1031 exchange rules

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.

Exchanging Equal or up in Value

Anonymous — Thu, 22 Jul 2021 16:23:19 +0000

Exchanging Equal or up in Value

Anonymous (not verified) Thu, 07/22/2021 - 16:23

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Exchanging Equal or up in Value

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are do's and don’ts and several gray areas of which taxpayers should be aware. Here at Accruit, we are accustomed to dealing with all types of complex exchanges, and we want to make sure that the complexity of exchange doesn't deter you from considering one. We'll help you put the pieces together for a successful exchange. For the taxable gain to be deferred, specific key requirements must be satisfied:

Properties Must Be Exchanged, Rather than Sold and then Purchased
There Must Be No Constructive or Actual Receipt of Exchange Funds
Properties Must be "Like-Kind"
Must Follow Exchange Time Limit & Identification Requirement
Properties Must Be Held for Business or Investment Purposes
Exchange Must Be Equal or Up in Value:
- To potentially defer all of the taxable gain, a property owner must first reinvest all of the equity in the relinquished property into the replacement property. Second, the purchase price of the property acquired must equal or exceed the sale price of the relinquished property. Typically, this requires debt on the new property to equal or exceed the debt that is paid off on the relinquished property.

Identification Rules: The 3-Property Rule

The 3-property rule states that the replacement property identification can be made for up to three properties, meaning that an exchanger may identify more than one alternate property to be received in an exchange. The taxpayer can identify and purchase up to three replacement properties after relinquishing their initial property to the qualified intermediary, like Accruit. The amount totaled at the end of the identification is not relevant to the requirements of section 1031, as long as it is not more than three properties. A majority of taxpayers will utilize this rule. Here is an example of the utilization of the 3-property rule: Ms. Garcia begins a 1031 exchange in Minnesota with Accruit, with a lot valued at $325,000. Before identifying her new replacement properties, Ms. Garcia confirmed to Accruit that she has identified three potential properties and intends to acquire only one. Within 45 days Ms. Garcia unambiguously identifies three new properties valued at $325,000, $350,000, and $370,000, respectively. As long as Ms. Garcia receives one of these properties within the replacement period, she has satisfied the 3-property rule.

Identification Rules: The 200% Rule

The 200% rule states that the taxpayer may identify:

“Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the taxpayer.”

Another way to state this is that the taxpayer can identify any number of properties and close on any number of them if the sum of the market value of all of them does not exceed twice the market value of the relinquished property. There is some uncertainty of how the market value of these properties is determined. The listing price? The amount the seller is willing to accept? The amount that the taxpayer agrees to pay? The answer is unclear, but using the listing price would surely be a safe choice. Here is an example of the 200% percent rule: Ms. Garcia is exchanging her lot valued at $300,000. She identifies four new properties, each priced at 100,000. Although Ms. Garcia identified more than three properties, their combined value does not equal more than 200% of the value of her relinquished property. Therefore, it has satisfied the identification rules.

Identification Rules: The 95% Rule

The 95-percent rule is defined as follows:

"Any replacement property identified before the end of the identification period and received before the end of the exchange period, but only if the taxpayer receives before the end of the exchange period identified replacement property the fair market value of which is at least 95 percent of the aggregate fair market value of all identified replacement properties."

As a practical matter, this rule is difficult to adhere to. It provides that should the taxpayer have overidentified for the first two rules, the identification can still be considered valid if the taxpayer receives at least 95% in value of what was identified. For example, suppose a taxpayer identified four properties or more whose market value exceeds 200% of the relinquished property value, to the extent that the taxpayer received 95% of what was identified the identification is deemed proper. In the real world, it is difficult to imagine this rule being relied upon by a taxpayer. Let's use Ms. Garcia as an example again, she is exchanging her $300,000 lot in Minnesota, and she overidentifies a total of 21 lots, each priced at $35,000. Ms. Garcia identified more than three properties and exceeded 200% of the value of her relinquished property. However, she can still keep her exchange valid if she purchases at least 95% of the value of those 21 lots she identified. If Ms. Garcia instructs her intermediary to convey at least 20 of those lots during the replacement period, she has satisfied the identification rules because she is purchasing at least 95% of the $735,000 she identified, and her exchange is still valid.

