership interest back to the LLC in consideration of his receipt of a deed for a percentage fee interest in the property equivalent to his former membership interest. The taxpayer would then own a tenant in common (TIC) interest in the relinquished property together with the LLC. At closing each would provide their deed to the buyer and the former member can direct his share of the net proceeds to a qualified intermediary.

At times, the majority of members will wish to complete an exchange and one or more minority members will wish to simply cash out. The drop and swap can be used in this instance also by dropping applicable percentages of the property to the exiting members while the limited liability company completes an exchange at the LLC level and the former members cash out and pay the taxes due.

Meeting the “Held For” Requirement in a Drop and Swap

As indicated above, in order for property to be exchanged, it must have been held by the taxpayer for use in a business or for investment. So, if on the eve of the closing on the sale of the relinquished property a fee interest is conveyed to the exiting member, that member would be hard pressed to claim that she personally had held the property for any real period of time. However, when outgoing members wish to cash out, the “held for” requirement is less of an issue since the exchange is done at the LLC level and the LLC has clearly held the property for a qualified use for a significant length of time. It does not matter that the outgoing members will not have satisfied the holding period requirement since they are not seeking exchange status.

For quite some time there have been recommendations from different groups to the IRS to allow outgoing members to be able to tack on their holding period as members to their individually-held ownership interest prior to an exchange. The Joint Committee of Taxation, which every several years comes up with suggested tax-related recommendations, has stated:

“For purposes of determining whether property satisfies the holding requirement under Section 1031 like kind exchange rules, a taxpayer’s holding period and use of property should include the holding period of and use of the property by the transferor, in the case of property….distributed by a partnership to a partner…”

To date the IRS has not adopted this position. If anything, over time the drop and swap appears to be increasingly disfavored by the IRS.

IRS Form 1065 U.S. Return of Partnership Income

In 2008, as part of the IRS’ attempt to limit drop and swap transactions, Schedule B 14 was added to Form 1065. Schedule B 14 asks “At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or other undivided interest in partnership property." Prior to the inclusion of this check-the-box requirement, drop and swaps were frequently done on a “don’t ask, don’t tell” basis.

As a result of this reporting requirement, it is far better, when planning on a member exchange, to distribute out to the member(s) in a tax year prior to the year in which the sale of the property takes place. This enhances the holding period requirement and separates the drop to a prior tax year from the year in which the former member is completing an exchange. Most Section 1031 experts also strongly suggest making any of these changes prior to entering into a contract for sale.

Underlying Loan Considerations

When a deed of conveyance to a fractional interest in the real estate is given to the outgoing member, that deed is subject to whatever debt is on the property, however the debt is an obligation of the LLC and not that of the member. As a result, the conveyance does not, by itself, act to transfer a pro-rata amount of debt to that member. In order to avoid all the debt remaining against the LLC, the Operating Agreement or the Partnership Agreement needs to be amended to allow for a special debt allocation to flow through to the member as part of his receiving a deed to the fractional interest.

Almost all loans secured by property contain “due on transfer” clauses. So conveying an interest in the property to one or more members may constitute a technical violation under the loan documents. This is often overlooked since the loan payments are kept current and the property would likely be sold before a lender took notice of any transfer.

Deemed Partnership

There is a long history of case law in which the IRS has successfully argued that if a TIC holding has the attributes of a partnership, the co-ownership relationship will be deemed a partnership. This would negate a drop and swap. Although there are many factors that go into determining whether a co-ownership constitutes a de facto partnership, the single largest factor is the degree in which the property is managed by the TICs. The least amount of management by the co-owners is helpful to avoid partnership characterization. Often in an attempt to deal with this consideration, the co-owners will appoint a single co-owner as management agent for the group or will have an outside management company manage the property.

For other various reasons, co-ownership groups will sometimes enter into a tenant in common agreement setting forth their respective rights and relationship. The terms of such an agreement comes from IRS guidance in the form of Rev. Proc. 2002-22. These agreements are often used by lawyers advising clients in order to rebut the argument of a deemed partnership. It is generally understood in the legal community that it is almost impossible for a co-ownership structure to adhere to each and every requirement set forth in the Rev. Proc., but many people try to pattern a tenant in common arrangement to include as many of the provisions as possible. Caution should be taken to avoid the situation where a TIC agreement is entered into, but its terms are ignored in whole or in part by the co-owners.

