1031 News

Now that tax rates on capital gains have dropped to 15% (from 20%), a lot of our clients are wondering whether they should just pay the tax or do a tax-deferred exchange when they sell their property. If you do not want to buy another property, or if you are selling bare land, then perhaps paying the tax may be the route for you. On the other hand, if you are going to buy another property, or if you’ve depreciated your old property, it probably makes more sense to do an exchange.

As Reverse 1031 Exchanges gain in popularity, the issue of financing becomes more and more critical.

Reverse Exchange loans are not saleable by the lender, so as a result, most reverse loans are made by “portfolio lenders” which are usually banks. Still, most banks don’t understand them, and so they shy away from them. 
First, let’s talk about how Reverse Exchanges work. A Reverse Exchange happens when you want, or need, to purchase your New Property before you’ve sold your Old Property. The IRS will not let you be in title to both the old property and the new property at the same time, so your exchange Qualified Intermediary steps in and buys (usually) your New Property and then holds it, or “parks” it until your Old Property is sold.

There are not many Qualified Intermediaries that have the technical know-how and trained personnel to do Reverse Exchanges, so before you start, make sure that they have the knowledge and experience to handle your exchange.

In today’s economic environment, an increasingly common question we get is how to structure a 1031 exchange for the seller of a property when the buyer wants the seller to carry back a contract in connection with the sale. We started advising our clients on this very issue over five years ago—this year the IRS said we were right!

Say you are selling your property, which is free and clear, for $200,000. The buyer offers to pay $50,000 at closing and wants you to carry a contract for the balance of $150,000. You have a $75,000 gain on this transaction and would prefer to do a 1031 exchange and want to know the procedures.

Up until the IRS approved Reverse 1031 Exchanges in a ruling (Rev. Procedure 2000-37) issued in September, 2000, many people, especially tax professionals, were skeptical of them. Now, however, even though there is lots of talk about them, many people really don’t know exactly what a Reverse Exchange is and how it works.

Reverse Exchanges arise when you want to (or need to) buy your New Property before you’ve sold your Old Property. The problem is that the IRS will not let you be in title to both your Old Property and your New Property at the same time. This situation, then, gives rise to a Reverse Exchange.

Saving tax money can be a complicated process. Although confusing, understanding IRS Code Section 1031 is worth it! 1031 exchanges can provide significant savings on capital gain taxes.

An exchange connects the sale of an old property and the purchase of a new property to postpone taxes. Exchanges are great for investors who are selling investment property that has increased in value or has been depreciated for tax purposes.

Unfortunately, legal and tax experts are oftentimes confused about these IRS rules. Much of the confusion comes from the relief (payoff) and replacement of mortgage debt on exchange properties.

The common misunderstanding about debt is that the investor must replace 100% of the debt held in the old property by taking on an equal amount of debt against the new property. This is incorrect. The solution lies in a thorough understanding of two tax themes addressed in The Code – taxable cash and taxable debt relief. 

The market for fractional ownership of commercial real estate (popularly known as Tenants-In-Common or TICs) is expanding its reach -- and look out!

These new ownership programs allow individuals, who normally may not have access to the institutional real estate market, to buy interests in large scale commercial real estate. In March, 2002, the IRS released Revenue Procedure 2002-22 which set forth the conditions and guidelines under which the IRS will allow a small group of single owners to invest into large real estate projects such as: office buildings, apartment complexes, shopping centers, even the neighborhood Wal-Mart store. But there are some inherent drawbacks, such as no established secondary market for selling your TIC interest, resulting in a less liquid investment.

Several months ago you stumbled upon a
property sorely neglected by its previous owners. Your practiced eye told you that there was a lot of money to be made if you bought the property, fixed the deferred maintenance items and did some basic cosmetic work.
Now you find out that you were right—you’ve received an offer that will return you a substantial profit. But here’s the problem—tax will eat a chunk of your profit—maybe as much as half!

The good news: your buddy tells you about a 1031 exchange and how you can roll the gain from this property to your next one. The bad news? You may not qualify for a 1031 exchange unless you structure the transaction correctly.

A 1031 exchange rolls the gain from the sale of your old property into your new one. Both properties have to have been held for investment, or used in a trade or business, and you only have 180 days from the sale of your old property to get your new property purchased.

To refinance or not to refinance: this is the common question many 1031 exchangers ask. By refinancing, exchangers are usually hoping to pull money (cash) out of their sale transaction to use for purposes other than investing in new 1031 property.

To answer the question, we need to understand the timing of the refinance. Based on the whether you, the taxpayer, are pulling money from the old, relinquished property or from the new, replacement property, the IRS has varying positions.

When refinancing the old property, a key 1031 exchange requirement drives the IRS’ position. The taxpayer cannot receive, touch or control the funds generated from the sale of the old property during the period until the purchase of the new property. Does refinancing the old property right before the exchange constitute “receiving money”?

Up until the IRS approved Reverse 1031 Exchanges in a ruling (Rev. Procedure 2000-37) issued in September, 2000, many people, especially tax professionals, were skeptical of them. Now, however, even though there is lots of talk about them, many people really don't know exactly what a Reverse Exchange is and how it works.

Reverse Exchanges arise when you want to (or need to) buy your New Property before you've sold your Old Property. The problem is that the IRS will not let you be in title to both your Old Property and your New Property at the same time. This situation, then, gives rise to a Reverse Exchange.

To refinance or not to refinance: this is the common question many 1031 exchangers ask. By refinancing, exchangers are usually hoping to pull money (cash) out of their sale transaction to use for purposes other than investing in new 1031 property.

To answer the question, we need to understand the timing of the refinance. Based on the whether you, the taxpayer, are pulling money from the old, relinquished property or from the new, replacement property, the IRS has varying positions.

When refinancing the old property, a key 1031 exchange requirement drives the IRS’ position. The taxpayer cannot receive, touch or control the funds generated from the sale of the old property during the period until the purchase of the new property. Does refinancing the old property right before the exchange constitute “receiving money”?