Conclusion

The relinquishment and replacement of properties are vital components of 1031 exchanges. Navigating the regulations in a 1031 exchange can seem daunting, and there are many questions throughout the process. Can you buy two properties in a 1031 exchange? What are the 1031 exchange rules in Florida or Kentucky? It is strongly recommended that you discuss your exchange with your tax and legal advisors along with a qualified intermediary. Accruit's leadership team has over 200 years of combined experience working with taxpayers and their advisors in structuring successful 1031 exchanges.

At Accruit, we handle all types of complex exchanges. Have a situation you'd like to speak to an expert about? No problem. We're happy to have a free, no-obligation consultation with you.

1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

Anonymous — Thu, 01 Jul 2021 19:13:39 +0000

1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

Anonymous (not verified) Thu, 07/01/2021 - 19:13

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1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

When you sell a piece of real estate the value of which has appreciated overtime, you have to pay a lot of taxes. After all you can’t really fully benefit from your real estate investment without paying taxes, can you? Actually, you can.

Back in 1921 Congress concluded that an investor simply switching from one property to another was only continuing the same investment and should not incur a taxable event. They called this a 1031 like-kind exchange. So, when you sell a piece of real estate and purchase a new one of at least equal value, you can defer tax payments. The key, follow the regulations.

First, choose a qualified intermediary or ‘QI’ such as Accruit, to process the exchange of properties. Next, transfer the property your relinquishing through the QI to the buyer. The QI holds the funds on your behalf for the time of sale to the time of purchase. Within 45 days, settle on possible new properties and within 180 days close on the replacement property which the QI acquires with the money held from the initial sale. The new property is transferred through the QI to you investor completing the task exchange between you and the QI.

When you partner with a trustworthy and experienced QI 1031 exchanges allow you to defer taxes that can otherwise eat up to a third of your profit. To speak to the leader in 1031 exchanges contact Accruit today.

Support Section 1031 Like-Kind Exchanges

Anonymous — Thu, 27 May 2021 15:56:32 +0000

Support Section 1031 Like-Kind Exchanges

Anonymous (not verified) Thu, 05/27/2021 - 15:56

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Support Section 1031 Like-Kind Exchanges

Section 1031 of the tax code positively impacts more than 19,500 communities, supports 568,000 jobs and adds $55 billion in value to our GDP. 1031 like-kind exchanges facilitate repurposing commercial real estate to a more productive use and helps American farmers better finance their operations. President Joe Biden’s proposed American Family Plan places severe limitations on Internal Revenue Code Section 1031 like-kind exchanges. Our communities will be severely impacted if we do not take action to preserve IRS Section 1031.

How can I help?

Submit a letter to congress
Spread the word! Talk to those around you about this issue and why it matters

Section 1031 impacts the growth of our communities.’ Support Section 1031 today! #Revolutionize1031

The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

Anonymous — Thu, 20 May 2021 17:12:11 +0000

The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

Anonymous (not verified) Thu, 05/20/2021 - 17:12

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The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

Most Section 1031 Like-Kind Exchange transactions involve a taxpayer who sells a relinquished property and then acquires a replacement property within the appropriate guidelines. An increasing number of exchangers are structuring their transactions as 1031 reverse exchanges, wherein the taxpayer first arranges for the acquisition of the replacement property and later sells their relinquished property. But there is a hybrid solution that often is overlooked – this is a combination forward-reverse exchange.

The Situation

Karen currently owns a small strip center and has received an attractive offer to sell the property for $500,000. She also has a small office building she is trying to sell, also worth about $500,000. She was planning to sell both properties and combine the proceeds to acquire replacement property worth at least $1,000,000.

The Problem

Karen’s small strip center will close in about 45 days, but she has not yet received any offers on the office building. The fact that she has identified a suitable replacement property for which the seller has agreed to accept $1,000,000 if she can close in 60 days further complicates matters. With the office building being under contract and not yet the subject of negotiations, she is worried about how to accomplish her 1031 exchange goals.

The Solution: A Combination Forward-Reverse Hybrid 1031 Exchange

Karen will structure the sale of her small strip center as part of a Section 1031 Like-Kind Exchange. After consultation with her attorney and Accruit as the Qualified Intermediary (“QI”), Karen understands both the forward 1031 exchange and reverse 1031 exchanges process.

The sale of the strip center took place on March 1, 2021, and the exchange proceeds were sent directly to Accruit, the qualified intermediary, to be held on her behalf until the purchase of her replacement property. This is necessary because a taxpayer participating in a like-kind exchange cannot be in actual or constructive receipt of the net sale proceeds while the exchange is pending.

