Archive for the ‘FAQs’ Category
Monday, August 10th, 2009 by Moore McLaughlin
Over the next few posts, I will be dispelling many of the common myths surrounding 1031 exchanges. The confusion and misunderstandings caused by the myths has resulted in many taxpayers paying more taxes than they should. By paying the excess taxes, the non-exchangers have reduced the amount that they can reinvest, thereby needlessly reducing their income.
Myth No. 1
I sold a single-family rental property, thus I must buy a single-family rental property.
Alexandra and I hear this all the time. Similarly, we hear “I can only trade raw land for raw land” or “multi-family for multi-family” or “Massachusetts property for Massachusetts property.” In actuality, Section 1031 requires an exchange of “like-kind” property. When dealing with real estate, “like-kind” is defined as any interest in real property. Therefore, an exchanger can trade a single-family rental property for a commercial building. Raw land can be exchanged for developed land. Massachusetts real estate can be exchanged for Florida real estate.
Fractional interests can be exchanged for fee simple (or undivided) interests. Likewise, fee simple interests can be exchanged for tenants-in-common interests. Often times we see exchangers selling fee simple interests in Rhode Island property and buying TICs in other states.
Conservation easements, development rights, air rights and other intangible real estate rights can qualify as real property and be exchanged for fee simple interests, TICs and other real estate investments.
In summary, real estate is broadly defined. Tax courts look to local law in determining if an interest is “real property”. If the interest is real property, then the exchanger has a very wide array of options
Myth No. 2
My property is not worth enough for the trouble of a 1031 exchange.
Nothing could be further from the truth. First of all, 1031 exchanges are very easy, especially with All States 1031 Exchange Facilitator, LLC. We handle all the paperwork to satisfy the stringent requirements of the IRS and hold your hand throughout the entire process. Our experience and knowledge of the tax law and the 1031 exchange process allows us to simply everything for you.
Second, the key in determining the value of the 1031 exchange is to look at the amount of taxes that will be deferred, not the selling price of the relinquished property. The amount of the tax that will be deferred is based on the amount of gain that will be recognized if you do not complete an exchange. Your CPA or other tax return preparer can help you with the exact calculation or use our capital gains calculator to determine an estimate of your tax. In any event, even for a low selling price, a taxpayer who has owned the property for many years or who otherwise has a low adjusted tax basis may be staring at a large tax bill. the other component of determining your tax is the tax rate. The federal long-term capital gains rate is currently 15%. However, under several proposals, this rate could increase to 20%, 28% or higher. Don’t forget that any depreciation you have taken gets taxed at 25% currently. And, for some of you, various states will impose taxes. For example, Rhode Island just increased its tax on long-term capital gains from 1.67% to 9.9%. By exchanging real estate in a 1031 exchange, all of these taxes can be deferred, and the tax money reinvested in your new property.
So, even a relatively low selling price of $300,000 by a person with an adjusted tax basis of $100,000 could result in a tax of over $50,000. Instead of sending that money to the government, why not reinvest it and reap the rewards of the larger investment?
In summary, understand the facts of 1031 exchanges and don’t fall for these common myths. You will save money in the long-run and be a smarter investor.
Check back for more posts dispelling other myths about 1031 exchanges. In the meantime, click here for more 1031 myths or contact me or Alexandra Hart at 877-395-1031 or by e-mail fmm@allstates1031.com or ahart@allstates1031.com.
Tags: 1031, 1031 exchange, alexandra hart, All States, capital gains tax, Certified Exchange Specialist, CES, conservation easements, development rights, FEA, Federation of Exchange Accommodators, investment, investment property, IRS, like kind, Moore McLaughlin, myth, QI, qualified intermediary, real estate, real property, Tenant In Common, TIC
Posted in 1031 Exchange Basics, 1031 myths, FAQs, Tenants-in-Common
Sunday, August 2nd, 2009 by Moore McLaughlin
The 1031 exchange is a powerful income tax savings and deferral tool. With proper planning and implementation, 1031 exchanges can be an integral part of estate tax planning. As with 1031 exchanges, anyone wishing to establish a well-thought out and properly considered estate plan is well advised to seek the services of a tax attorney who specializes in estate tax planning.