Summary

The possibility of structuring of a 1031 tax exchange by a subsection of the partners in a partnership or members in an LLC, is one of the most common questions asked by taxpayers to their exchange facilitator or their advisers. While at one time this was done regularly and with apparent impunity, over time the IRS has taken steps to limit this deferral opportunity when the taxpayer has failed to hold the property for an amount of time. The technique of “dropping” an interest to a partner in the form of a tenant in common ownership of title to the property and then “swapping” that interest is very popular. The same can be true when a member wishes to cash out where the LLC seeks to do an exchange. There are some planning steps that can be taken in order to provide the exchange transaction the best chance to pass IRS muster.

Updated 4/4/2022.

Cash Out Refinance Before or After a 1031 Exchange?

Anonymous — Mon, 21 Mar 2022 22:24:58 +0000

Cash Out Refinance Before or After a 1031 Exchange?

Anonymous (not verified) Mon, 03/21/2022 - 22:24

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Cash Out Refinance Before or After a 1031 Exchange?

Most taxpayers wish to defer tax in full when completing a 1031 exchange. In order to accomplish this, one simple rule of thumb is that the taxpayer must trade “up or equal” in value. Perhaps a better way to look at this is to make sure the net proceeds of sale (i.e. the amount held in the exchange account) are used in full and the taxpayer puts on equal or greater debt on the new property compared to the amount paid off at the time of closing on the sale. Another expression sometimes used is that the taxpayer should have “no net debt relief.” Any cash taken out at closing and any debt that is not covered could be subject to:

Capital gains tax
Recapture of depreciation
State taxes
Net Investment Income Tax (also known as Affordable Care Act tax)

Oftentimes with exchange transactions, taxpayers wish to receive some cash out for various reasons. Any cash generated at the time of the sale that is not reinvested is referred to as “boot” and the amount is taxable. There are a couple of possible ways to gain access to that cash while still receiving full tax deferral.

Refinancing Relinquished Property Prior to Closing

For an owner of real estate, not engaging in a 1031 exchange, who wishes to refinance it at any time, any cash proceeds received are not subject to tax. However, in many cases, a taxpayer looking ahead to an upcoming exchange of his property may find himself with a high amount of equity and relatively low (or no) debt, this will require him to reinvest all the cash (and match debt). The taxpayer may wish to finance or refinance the property pulling cash out and later go to closing with higher debt and lower cash equity, as a result his reinvestment requirements for the replacement exchange property are suddenly very different. Essentially he walks away from the transaction with the debt on the property paid off, cash in his pocket, higher debt and lower equity in his replacement property and total tax referral The problem with this approach is that the IRS does not like it. It is almost like cheating. Essentially it is substituting new debt for cash taken out. Since the taxpayer cannot take out cash on a tax deferred basis at closing, essentially doing the same thing just prior to the closing should be disallowed as well. The IRS does not look favorably upon a step transaction, which basically means that if something is not allowed to be done in a direct fashion (taking out cash at closing), by taking a few additional steps to avoid the application of the rule, is not allowed either.

There are a couple of facts which may improve the IRS position on these refinance transactions. One of these is the impression that the refinance is not done in anticipation of the exchange of the property. In general, the more time that elapses between any cash out refinance and the eventual sale of the property is in the taxpayer’s best interest There is no bright line safe harbor for this, but at the very least if it is done somewhat prior to listing the property, that fact would be helpful. The other consideration that comes up a lot in IRS cases is the presence of independent business reasons for the refinance. Maybe the taxpayer’s business is having cash flow problems. Maybe the property needs a new roof, etc. To the extent that the refinance is done for other reasons and not solely to effect a favorable change to the debt and equity numbers, a taxpayer should be able to refinance even while contemplating a subsequent 1031 exchange of the property.

Refinancing Replacement Property After Closing

As was stated above, in the absence of any exchange transaction, a taxpayer who chooses to do a cash out refinance does not trigger any tax. The question then is whether that principle applies to refinancing to pull equity out after the acquisition of the replacement property is complete. Is that taxpayer in any different position from one who is doing a cash out refinance for property held but not part of an exchange transaction? Probably not and accordingly, the IRS does not seem to disallow these post-exchange refinancings. The American Bar Association Section on Taxation addressed these issues, and others, as part of an open report it prepared after the exchange rules came out. The committee concluded that in the case of pre-exchange refinance the taxpayer is no longer obligated to pay the debt once the loan is paid off at the closing, while still retaining the cash. In a post-exchange transaction, the taxpayer retains the cash but has an outstanding obligation to repay the debt. The committee concluded:

“The key to the distinction between pre-and post-exchange refinancings is that the taxpayer will remain responsible for repaying a post-exchange replacement property refinancing following completion of the exchange whereas the taxpayer by definition will be relieved from the liability for pre-exchange relinquished property refinancing upon transfer of the relinquished property. A fundamental reason why borrowing money does not create income is that the money has to be repaid and therefore does not constitute a net increase in wealth.”