Within 45 days after the closing on the sale, Karen identified a one-half interest in her target replacement property using Identification Rules in 1031 Exchanges. Karen also worked closely with the qualified intermediary, Accruit, to begin the reverse exchange component of her transaction. Accruit, through its affiliate, known as an Exchange Accommodation Titleholder (“EAT”) will take title to the other one-half interest in Karen’s target replacement property.

Specifically, Karen will lend the additional $500,000 to a new LLC (let us call it Newco LLC), with the EAT as its sole member, which was established specifically for the purpose of facilitating the reverse 1031 exchange. The loan from Karen to Newco LLC will be documented by a note and secured with a pledge of the EAT’s membership interest in Newco LLC.

Karen ultimately closes on the acquisition of the target replacement property on April 30, 2021, with title vested 50% in her personal name and 50% in Newco LLC, as tenants in common. (Learn more about Tenants in Common.) On June 1, 2021, while the replacement property is held by Karen and Newco, Karen enters a contract to sell the small office building, her second relinquished property, for $540,000, with a closing date of August 20, 2021. At closing, after all closing costs are paid, the net proceeds of $500,000 will be deposited into Karen’s exchange account with Accruit. Karen will acquire the remaining 50% tenancy in common interest from the EAT and will direct Accruit to transfer the funds from the exchange account to the closing agent for this portion of the transaction. Immediately Upon receipt of those funds the EAT will direct the closing agent to remit that sum to Karen to pay off the loan that was made to the EAT to acquire the new property. Upon payoff of the $500,000 loan owed to Karen, Karen receives full ownership of the replacement property. In this manner it is the same as if Karen had acquired the replacement property outright from seller.

The Result

Karen used the forward exchange for the sale of the strip center and the reverse exchange for the sale of the office building to ultimately acquire 100% of the new building, deferring the taxes on both sales in the process. In doing so, Karen exchanged from two properties worth approximately $1,000,000 into a single, more desirable building worth about the same.

Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

Anonymous — Wed, 12 May 2021 22:46:16 +0000

Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

Anonymous (not verified) Wed, 05/12/2021 - 22:46

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Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

In a hot market or market’s with limited inventory, the 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window. (To read more about 1031 exchange process and rules, visit our 1031 explained page) Luckily, the 1031 exchange rules provide for the ‘Reverse 1031 Exchange’ to exist. Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence, also approved by the IRS, is often referred to as a “reverse 1031 exchange.” The reverse exchange technique essentially consists of an exchange accommodator holding or “parking” title to the new property on behalf of the taxpayer to avoid the taxpayer having simultaneous ownership of two properties. Immediately after the sale of the old property (but no later than 180 days) the exchange accommodator transfers the new property to the taxpayer. This 'technically' creates the proper sequence. Financing the Purchase of the Replacement Property

The concept of a Reverse 1031 exchange can sound attractive to many investors until the reality of financing the purchase of the replacement property is considered. For investors with the means to purchase the property outright in cash or those with strong lending relationships this can be relatively straightforward, however, for others they must ensure they take some nuances into consideration such as:

The title to the replacement property will be parked with an entity created by the Qualified Intermediary for the sole purpose of holding title to the property. The loan cannot be in the name of the taxpayer, but instead must be in the name of the parking entity. This requires a short-term bridge loan that can be refinanced into a longer-term loan or paid down once the old property is sold and new property is transferred into the name of the taxpayer. Many banks will not entertain these loans as they do not fit into their traditional lending model. It may take some time discussing with several local or regional banks to get them to understand the structure.
Ensure you have sufficient collateral and equity. Banks will underwrite the replacement property as well as look at the taxpayers overall financial position to ensure adequate coverage. Traditionally, banks are willing to lend between 65-75% of the replacement property’s value to qualified buyers depending on the type of property and quality of collateral.
Think about financing well in advance of pursuing a purchase through a reverse 1031 exchange. Banks take time to order appraisals and underwrite collateral for specialty bridge financing. This can be several weeks. If you are in a rush and can’t wait for a bank, there are lenders willing to provide these types of loans, but you are going to pay handsomely for it in rate and upfront fees

Financing a reverse exchange can be more difficult than a traditional loan, but it is common place for 1031s. Take the time and do the research by speaking with several banks and the right Qualified Intermediary - Accruit.

Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

Anonymous — Wed, 28 Apr 2021 17:06:43 +0000

Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

Anonymous (not verified) Wed, 04/28/2021 - 17:06

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Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

In considering selling an investment property in a fast-moving real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 explained page) In places like Dallas or Austin, Texas attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?