The primary reason why 1031 exchanges can be used so effectively in estate planning is because of the law that allows the heirs to receive a stepped-up basis in the assets transferred to them upon death. Capital gains are calculated based on the difference between the amount received from the sale of the asset and the seller’s adjusted tax basis. The seller’s adjusted tax basis is the amount paid for the asset originally, plus the cost of capital improvements, reduced by the amount of depreciation deductions taken over the years. If the amount received (including debt paid off or assumed) exceeds the adjusted tax basis, a capital gain results. A 1031 exchange allows the seller to avoid gain recognition, in part, by transferring the basis from the relinquished property to the replacement property. Then, if the replacement property is ever sold, the deferred gain may be recognized or deferred again with another 1031 exchange.
However, if the replacement property is owned by the exchanger upon the exchanger’s death, then the heirs get to “step up” the basis to the property’s fair market value as of the date of death. If the heirs sell the property the next day, no gain is recognized because the basis of the property was increased to an amount equal to the fair market value. In this instance, the gain that was deferred by the 1031 exchange is permanently avoided.
Exchangers are sometimes confronted with the decision of whether to sell a property and take back a promissory note, i.e. seller financing. In such a case, the seller would recognize the capital gain over time, as payments are made under the terms of the promissory note. The downside to this plan, from an estate tax perspective, is that the heirs do not get to step up the basis in the promissory note. As a result, the entire amount of gain must be recognized at some point in the future as payments are received.
Most seniors and retirees look at an asset as merely a producer of an income stream, whether payments under a note, net rent from an investment property, or stock dividends. Many times, these seniors and retirees are looking for an income stream that is generated without any effort on their part. They’ve put in their time over the years and are looking for passive income.
A 1031 exchange is the perfect solution because of the IRS definition of real estate and the development of tenant-in-common (TIC) investments 
and the proliferation of single-tenant triple-net lease properties. I’ve worked with many people in this exact situation and they come to realize that they can enjoy a greater stream of income by reinvesting all of their sales proceeds, not just the net after taxes. 1031 exchanges all investors to achieve a higher reinvestment capital through the power of tax deferral. furthermore, distributions from TIC investments are often times easier to split up amongst heirs than leaving behind a physical piece of real estate, especially one that requires hands-on management.
To learn more about estate tax planning, click here.Â
To learn more about various types of passive investments that qualify for 1031 exchange replacement property, click here.
For more information about estate planning, contact F. Moore McLaughlin, Esq, CPA, CES(r) at 401-421-5115 x212 or by e-mail at mmclaughlinquinn@mclaughlinquinn.com.
Tags: 1031, 1031 exchange, All States, capital gains tax, Certified Exchange Specialist, CES, CPA, estate planning, estate tax planning, investment, investment property, Moore McLaughlin, QI, qualified intermediary, qualifying property, tax attorney, Tenant In Common, TIC
Posted in 1031 Exchange Basics, FAQs, Qualifying Properties, Tenants-in-Common
Tuesday, July 21st, 2009 by Moore McLaughlin
Everyone from the greatest tax attorney on down knows that the Internal Revenue Code is complicated and impossible to understand. I’ve always maintained that the easiest way to achieve true tax simplification is to pass a law requiring everyone in Congress and the President to prepare their own tax returns, by hand, and be subjected to a line-by-line audit. I guarantee that the tax code would be shortened and made easier to understand. I’m not sure that would be so great for tax attorneys, but I’m sure it would be good for America.
Since we know this will never happen, we are left with trying to understand the laws as they are currently written. Fortunately, a few of us 
make our living understanding and applying the tax laws in ways to help our clients. I have been teaching tax law to CPAs, attorneys, real estate brokers, real estate and other investors, and anyone who will listen since I began practicing law over 17 years ago. I believed then, and I believe even more strongly now, that those who are better educated about how the tax laws work have a decided advantage over those who don’t. Seeking an experienced professional is certainly a wise move, but the client who has more than a mere passing knowledge of the tax laws will, in the long run, be more successful than his or her peers who lack a solid understanding. Remembering that it is not what you make, but what you keep that is important.
All of this brings me to the topic of 1031 exchanges. 1031 exchanges are a very powerful tool, in the right hands. While in many respects 1031 exchanges are very simple, and should scare no one, certain complex nuances can be exploited to save even more taxes when used properly. Alexandra Hart and I spend a good portion of our work time educating investors and their professionals about basic and not-so-basic aspects of 1031 exchanges and debunking the most common myths and misunderstandings about 1031 exchanges. We send out monthly educational newsletters to further educate exchangors and their advisors.