Consistent with this reasoning, one noted author used the term “nanosecond” to indicate how long a taxpayer needs to wait before entering into a cash out refinance on the replacement property. In other words, once a taxpayer owns the replacement property and refinances it incurring a repayment obligation, that taxpayer is in no different position than anyone else owning property and refinancing it. Most authors take a similar position, but caution not to have the cash out refinance done concurrently with the acquisition of the property nor to have it prearranged prior to the purchase of the property. Best practice would be to start the cash out refinance process any time after the replacement property acquisition.

Summary of Cash Out Refinance in 1031 Exchange

Taxpayers sometimes wish to generate some cash on or around the time of selling relinquished property as the first leg of an exchange. Any sums paid to the taxpayer at closing are subject to taxation. As an alternative, a taxpayer may wish to refinance the relinquished property before the exchange or refinance the replacement property after the exchange. In the absence of mitigating factors, refinancing the relinquished property is generally discouraged, however refinancing the replacement property should not result in any tax issues and should not jeopardize the tax deferral on the transaction. The primary logic for these positions is that with the former, the taxpayer is able to pay off the loan debt at the closing, whereas in the second alternative the taxpayer retains the debt obligation as an offset to the receipt of cash.

Updated 3/21/2022.

What is "Like-Kind" in 1031 Exchange?

Anonymous — Wed, 20 Oct 2021 16:32:18 +0000

What is "Like-Kind" in 1031 Exchange?

Anonymous (not verified) Wed, 10/20/2021 - 16:32

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What is "Like-Kind" in 1031 Exchange?

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are dos and don'ts and several gray areas of which taxpayers should be aware. For the taxable gain to be deferred, specific key requirements must be satisfied.

There Must Be No Constructive or Actual Receipt of Exchange Funds
Exchange Must Be Equal or Up in Value
Must Follow Exchange Time Limit & Identification Requirement
Properties Must Be Held for Business or Investment Purposes
Properties Must Be Exchanged
Properties Must be "Like-Kind": Two real estate assets of a similar nature irrespective of class or quality, that (if exchanged by the rules) can be replaced without realizing any taxable gain.

Defining Like-Kind Requirements

There are many requirements to ensure a compliant 1031 exchange. Potential exchangers frequently pose questions on what property is considered "like-kind" to another property. Generally, any type of genuine property interest is like‐kind to any other type of real property. The properties do not have to be of the same nature. For example, an exchanger could exchange a single-family home held as a rental property for a vacant parcel of land purchased as an investment. Section 1031 defines like-kind property as any property owned for investment or use in a trade or business. The relinquished property and the replacement must be of like-kind to qualify for exchange treatment.

Examples of Property that are not Like-Kind

In simple terms, the taxpayer must use both properties involved in exchange for trade, business, or investment purposes. So, for example, although a personal residence or a vacation home is real estate, it would not qualify for exchange treatment since it is held for personal use and not for investment. Property owned as part of a dealer's or developer's inventory also does not qualify. The rules provide that the words "like-kind" reference the nature or character of the property and not its class or quality. Under regulations, things to consider are "the respective interests in the physical properties, the nature of the title conveyed, the rights of the parties, and the duration of the interests."

Like-Kind Examples

Based on these provisions, like-kind is defined in the tax code quite liberally in that any real estate is like-kind to any other type of real estate. For example, whether the real estate is improved or unimproved is not significant. Many court cases and rulings have addressed the like-kind standard for real property. Regulations provide examples of like-kind real property, some of which are obvious, others less so. Below are examples of real property interests that one can exchange for any other type of real estate:

Strip center for multi-family rental
Vacant lot for improved property
Improvements on property not already owned
Oil, gas and other mineral interests
Water rights
Cell tower, billboard and fiber optic cable easements
Conservation easements

The Regulations require the replacement property to be located within the United States (and some territories) and qualify as like-kind for the property sold in the United States. For example, a taxpayer cannot use proceeds from an office building in Dallas to acquire an investment property in Mexico. While a Mexican condominium investment sounds like a great retirement plan, after the extended rental period is over it's not going to pass muster with the IRS when it comes to Section 1031. Property located outside the United States is like-kind only to other property located outside of the United States.