Luckily, the 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges.

Reverse 1031 Exchanges

Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “reverse 1031 exchange”.

The reverse exchange technique essentially consists of an exchange facilitator holding or “parking” title to the new property on behalf of the taxpayer to avoid the taxpayer having simultaneous ownership of two properties. Immediately after the sale of the old property (but no later than 180 days) the exchange company affiliate transfers the new property to the taxpayer. This 'technically' creates the proper sequence.

For example, an investor holding a commercial investment property in Dallas, Texas is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Fort Worth. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Dallas property and has 180 days to close on the sale to defer their gain into the newly purchased Fort Worth property.

Build-to-Suit or Improvement Exchange

Build-to-Suit, also known as Construction-to-Suit or Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.

In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.

As an example, an investor owns an office building in Austin, Texas and wants to invest in multi-family units in Houston. However, the only multi-family complexes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an improvement exchange of real estate whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the commercial property in Austin.

As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our Headquarters in Denver, Colorado or our Texas Regional Office in Dallas by calling (800) 237-1031 or emailing info@accruit.com for more information.

Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

Anonymous — Wed, 28 Apr 2021 16:52:41 +0000

Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

Anonymous (not verified) Wed, 04/28/2021 - 16:52

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Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 explained page) In places like Los Angeles or San Diego, California attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?

Reverse 1031 Exchanges

For example, an investor holding a single-family rental property in Los Angeles, California is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Anaheim. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Los Angeles property and has 180 days to close on the sale to defer their gain into the newly purchased Anaheim property.

Build-to-Suit or Improvement Exchange

In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.

For example, an investor owns an apartment rental in San Diego, California and wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an improvement exchange of real estate whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the apartment rental.

As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our offices by calling (800) 237-1031 or emailing info@accruit.com for more information.

Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

Anonymous — Wed, 28 Apr 2021 14:48:00 +0000

Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

Anonymous (not verified) Wed, 04/28/2021 - 14:48

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Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 explained page) In places like Miami or Jacksonville, Florida attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?

Reverse 1031 Exchanges

For example, an investor holding a commercial investment property in Jacksonville, Florida is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Tampa Bay. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Jacksonville property and has 180 days to close on the sale to defer their gain into the newly purchased Tampa Bay property.

Build-to-Suit or Improvement Exchange

In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.

For example, an investor owns an apartment rental in Miami, Florida and wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an improvement exchange of real estate whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the apartment rental.

As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our offices by calling (800) 237-1031 or emailing info@accruit.com for more information.

Reporting a 1031 Exchange on IRS Form 8824

Anonymous — Thu, 12 Nov 2020 20:14:21 +0000

Reporting a 1031 Exchange on IRS Form 8824

Anonymous (not verified) Thu, 11/12/2020 - 20:14

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Reporting a 1031 Exchange on IRS Form 8824

After the real estate transactions in a 1031 exchange have been completed, there is a final step to report the exchange to the IRS so that the deferral is recognized. Filing form 8824 is not simply "another" tax form. It is a critical step to appropriately document that a like-kind exchange has occurred. Once those financial statements are complete, accountants can utilize this information to prepare related tax returns. For owners who have completed a 1031 like-kind exchange, Form 8824 will need to be prepared and filed with the Internal Revenue Service (IRS).

What is Form 8824?

Titled, “Like-Kind Exchanges (and section 1043 conflict-of-interest sales)," Form 8824 serves two primary purposes:

To allow business owners to report the deferral of gains through Section 1031 tax deferred exchange transactions
To allow certain members of the Federal Government to report the deferral of gain through conflict-of-interest sales

The form is divided into four distinct parts, including:

Part I – Information on the like-kind exchange
Part II – Related Party Exchange Information
Part III - Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received
Part IV – Deferral of Gain From Section 1043 Conflict-of-Interest Sales

Part I – Information on the Like-Kind Exchange

This section covers the basics of the 1031 exchange, including:

Description of the like-kind property (given up)
Description of the like-kind property (received)
Date the given-up property was originally acquired
Date the received property was actually received

Part one also asks if any like-kind property was either sold to or purchased from a related party. If the answer is yes, then the form’s preparer must complete Part II. If the answer is no, then the preparer may skip Part II and move on to complete Part III.