One of the basic areas where we educate investors deals with what types of properties qualify for 1031 exchanges. Once people learn that they can exchange a three-family rental for a commercial building, or raw land for improved land, or property in Rhode Island for property in Florida, they start to see the unlimited possibilities. We educate exchangors about the time constraints set forth for 1031 exchanges. Exchangors who understand these rules make better decisions about which properties to pursue. Alexandra spends many hours each week speaking with CPAs explaining how to calculate the tax a client would owe without the exchange and how to compare it to the tax savings of doing the exchange.
We also explain the possibilities of investing in tenant-in-common arrangements, whereby a small investor can leverage his or her exchange proceeds into a larger, more profitable, and easier-to-manage property, all within the rules of section 1031. Again, education is the key. These investors are more informed and geneally make smarter investment decisions.
I encourage everyone who is interested in exchanging to read, read and read, and ask questions. As a caveat, make sure you ask the right people, not your brother, your neighbor, or your friend from the gym (unless these people are trained in 1031 exchanges). Visit our website at www.allstates1031.com to read the many articles I have written. Continue checking this blog. Call or e-mail me or Alexandra or request our free 1031 exchange guide and start the education process early to give yourself the best chance for a successful 1031 exchange.
Tags: 1031, 1031 exchange, alexandra hart, All States, Certified Exchange Specialist, CES, investment, investment property, IRS, Moore McLaughlin, QI, qualified intermediary, qualifying property, Tenant In Common, TIC
Posted in 1031 Exchange Basics, Choosing a Qualified Intermediary, FAQs, Qualifying Properties, Tenants-in-Common, Test Your Exchange IQ
Tuesday, July 14th, 2009 by Moore McLaughlin
In Ocmulgee Fields, Inc. (2009), the United States Tax Court had another opportunity to consider whether a taxpayer can acquire replacement property from a related party in a 1031 like-kind exchange. Â Relying on its prior decision in Teruya Brothers, Ltd. (2005), the court rejected the claimed like-kind exchange even though the replacement property had been acquired through a qualified intermediary. Â The Tax Court indicated its belief that the basis shifting that occurs in a like-kind exchange is sufficient grounds to apply the anti-abuse rule in Code Section 1031(f)(4). The case is important because it highlights the potential tax risk in acquiring replacement property from a related party.
In general, Congress and the IRS have always cast a wary eye on transactions between related parties. The Internal Revenue Code does not contain a blanket ban on such transactions.  However, many sections of the tax code apply special rules where Congress or the IRS suspects a greater potential for abuse.  In particular with section 1031, the IRS and the courts have generally held that an exchanger cannot purchase replacement property from a related party.  One exception is where the related party is also doing a 1031 exchange, and buying from an unrelated party.
Interestingly, however, the IRS and the courts have recently ruled on several occasions that an exchanger may sell the relinquished property to a related party without violating the letter or spirit of the related party rules under section 1031.
The moral of this case is to be aware of the relationships among all of the parties to an exchange and consult an experienced tax attorney when in doubt. Â If you would like to know more about the recent cases, or related party exchanges, contact All States 1031 Exchange Facilitator, LLC owner F. Moore McLaughlin, Esq., CPA, CES at fmm@allstates1031.com or Alexandra L. Hart at ahart@allstates1031.com or by calling at 877-395-1031.
Tags: 1031, 1031 exchange, alexandra hart, All States, IRS, Moore McLaughlin, related party exchange
Posted in 1031 Exchange Basics, 1031 News, FAQs
Monday, June 8th, 2009 by Alexandra Hart
As an exchange consultant, I receive the same sad phone call at least once a month: “I just sold my investment property and I’d like to do a 1031 exchange.” Unfortunately, once the closing has happened and the seller receives the proceeds- it’s too late to do a 1031 exchange. They will be stuck paying the tax that they could have deferred (if they had just called me earlier). Generally, that’s about 25% (or more) of their gain going to the IRS instead of giving themselves a higher reinvestment capital by deferring the tax. The same is true for buyers- if they want to defer taxes with a reverse 1031 exchange, they must get in touch with a Qualified Intermediary (QI) like All States 1031 prior to the closing.