Summary

Like-kind real estate are assets of the exact nature or character, irrespective of class or quality, one can exchange that without realizing tax liability under Section 1031
Properties must be held for use in a trade or business, or investment purposes, but do not need to be similar in class or quality
Any type of real estate is like-kind to any other real estate interest
Many non-traditional real estate interests are like-kind to conventional interests
Properties must be in the United States (and some US territories and possessions) to qualify as like-kind to other properties in the United States

Be sure to discuss 1031 exchange plans with a trusted Qualified Intermediary. Following the like-kind requirements is just one of several rules that must be adhered to in order to complete a successful 1031 exchange.

#Revolutionize1031 at FEA 2021

Anonymous — Mon, 27 Sep 2021 14:59:09 +0000

#Revolutionize1031 at FEA 2021

Anonymous (not verified) Mon, 09/27/2021 - 14:59

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#Revolutionize1031 at FEA 2021

Last week, several members of Accruit joined other industry colleagues at the annual FEA conference in Chicago to hear about the latest updates regarding tax reform and the potential impact to 1031s. Through the efforts of the 1031 Coalition, the 1031 industry was successful in ensuring capping 1031s were not part of the revenue offsets presented by the House of Representatives earlier this month. This is a positive outcome as we typically see the Senate follow the lead on tax offsets from the House. Furthermore, on the Senate floor last month, Senator Kennedy (LA) submitted an amendment during a “vote-a-rama” to retain 1031s in their current state. Per the request of Senate Finance Chairman Wyden (OR) the vote was taken as a voice-vote and received unanimous support from all Senators.

This week, Brent Abrahm, Accruit President & CEO, participated in three significant virtual calls with Senators to further underscore the importance of retaining 1031s as an effective stimulus for our country. Along with other members of the 1031 Coalition, critical points were made regarding the positive impact of 1031s. A few key supporting facts were highlighted in each call; 1031 like-kind exchanges allow the country to repurpose inefficient commercial properties, 1031s actually produce a positive economic benefit, increase income taxes, and create additional jobs by stimulating our economy, and any attempts to cap the 1031 provision is equivalent to repeal. Senators Bennet (CO), Tester (MT) and Kennedy (LA) all showed wide support and understanding of our data and points of impact.

The efforts are not over and work still needs to be done. Accruit will participate in additional Hill meetings in the coming weeks. We still ask that anyone who may be impacted by a change in the 1031 code, please ACT NOW and share your support.

Take Action To Protect Section 1031 Like-kind Exchanges - Tax Reform Update

Anonymous — Thu, 09 Sep 2021 16:03:29 +0000

Take Action To Protect Section 1031 Like-kind Exchanges - Tax Reform Update

Anonymous (not verified) Thu, 09/09/2021 - 16:03

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Take Action To Protect Section 1031 Like-kind Exchanges - Tax Reform Update

The White House recently released details of President Joe Biden’s proposed $1.8 trillion American Families Plan. The Plan includes a cap on gains deferred through a 1031 exchange as a way to defray part of the Plan's overall cost. The proposed limitation to 1031 exchanges would negatively impact American families and businesses.

This week, House Ways and Means Chairman Richard Neal notified the Committee’s members to be ready for the Committee reconciliation markup September 9-14. The Committee's mark-up of their portion of the reconciliation bill will include all tax-related items in the legislation -this may include the proposed cap on Section 1031.

By clicking 'take action today' below you can quickly and easily send a letter to your representatives to let them know they should preserve Section 1031 rules and regulations in their current state.

For those who wish to submit a letter directly to members of the House Ways & Means Committee, we have included a link to a letter template and a list of majority members' contact information.

Accruit Launches SaaS Offering of Exchange Manager Pro℠ Software

Anonymous — Thu, 26 Aug 2021 17:19:41 +0000

Accruit Launches SaaS Offering of Exchange Manager Pro℠ Software

Anonymous (not verified) Thu, 08/26/2021 - 17:19

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Accruit Launches SaaS Offering of Exchange Manager Pro℠ Software

SaaS Offering of Exchange Manager Pro^SM

In 2020 and 2021, we have seen an unprecedented surge of interest in, and execution of, 1031 exchanges in all areas of the country. Qualified Intermediaries (QIs) all over America are challenged to keep up with demand for 1031 exchange services well outpacing all previous transactional levels. With that in mind, the time is right for Accruit to offer our internally developed, patented, safe, simple, and secure software, Exchange Manager Pro^SM, previously available only to Accruit and select partners and clients, for white-label licensing to the QI industry as a whole.

