What Do Investors Know About IRS 1031?
December 16, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
It is a well known fact that the IRS 1031 has some major benefits for investors; however, there are other lesser known facts that can also be used to an investor’s advantage. One of those is the reverse exchange, a fairly recent development that allows investors to purchase their replacement property before selling their original property. This is especially useful in a market where property sells quickly. Of course, since investors cannot hold the title to both properties at the same time, a Qualified Intermediary (also known as an Accommodator) has to hold one of them, making this a more expensive transaction than the traditional forward exchange.
If an investor buys a replacement property of lesser value that the one being sold, then this is called a partial exchange and the investor must pay the relevant tax on the difference in property values. This type of 1031 properties exchange provides flexibility for investors who only want to reinvest part of their capital gains into new, “like kind” property.
An IRS 1031 may also be completed by an investor with US real estate investment property in a few unique ways that still allow the property to be considered “like kind.” Oil and gas investments and water and mineral rights are a few of the avenues that might be allowed as a 1031 exchange, as well as TIC (tenant-in-common) investors that share a fractional part of a large commercial building.
There are also times when foreign exchanges are considered to be “like kind” properties, such as when the investor exchanges a foreign property for another foreign property. For instance, exchanging a French property for a Canadian property would be allowable, whereas exchanging a U.S. property for a Canadian property would not.
Another 1031 like kind exchange that can be used to take advantage of the IRS 1031 code is called an improvement exchange, or as it is also known, a build-to-suit or construction exchange. A QI will hold the title on a replacement property purchased by the investor for an amount less than the value of the property they are selling. The owner then has 180 days to make repairs and improvements that will bring the value of the replacement property up to par, enabling the investor to take advantage of the entire tax deferral amount.
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What Is The Internal Revenue Code 1031 About?
December 16, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
Naturally, every real estate investor wants to know how to make the Internal Revenue Code 1031 work best for them. They may think it is just for investors who have multi-million dollar properties, however that is incorrect. If an investor wants to sell their property, not have to manage real estate again and have their cake and eat it too, then a 1031 property exchange is a powerful tool.
The 1031 real estate exchange is so powerful because is available to all investors, regardless of the size of their holdings, as long as the property has been used for investment or business purposes. No matter whether you are interested in selling undeveloped land, a multi-family dwelling, a strip mall or hotel property, the 1031 is a great tool to use for deferring non-recaptured depreciation and capital gains.
Many investors who chase market appreciation realize that investments must make financial sense and produce enough of a cash flow to be justified. The Internal Revenue Code 1031 provides them with the ability to redirect their investment dollars without incurring capital gains taxes. By realigning their real estate holdings, they are doing themselves one of the biggest favors possible, especially in a tenuous marker. This allows for advantageous bargains that become available as they reinvent their strategies and utilize the benefits of a 1031 like kind exchange.
One of the biggest developments in the section 1031 exchange is the variety of replacement property choices that now exist. Originally, investors were limited to locating new property that would carry pretty much the same headaches as their old property; however, IRS procedure 2002-22 codified TIC exchange (tenant-in-common) and this was basically the birth of a new real estate industry.
Naturally, many real estate investors become fed up with having to deal with hands-on management, with all of the capital improvements necessary and the increasing operating costs, thus making the Internal Revenue Code 1031 a perfect solution to a great real estate exit plan. Older investors are looking for income streams, and now they can sell their properties under a 1031 exchange and obtain TIC interest. This turns the management aspect along with the profit and loss statement over to a group of experts and the investor receives a steady income stream. This also allows them to exchange their property and later turn it into their primary residence all without worrying about capital gains.
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Who Would Know About The 1031 Tax Free Exchange
December 4, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
Who Would Know About The 1031 Tax Free Exchange
So what is a 1031 exchange? It is when one person actually exchanges a particular property, or asset, for another particular property, or asset. It is basically trading one investment property for another investment property and it does not matter whether it is in an industrial, retail, office or residential sector. The 1031 tax free exchange is used as a tool for tax deferment and since many of the 1031 exchange laws have become a little more relaxed, many more people use it during an upswing in the real estate market, as there is the possibility of large capital gains after the property is sold. However, there are still some tough and complex rules that must be followed in order for the exchange to be approved.
At times there is some confusion as to what qualifies as a “like kind” type of property for a tax deferred 1031 exchange. Some examples of qualifying properties include duplexes, apartments, single family rentals, raw lands and commercial properties. For instance, you can exchange a single family rental for raw land or a commercial building or even apartments and they can be exchanged anywhere in the United States.
Some property owners are leery of attempting a 1031 tax free exchange as they believe that the sale of the old property and the acquisition of the new property must be completed at the same time. But in reality the 1031 like kind exchange is almost never a two party, or two person trade. Many are delayed exchanges that make use of the 180 days allowed to complete the transaction, from the sale of the one property to acquiring the new property. However, you only have 45 days from the closing of the sold property in which to advise the IRS of the replacement property’s identity.
The 1031 rules are applicable whenever you intend to sell a property that is not your primary residence (and follows the like kind rule), and you plan to purchase a property within 180 days after you close on the sold property.
Another attractive feature of a 1031 tax free exchange is that there is no limit on the number of properties that you can include in the same exchange. Of course, in order to retain some flexibility you may want to consider a separate one for each of the relinquished properties, but it is allowable to complete them at the same time.
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Understanding the 1031 Tax Deferred Exchange and the Qualified Intermediary
November 30, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
When an investor uses the 1031 tax deferred exchange they will avoid paying large capital gain taxes; however, there are other costs and transactions fees involved. The fees involved usually have to do with fair compensation for services performed by a Qualified Intermediary that are above and beyond their normal scope of required duties.
The Qualified Intermediary gets approximately two thirds of their revenue from the 1031 exchange interest. This is the money that is obtained from the interest on the deposits that are held by the QI’s, as they can hold the interest on the funds deposited with them on your deferred 1031 exchange money. They also have the option to share a full portion or only some of the income that is generated from that interest.
The use of a fee structure is considered a very fair and concise way in which to pay the Qualified Intermediary handling your 1031 tax deferred exchange, yet all of the details need to be evaluated and understood completely by everyone. Keep in mind that the exchange size has a direct affect on how much risk the QI is exposed to, since they are equally exposed to the interest income gains from the deposits being held by them.
Some QI’s have the ability to make their fee schedule look less expensive than the competition, so consider all of the facts involved in a 1031 like kind exchange and compare each proposal to make an informed decision.
The fee structure used for paying the Qualified Intermediary for your 1031 tax deferred exchange needs to be negotiated and understood completely by all involved parties. Keep in mind that the size of the 1031 like kind exchange will have a direct impact on the amount of risk that they are exposed to, with regard to the interest income gained from the deposits they retain.
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