TEE-Shots Newsletter

Many people ask the question, "Won't I still have to pay the capital gain taxes on my property when I eventually sell it? So what is the difference if I pay them now or later?"

Does a Fix-and-Flip property qualify for a 1031 Exchange...?

Generally, fix-and-flips do not qualify for a 1031 Exchange. The reason they don’t qualify is that typically people plan on selling a fix-and-flip as soon as the improvements are finished.

In the upcoming book, Rich Dad's Real Estate Advantages: Tax and Legal Secrets of Successful Real Estate Investors (Warner, Paperback), Gary Gorman writes,

If I follow all the 1031 rules, can the IRS still disallow my exchange...?

This should never happen, although a renegade auditor can do almost anything he wants. But if this were to happen, his superiors should quickly reverse his decision. That's because IRC §1031 is not a loophole, or a procedure that gets around a law. IT IS THE LAW; it is section 1031 in the Internal Revenue Code.

The answer is a definitive NO. You cannot do a 1031 Exchange. However, you can do a 1033 Exchange! Section 1033 of the Tax Code addresses condemnations and "involuntary conversions" of property.

CBS4 News in Denver, CO, reported Friday on the indictment of a Qualified Intermediary who conspired with two others to bilk investors out of millions of dollars in an elaborate real estate investing scam. He is charged with 11 counts of securities fraud and 12 counts of theft. He had been previously convicted of other felonies.

So how did this QI get qualified? Quite simply, the 1031 exchange industry is completely unregulated. Anyone can print business cards and call himself a "Qualified Intermediary."

TICs (rhymes with 'sticks') offer small real estate investors the opportunity to participate in big real estate projects. TIC investments (Tenant-In-Common) are like buying pizza by the slice; you're buying a slice of institutional-sized real estate instead of having to buy the whole thing.

What to do if you don't have an agreement in place (when you know that you really should)

By Peter Conti, www.resultsnow.com

Boot is the term used by the IRS and tax professionals when they talk about the taxable portion of a 1031 exchange. But where does it come from?--it's not defined anywhere in the internal revenue code, or in any court cases.

You've sold your purple duplex and you want to do a 1031 exchange. When it's time to pick your intermediary, how do you know if the intermediary has previously been convicted of fraud? At least one has! Can you tell if the intermediary is daytrading with their client's money? Several have! Could the intermediary get on an airplane with your money and disappear? Several have!

The answer is no -- you cannot tell from talking to them, or meeting them in person. And there is no agency that is dedicated to protecting you.

The IRS has just released proposed regulations which will have a huge impact on the 1031 industry.

The good part of this ruling is that it will encourage intermediaries to hold exchange proceeds in a separate account for each client (rather than the highly risky practice of holding proceeds in a common, or commingled, account). The bad news is that you will see a lot of intermediaries go out of business because of these regulations. You will also see exchange fees will go up across the country.