Part II – Related Party Information

It’s interesting to note, this section does not require any calculations. It simply asks for some basic information about the related party transaction, including:

The related party’s name, address and relationship
Timing of any dispositions (by the related party) of the property received from property owner
Timing of dispositions related to the property acquired

Background on Related Parties

Part II addresses very specific concerns regarding what is known as basis shifting. In these transactions, related parties were working together by exchanging low basis property for high basis property with the immediate plans to sell, at a gain, the lower basis property. By following this strategy, related taxpayers were effectively reducing the gain on the sale of the low basis property. For like-kind exchange purposes, related parties are defined under Internal Revenue Code Section 267(b) or 707(b)(1) and can include:

Family members, including brothers and sisters, husbands and wives, lineal descendants, ancestors
Individuals and corporations, where more than 50% of the value of the stock is owned directly or indirectly by or for the individual
A corporation and a partnership if the same persons own more than 50% in the value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership.

Part III – Realized Gain or Loss, Recognized Gain, and Basis of Like-Kind Property Received

This entire section is dedicated to determining the results of the like-kind exchange. Of the 14 total lines contained within this section, eight are simple addition and subtraction fields. This leaves the form’s preparer with some additional work to gather the data for the remaining six fields. It’s critical to avoid being fooled by the form’s apparent simplicity. The tax preparer must understand the precise meaning of this section’s terminology and each line’s requirement in order to complete the form correctly. Amongst other things, Part III will require the following:

Fair market value and adjusted basis of other property given up
Cash received and fair market value of other property received
Net liabilities received by the other party

Part IV – Deferral of Gain From 1043 Conflicts-of-Interest Sales.

This section, although provides a reporting requirement for a deferral of Gain, has little to do with a like-kind exchange. Part IV requires reporting on capital gains deferral on the sale of the property that would cause a conflict for those serving as an officer or employee of the executive branch of the federal government. Congress enacted section 1043 to further the collective good by eliminating a tax-based barrier for entry into public service. Interesting, but not relevant to 1031s.

Summary

For the vast majority of property owners, part IV of Form 8824 will simply not apply, and as such it can be ignored. However, property owners should carefully report each and every exchange of like-kind property using the first three parts of this form. In doing so, property owners can effectively communicate to the IRS why the disposition(s) of their real estate, should not trigger any income taxation.

Accruit is a 1031 Exchange Qualified Intermediary and facilitates 1031 exchanges. Always consult your CPA or tax advisor for advice pertaining to your specific tax situation. For more information, visit www.accruit.com or call (800) 237-1031.

1031 exchange rules

What Happens if a 1031 Exchange Spans Two Tax Years?

What Happens if a 1031 Exchange Spans Two Tax Years?

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What Happens if a 1031 Exchange Spans Two Tax Years?

Realize Full Exchange Timeline by Filing for an Extension on Taxes

Convert Failed 1031 Exchange to Installment Sale

Implications of a Partial Exchange

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Exchanging Equal or up in Value

Exchanging Equal or up in Value

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Exchanging Equal or up in Value

Identification Rules: The 3-Property Rule

Identification Rules: The 200% Rule

Identification Rules: The 95% Rule

Conclusion

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1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

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1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

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Support Section 1031 Like-Kind Exchanges

Support Section 1031 Like-Kind Exchanges

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Support Section 1031 Like-Kind Exchanges

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The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

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The 1031 Exchange Hybrid Solution - Combining Forward and Reverse Exchanges

The Situation

The Problem

The Solution: A Combination Forward-Reverse Hybrid 1031 Exchange

The Result

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Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

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Reverse 1031 Exchange: Considerations in Financing the Purchase of Replacement Property

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Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

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Improvement and Reverse 1031 Exchanges in Fast Moving Texas Real Estate Markets

Reverse 1031 Exchanges

Build-to-Suit or Improvement Exchange

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Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

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Reverse and Improvement 1031 Exchanges in Red-hot Real Estate Markets like LA

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Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

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Reverse and Improvement 1031 Exchanges in Hot Florida Real Estate Markets

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Reporting a 1031 Exchange on IRS Form 8824

Reporting a 1031 Exchange on IRS Form 8824

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Reporting a 1031 Exchange on IRS Form 8824

What is Form 8824?

Part I – Information on the Like-Kind Exchange

Part II – Related Party Information

Background on Related Parties

Part III – Realized Gain or Loss, Recognized Gain, and Basis of Like-Kind Property Received

Part IV – Deferral of Gain From 1043 Conflicts-of-Interest Sales.

Summary

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