The Benefits of Accruit's Exchange Manager Pro^SMSoftware

Administrative Efficiency: By simplifying process flow, reducing duplicate data entry, and pushing some data collection out to the taxpayer or their advisors where possible, Exchange Manager Pro^SM reduces time needed for administrative tasks during exchange processing by more than 50%, while reducing the opportunity for errors. Decrease the time spent on mundane clerical tasks so you can spend more focused time with your clients.
Simplify and Accelerate Document Creation: In the current real estate climate, closings often pop up with very little warning, and creating exchange documents becomes a sudden priority. Developed for scale and efficiencies, Exchange Manager Pro^SM reduces the time to create documents to just a few minutes, reducing the impact of such an interruption to an exchange specialist’s workflow while increasing client satisfaction.
System Notifications: Key communications such as deadline reminders, detailed next steps, and distribution of documents are all highly automated and configurable while opting in or opting out clients, advisors, referral sources, and other associated contacts as desired. Make sure all parties are aware of relevant milestones without having to maintain templates and set reminders.
Central Repository for all Exchange Documents and Other Data: Exchange Manager Pro^SM retains all exchange documents, system notifications, notes, and exchange data in one cloud-based location. Just a handful of clicks take you from exchanger details to exchange overview to exchange documents to fee information to sale or purchase details.

1031 Exchange Timeline Overview and Considerations

Anonymous — Thu, 19 Aug 2021 17:23:52 +0000

1031 Exchange Timeline Overview and Considerations

Anonymous (not verified) Thu, 08/19/2021 - 17:23

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1031 Exchange Timeline Overview and Considerations

IRC Section 1031 has been around for more than 100 years. Although the overall concept and purpose of 1031 like-kind exchanges have largely remained the same, the regulations and sequence of events an exchange must comply with have evolved. Legislation has sought to address and prevent potential wrongdoings or misinterpretation, as was done in the landmark legal ruling in the Starker vs US case. To fully benefit from the tax deferral, the requirements to exchange are as follows:

An exchange must be facilitated through a Qualified Intermediary (QI)
Property must be held for investment or business purposes
There must be no constructive or actual receipt of exchange funds
Taxpayer must adhere to the time limits set out in the tax code
Property must be "like-kind"
The property exchanged into must be equal or up in value

The requirement that investors tend to feel is the most restrictive once they deem their property eligible for exchange is the strict timeline they must follow.

Forward Exchange

In a typical forward exchange, the taxpayer will hire a Qualified Intermediary (QI) to help transact their exchange. The taxpayer will list their property, and once it sells, the QI will hold the proceeds from the sale of the relinquished property for later use in purchasing the identified replacement property(s). Once the relinquished property sells, the taxpayer has 45 days to identify replacement property(s) and 135 days after that to finalize their exchange for a total of 180 days.

Reverse Exchange

The Internal Revenue Service (IRS) does not allow a taxpayer to hold the replacement property and the relinquished property simultaneously. This restriction can present challenges to investors who would like to purchase their replacement property before selling their relinquished property when a reverse exchange is required. The timeline of a reverse 1031 exchange, sometimes called a parking exchange, is the same as a forward exchange. The main difference is that instead of the QI holding funds, they hold a property. After hiring the qualified intermediary, the taxpayer and QI will open an LLC that will act as the Exchange Accommodation Titleholder (EAT), which will hold the replacement property as the taxpayer sells the relinquished property. Once the EAT has taken the title of the new property, the exchanger has 45 days to identify the property they will be selling. After the initial 45 days, the taxpayer has the remaining 135 days of the total 180 to sell the property they identified and finalize the exchange.

Build-to-Suit or Improvement Exchange

There are times when a taxpayer would like to sell a property and exchange it for a property they would like to develop or improve. Build-to-suit exchanges refer to exchanges in which improvements are made on the property acquired. In a build-to-suit or improvement exchange, the taxpayer can sell their property to purchase and improve a new property or purchase the replacement property first and then use the funds from the sale of the relinquished property to pay back loans used to fund the initial purchase and improvements. In both cases, the taxpayer has 180 days to use the balance of funds to improve the property. Any funds that have not been used during the parking period are considered real estate “boot” and are subject to capital gain tax. The 180-day time limit begins when the EAT, set up with the QI before the exchange, assumes title of the property.