In fact, I get calls literally from the closing table: “I’m at the closing- is it too late to do a 1031 exchange?” No- it’s not too late to do a 1031 exchange! I can draft the necessary 1031 documents very quickly and it is still possible to defer taxes at that point with a 1031 exchange (and still close on time!). Planning ahead is the best way to ensure a seamless 1031 exchange. Often times, I receive calls from people who are merely thinking about selling their investment property. I am happy to answer any questions or give complimentary consultations. The more time someone has to plan ahead, the better they will fully understand all of the 1031 rules and the exchange process.
For example, many exchangers think that 45 days to identify potential replacement properties is not enough time. This “exchange clock” starts ticking once the exchanger sells their relinquished property. However, if the exchanger plans ahead, they can start looking for potential replacement properties before they even sell, therefore giving them much longer than 45 days to make such an important decision. I’ve seen many organized exchangers coordinate their sale closing and purchase closing to be within days of each other- that way they don’t even have to worry about the 45 or 180 day time limits.
If you are considering buying or selling investment property, or for more tips on planning ahead for a 1031 exchange, please call me toll free at (877) 395-1031 extension 217 or e-mail me at AHart@AllStates1031.com
Tags: 1031, 1031 advice, 1031 consultant, 1031 exchange, 1031 Facilitator, 1031 Intermediary, 1031 tips, 180 days, 45 days, Add new tag, capital gain tax, capital gains tax, complimentary 1031 consultation, exchange advice, exchange consultant, exchange consultation, Exchange Facilitator, exchange time lines, exchange tips, like kind exchange, planning ahead, QI, qualified intermediary, real estate excahnge, reverse exchange, tax deferred exchange, tax free exchange, time limits
Posted in 1031 Exchange Basics, Choosing a Qualified Intermediary, FAQs, Qualifying Properties
Thursday, November 15th, 2007 by Moore McLaughlin
Foreclosure rates have increased dramatically recently, and the trend is expected to continue through the last quarter of 2007. Many foreclosed owners suffer a second indignity when they discover that they owe a substantial capital gains tax resulting from the foreclosure. The final straw comes when they learn that the gain could have been deferred through a 1031 exchange despite the fact that there was zero equity from the foreclosed property.
When appreciated real estate is to be sold, many taxpayers are aware that they can defer income tax on the gain by entering into a like-kind exchange under Section 1031 of the internal Revenue Code. When real estate is to be foreclosed on, however, few taxpayers are aware that they too may need a 1031 exchange since they may have “phantom income” if the debt encumbering the foreclosed property exceeds the fair market value of the property.
For income tax purposes, a foreclosure (and a deed in lieu of foreclosure) is treated as a sale despite the involuntary nature of the proceeding. Gain from the “sale” is equal to the amount realized over the adjusted basis of the property.
With nonrecourse debt, the amount realized is equal to the outstanding amount of the nonrecourse debt, regardless of the current fair market value (”FMV”) of the asset (i.e. the “phantom gain”). When recourse debt is discharged through a foreclosure, the transaction is treated as (i) a sale of the real estate for its FMV (with gain equal to the difference between the FMV and adjusted basis) and (ii) cancellation of debt (”COD”) income, taxed at ordinary rates, for the amount of the debt relieved that exceeds the FMV. The tax code does provide some exceptions to recognition of COD income for insolvent and bankrupt taxpayers, in exchange for reduction of certain tax attributes.
IRC § 1031 provides that no gain or loss will be recognized on the exchange of properly held for productive use in a trade or business or for investment if the property is exchanged for property of a like kind. The regulations which define the term “like kind real property” generally consider US real property to be of like kind to all other US real property. There is no requirement in the Code or the Regulations that a taxpayer must have equity in the property being transferred for the exchange to be valid.
A taxpayer engaging in an otherwise valid like kind exchange will recognize gain if “boot” is received. Boot includes cash and the fair market value of any property other than qualifying like kind property. Boot also includes any relief from debt on the property-being sold, unless the taxpayer acquires a property with an equal amount of debt.
