1031 News

"bi‚fur‚cate: verb, meaning to divide into two parts." "Bifurcate" in real estate terms means to divide into two closings. Bifurcating your closing can result in some serious 1031 benefits for you. In the correct situation it can really supercharge your exchange.

Let's take a hypothetical situation and let me show you how this works: Let's say that you are selling a large piece of land for $10 million. This land is composed of two parcels: one 20 acre and one 30 acre for a total of 50 acres.One of the requirements for a 1031 exchange is that within 45 days you have to identify a list of properties you might buy. If your list has three properties or less, there are no limitations. However, if your list exceeds three properties, you are subject to the "200 Percent Rule" of Section 1031, which requires that the combined total purchase price of everything on your list can not exceed twice the selling price of the Old Property.

In a market this hot, if you want to do a 1031 exchange you have quite a dilemma. You would like to exchange your highly appreciated Old Property, but finding replacement property in time is difficult. In a straight 1031 exchange, you have 45 days from the date of sale to identify potential replacement property and 180 days to close the purchase. There are no extensions to these time frames! Property not identified or purchased in time will toast your exchange, and you'll pay tax on the sale of your Old Property.

We're currently in a market where inventory is in short supply, and if you don't act fast, properties are gone. If you're hesitant to sell your Old Property first for fear of not being able to find the perfect New Property in time, consider doing a "Reverse Exchange."

Section 1031 allows you to roll the gain from the sale of your Old Property to the purchase of your New Property. To do this, you have to jump through certain hoops: we've written previously about how your property has to be held for investment and that it can not be held for resale. We've talked about the requirement to identify potential replacement properties for your exchange and how you have to complete a list of these potential properties within 45 days with the stipulation that what ever you purchase must be on your 45 Day List. We also talked about how your money must be held by an independent third party called a qualified intermediary and how you must make sure that the intermediary holds your money in an account separate from their other exchanges. And last month we talked about the requirement that you need to take title to the new property in the same name or entity that held title to your Old Property.

What happens to your 1031 exchange if the lender requires that you take title to your New Property in its own separate, single purpose entity -- like an LLC? Will it toast your exchange? Is there a way to salvage the exchange? What are your options?

This is a common problem, especially with commercial properties. From the lenders standpoint, a "single purpose," or "bankruptcy remote" entity makes sense. What the lender is seeking to prevent is another of your properties that might be having problems from dragging down this one good property and putting their loan in jeopardy.

Section 1031 allows you to roll the gain from the sale of your Old Property to the purchase of your New Property. To do this, you have to jump through certain hoops. We've talked in previous articles about how your property has to be held for investment and that it can not be held for resale.

We've also talked about the requirement to identify potential replacement properties for your exchange and how you have to complete a list of these potential properties within 45 days. We talked about the requirement that whatever you purchase must be on your 45 day list. And then last month we talked about how your money must be held by an independent third party called a Qualified Intermediary (QI) and how you must make sure that the intermediary holds your money in an account separate from other exchanges.

Even though mortgage money is plentiful and interest rates are low, we still get a lot of questions about "owner carry" notes and how they impact a tax-deferred or like-kind exchange. Whether you call it seller financing or contract for deed or purchase money mortgage, what we are talking about is the amount of financing that the seller of a property is willing to help the buyer with.

Let's say that you are selling your investment property for $100,000, and the buyer of your property is able to put up $80,000 in cash (whether from a loan, or his own funds, or both), but the buyer needs you to carry back the difference of $20,000. You want to do a Section 1031 exchange but are uncertain how the $20,000 note would affect it.

Section 1031 of the Internal Revenue Code allows you to roll the gain from the sale of your Old Property to the purchase of your New Property -- and not pay any capital gains taxes! To do this, you have to jump through certain hoops.

We've talked in Part 1 about how your property has to be held for investment or business use, and that it can not be held for resale (like a developer or fix-&-flips). We talked in Part 2 about your requirement to identify and list potential replacement properties for your exchange within 45 days of the closing of your sale of the Old Property. In Part 3 we talked about the requirement that you purchase your replacement property within 180 days of the sale of your Old Property, and that you must buy at least one of the properties listed on your 45 Day List.

You own a condo in a nicely situated, but somewhat dated, building. Dave Developer comes to you and offers to buy your unit for a reasonable price. What Dave wants to do is gut the building and rebuild it into a modern condominium complex. Or maybe Dave even wants to tear down the building and build a new condominium tower.

You don't mind selling but you don't want to pay tax on the sale. What you would really like to do is buy one of the new units when he gets his development completed in a year or two. How do you do this and not pay the capital gains tax?

Probably the most common and most popular way to get to where you want to be without paying tax is to do a Section 1031 exchange. What is a 1031 exchange and how does it work?

Section 1031 of the Internal Revenue Code allows you to roll the gain from the sale of your Old Property to the purchase of your New Property -- and not pay any capital gains taxes! To do this, you have to jump through certain hoops. We've talked in the past about how your property has to be held for investment or business use, and that it can not be held for resale (like a developer or fix-&-flips). We've also talked about your requirement to identify and list potential replacement properties for your exchange within 45 days of the closing of your sale of the Old Property.

Two years ago, the IRS issued Revenue Procedure 2002-22 which blessed Tenant-In-Common, or "TIC" (rhymes with "pick") properties as qualifying for Section 1031 as replacement properties. In the last two years I've watched that industry explode. For example, a recent search on Google under "Tenants in Common" returned about 490,000 hits -- most of them sellers or "sponsors" of TIC properties. Many of our client's real estate brokers are uncertain as to what the ramifications are if they accept a commission or referral fee from a sponsor to whom they refer clients. A recent Supreme Court case would seem to answer this question -- and it isn't pretty!