TEE-Shots Newsletter

Is the "Year-and-a-Day" rule The Law?

Recently, we encountered a great deal of confusion and consternation concerning a 1031 exchange, and the so-called "year-and-a-day" rule. You've probably heard that you should hold both your Old Property and your New Property for at least a year-and-a-day before and after a 1031 Exchange.

Why is there a 45-Day and 180-Day Rule for 1031 Exchanges?

Time for some 1031 Trivia!!

As you know, when performing a Section 1031 Like-Kind Exchange, you have 45 days to identify your New Property (calculated from the date of closing on the sale of your Old Property), and 180 days to close on the purchase of your New Property.

But, why did Congress choose these particular time deadlines? Unfortunately, the answer to this question is a bit esoteric. But, here are the answers -- for what they're worth!

Is §1031 a tax "loop-hole?"...?

Typically, when most people hear the term “tax loop-hole,” they think that something sneaky is going on. And, although, the “loop-hole” may technically be legal, the resulting tax treatment is not what Congress or the IRS intended.

Is a "Starker Exchange" different from a regular "1031 Exchange"...?

The answer is "no" -- there is no difference between a 1031 Exchange and a Starker Exchange.

1031 Exchanges are named after the section of U.S. Tax Code that allows for tax-deferred exchanges of real estate and other assets -- I.R.C. §1031. "Starker Exchanges" are named after a court case decided in 1979 (Starker v. U.S., 602 F.2d 1341 (9th Cir. 1979)).

This Tee-Shot stated that you absolutely CANNOT exchange out of real estate and into a REIT. This is still true, except in the following limited situation:

There have been three situations that have come to light this year involving intermediaries that have taken, or dipped into, the exchange funds they were entrusted to protect for their clients. Each of these defalcations came about because the intermediary held the exchange funds in a "commingled" account where all of the exchange funds were combined.

In what was probably the most important development in the 1031 industry this year, the IRS approved Delaware Statutory Trusts as a "disregarded entity."

My prediction is that in a couple of years, as real estate investors begin to truly understand the benefits of a Delaware Trust, this will become as popular a method of holding property as LLCs are.

Other QI's have told me I could do an exchange on my personal residence if I keep it quiet. Is this risky?

Yes it is risky -- AND it's an unnecessary risk at that. You don't need to do a Section 1031 exchange on your primary residence to defer or eliminate taxes. If you've lived in your house for two out of the last five years, you can claim the exemption (under Section 121 IRC) on capital gains up to $250,000 for single tax filers and up to $500,000 for joint returns. And, you can take this exemption every two years!

More good news (tax-wise) for hurricane-affected taxpayers

Hurricanes continue to plague Florida and the eastern United States, and our hearts go out to those of you who have been affected by them.

Where did §1031 and “exchanges” come from...?

In 1918, the U.S. enacted its first income tax. At this time, gain or loss was recognized on the sale and disposition of all property. To many legislators, it did not seem fair to impose taxes on dispositions involving an exchange of property when the taxpayer was essentially continuing his investment in real estate. Therefore, Section 202 of the Internal Revenue Code (I.R.C.) was enacted in 1921 which permitted simultaneous Tax-Deferred Exchanges of property.