1031 Exchange Timeline Considerations

Following the timeline on a 1031 exchange is not always as easy as it sounds. A taxpayer may not be able to identify a suitable property to buy in the 45-day identification period. A taxpayer may not be able to sell their property within 180 days. Improvements on a property may take longer than 180 days. Once a safe harbor provision is not met, the exchange is no longer eligible for tax deferment.
Here are a few ways of setting yourself up for a successful exchange:

If you want to begin a forward exchange, start looking for your replacement property as early as possible
You can stretch out this extra period by delaying the close date on your relinquished property, preventing your 45-day countdown from starting
If you have already identified a property you would like to purchase but have not been able to sell your current property, consider a reverse exchange. That way, you will ensure your purchase and have 180 days to sell the old property
To avoid unwanted delays that may cut your 1031 exchange timeline short, ensure that your financing is in order before entering into an exchange agreement

1031 Exchange Timeline and Identification Requirements

Anonymous — Fri, 06 Aug 2021 18:50:25 +0000

1031 Exchange Timeline and Identification Requirements

Anonymous (not verified) Fri, 08/06/2021 - 18:50

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1031 Exchange Timeline and Identification Requirements

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are dos, don’ts, and several gray areas of which taxpayers should be aware. As an experienced Qualified Intermediary, Accruit is accustomed to dealing with all types of complex exchanges and wants to make sure that the complexity of exchange does not deter property owners from considering one. Accruit can help you put the pieces together for a successful 1031 exchange.

For the taxable gain to be deferred, specific vital requirements must be satisfied:

Properties must be exchanged, rather than sold and then purchased
There must be no constructive or actual receipt of proceeds received by the taxpayer from the transfer of the relinquished property pursuant to the relinquished property contract
Properties must be “Like-Kind”
Properties must be held for business or investment purposes
Exchange must be equal or up in value
The exchange must follow time limit and identification requirements: A taxpayer must acquire or identify the target replacement property within 45 days after the transfer of the relinquished property. Properties received (purchased) within the 45-day designation period are deemed to be identified. The replacement property must be designated in a written document, unambiguously described, signed by the taxpayer, and received by the qualified intermediary on or before the 45th day. If the taxpayer identifies replacement property within the designated period, the exchange period end date may be extended up to 180 days from the transfer of the first relinquished property. This provides the taxpayer with additional time to complete the exchange. However, it might be necessary for the taxpayer to file a tax-filing extension to utilize the full 180 days.

Property Identification

In a typical forward exchange, the taxpayer will hire a 1031 exchange qualified intermediary (QI) to help transact their exchange. The QI will hold the proceeds from the sale of the relinquished property to use later to purchase the identified replacement properties. Once the relinquished property is sold, the taxpayer has 45 days to identify replacement properties and 135 days after that to finalize their exchange for a total of 180 days. The property requirements can be found in more detail in “1031 Exchange Explained: Equal or up in Value”. Here’s an example to better explain the timing regulations.

“Mr. Clark wants to sell his farmland and exchange it for a less laborious property. Before he lists his property, Mr. Clark reaches out to the QI he would like to work with and begins the necessary documentation for his exchange, then listing his farm for sale. Mr. Clark can look for replacement properties while his farm is on the market, but his identification period officially begins the day his farmland sells.

During his 45-day identification period, Mr. Clark identifies a small commercial office building he would like to acquire. One of the critical conditions when identifying property is the specific description when relaying the information to your QI. It would not suffice if Mr. Clark were to contact his QI and describe the property he would like to acquire as “an office building near the business district.” Mr. Clark must unambiguously identify his property, with an address, as “100 Main St. Denver, CO.””

There are two rules to follow when describing specified property:

Replacement property is identified only if it is unambiguously described in the written document or agreement
Real property is generally unambiguously described if it is characterized by a legal description, street address, or distinguishable name (e.g., the Mayfair Apartment Building)

Keep in mind that once a property is identified within the 45-day period, the only way to end the exchange early is if there occurs a material and substantial contingency that relates to the exchange is provided for in writing is beyond the taxpayer’s control or any other disqualified person. Otherwise, the funds must remain in the exchange account for the entire 180-day exchange period. For example:

“Mr. Clark identifies the property he wants to acquire early on in the 45 days. Once he gives written and unambiguous notice, the funds received from the sale of his old property must remain with the QI until the identified property is purchased or 180 days whichever is earlier.”

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