If a foreclosure or deed in lieu of foreclosure is inevitable, then the real estate owner can opt to enter into a deferred exchange transferring the distressed property to a qualified intermediary (”QI”). The QI disposes of the property by allowing the lender to complete the foreclosure. The QI would receive no proceeds from the sale, and would therefore not be required to spend any funds on the replacement property. The replacement property would, however, need to have a FMV equal or greater than the foreclosed property, and debt equal to or greater than the debt on the foreclosed property in order to avoid the receipt of boot.
Since it is doubtful that the real estate owner will be able to obtain 100% financing for the replacement property, it will be necessary for the owner to invest additional capital into the replacement property. The taxpayer and the QI would effectuate the purchase like a traditional exchange, with the exception being that the taxpayer would bring any required equity to the closing. The cost of expending additional capital, however, should be weighed against the tax resulting from the phantom income that would otherwise be due. In most cases, it makes sense to do the exchange. A taxpayer thinking about entering into this type of exchange should consult with a tax professional.
Tags: 1031, 1031 exchange, All States, bankruptcy, boot, cancellation of debt income, COD income, deed in lieu of foreclosure, foreclosure, gain, IRS, nonrecourse debt, phantom income, QI, qualified intermediary, short sales, zero equity
Posted in 1031 Exchange Basics, FAQs
Monday, June 18th, 2007 by Moore McLaughlin
I am sure many of you have recently read articles telling of horror stories of Qualified Intermediaries running into the sunset with their clients money. It’s sad to say but it has happened. The Exchangors doing business with these companies either were misinformed about the security features offered by the companies or they did not ask any questions about what was happening with their funds.
Make sure your funds are in an INDIVIDUAL, DUAL SIGNATORY ACCOUNT and make sure that you are receiving monthly statements directly from the bank or that you can call and get the current balance on your account from the bank.
Ask if they are bonded and insured.
Ask if they are members of the Federation of Exchange Accommodators and if they have a Certified Exchange Specialist on staff.
Remember not to focus on the price of the exchange - You get what you pay for. If you want superior knowledge, protection and service, it’s going to cost you a reasonable fee but in the long run you are going to be thankful for the security in knowing your exchange was completed correctly and you have no worries.
The bitterness of poor quality remains long after the sweetness of low price is forgotten
You have the right to know these things.
Click here to see all the security features that All States 1031 has to offer.
Tags: 1031, 1031 exchange, All States, bankruptcy, Certified Exchange Specialist, CES, dual signatures, exchange funds, FEA, Federation of Exchange Accommodators, QI, qualified intermediary, safety, security, trust
Posted in 1031 Exchange Basics, Choosing a Qualified Intermediary, FAQs
Monday, June 18th, 2007 by Moore McLaughlin
QUESTION - “My dad would like to exchange 80 acres of corn/soybean ground in Illinois for a piece of waterfront property in eastern Oregon. The property in Illinois is all corn, with some “natural/conservationâ€? along the drainages. The property in Oregon is made up of three parcels. One parcel is natural sage brush, the other parcel has grape/apple/cherry orchard and a house.
My family would live in the house and continue to operate the orchard. In the future, my dad would retire and build on the parcel that is currently in sage brush.
Does this qualify as like-kind?? Other complications??
ANSWER- The answer to this question isn’t a simple one. The easy part of this is the actual real estate. If the property qualifies as investment property then it can be exchanged for other investment property. However, with the crops, or if there are assets, etc. with the property those types of things can be exchanged but not for real estate. Please contact us at 877-395-1031 to discuss the transaction further.
Tags: 1031, 1031 exchange, All States, crops, farm, investment property, qualifying property
Posted in 1031 Exchange Basics, FAQs, Qualifying Properties
Monday, June 18th, 2007 by Moore McLaughlin
QUESTION - “Can I identify a replacement property and purchase it before I sell my original investment property and still use a 1031 tax exchange? I have a piece of property that I want to sell, but I want to purchase another piece quickly and I don’t know how long it will take me to sell my current property. ”
ANSWER- The answer is Yes! You can buy first and sell later by using a Reverse Exchange. It is a complicated transaction that requires your Qualified Intermediary to take title to your replacement property and hold it until you sell your Relinquished property. We have done many, many of these types of exchanges. We have a few articles as well that you can read about doing a reverse exchange the links are below.
Tags: 1031, All States, reverse 1031 exchange, reverse exchange
Posted in 1031 Exchange Basics, Choosing a Qualified Intermediary, FAQs, Qualifying Properties, Test Your Exchange IQ
