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Posts Tagged ‘capital gains tax’

Congress defers pressing tax issues until December

Monday, November 22nd, 2010 by Moore McLaughlin

The lame-duck Congress departed for its Thanksgiving recess with no clear path in sight for dealing with pressing tax issues: extension of the Bush tax cuts; resolving the estate tax problem; patching the alternative minimum tax (AMT); and dealing with extenders, i.e., deciding whether to retroactively extend some or all of the tax provisions that expired at the end of 2009 (including the research credit). What’s more, it looks as if the lame-duck Congress may not resolve these issues until the very last minute, i.e., right before Christmas. On November 18, Senate Finance Chair Max Baucus (D-MT) told members of the press to “get your snow boots on.”

The thorniest issue is the expiring Bush-era tax cuts. The Democrats (and the Administration) want to extend the tax cuts for “non-high-income” taxpayers only. The Republicans want to extend the tax cuts for everyone. The problem is that neither party has the votes to prevail. That inevitably will lead to a compromise of some sort. One possibility is an across-the-board, but temporary, extension of the Bush-era tax cuts for individuals.

Stay tuned to our blog and e-mail alerts for any late-breaking news.

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Posted in 1031 News, Other

What do I do if my TIC is in trouble?

Saturday, February 20th, 2010 by Moore McLaughlin

Alexandra L. Hart, CES® and I have been asked this question almost every other day for the past several months.  With the national commercial real estate and financial markets in turmoil, many investments that seemed solid only a year or two or three ago are now floundering.  Lenders are beginning foreclosure proceedings or are negotiating with the owners to take back a deed in lieu of foreclosure.  Buildings are being sold in so-called short sales.  And, lenders are selling off the promissory notes at deep discounts.  In other instances, the banks are not taking any immediate action, but the sponsors are offering to buy out investors for the amount of their investment.  Sometimes, individual investors are concerned and want to sell their interests, thus giving the other co-tenants an opportunity to buy a larger percentage for a small amount.tic-foreclosure

The question that we are continually asked is “What is my tax exposure?”  As a tax lawyer, I have been trained to answer “Well, it depends.”

In every TIC I know of, the property is encumbered by non-recourse debt.  Non-recourse debt is a loan made by a lender (could be a bank, an insurance company, a pension plan or some other type of lender) which debt is secured only by the property.  The key feature of non-recourse debt is that no one is personally liable for the debt and the lender can look only to the property for repayment.  As long as the rents are able to cover the expenses of the property and make the mortgage payments, then the lender typically feels comfortable.  However, if the cash flow only covers the expenses and the investors do not receive any distributions, then the investors are not comfortable.  Once the cash flow fails to cover the expenses, then the trouble really begins. 

Sometimes the sponsor or property manager will make a cash call.  If one or more of the owners is not willing or able to contribute enough cash, then the tenant-in-common agreement generally provides that the non-contributing owner either has to sell his or her interest, or the property has to be sold.  In any event, if there is insufficient cash to cover the expenses, the lender will eventually take action.

In most of these cases, the TIC investors do not contribute additional cash.  Thus, the lender starts the process of taking back or selling the property.  Because the debt is non-recourse, the lender cannot go after the TIC owners, and cannot force the TIC owners to pay any money.  So, the TIC owners generally lose the property, and their investment, but that is the extent of their losses.

These investors are convinced that they have sustained a loss for tax purposes.  In almost every instance, that is not the case.  For tax purposes, if a property that is encumbered by non-recourse debt is foreclosed upon or transferred back to the lender by a deed in lieu of foreclosure, the investor is treated for tax purposes as if he or she sold their interest in the property for their share of the non-recourse debt.  For tax purposes, this is known as the amount realized.  Taxable gain is calculated as the amount realized minus the adjusted tax basis of the property.

So, the next issue is to determine the investors’ adjusted tax basis in the property.  Most of the TIC owners acquired the TIC interest as a replacement property in a 1031 exchange.  If so, then their adjusted tax basis in the TIC interest is determined, in whole or in part, based on their adjusted tax basis in the property or properties that they sold in the 1031 exchange(s).  If the investor traded up in value on the 1031 exchange, then the investor may have added to his or her adjusted tax basis.  Any investor facing this dilemma should consult a qualified CPA or tax attorney who can make these complicated calculations.

Non-recourse debt that is forgiven does not result in cancellation of indebtedness income (”COD income”).  COD income can be generated only from recourse debt.  COD income is subject to a completely different set of tax rules.  So, investors should not become confused with how the COD income rules operate.

The character of the gain on the foreclosure or deed in lieu of foreclosure of a TIC interest is likely to be capital.  The holding period of the TIC interest is determined, to some extent, based upon the holding period the investor had in his or her relinquished property or properties from the 1031 exchange.  However, if the investor traded up in value, he or she could have a split holding period.  In order to enjoy the lower long-term capital gains tax rates, the property has to have been held for more than twelve months.  In calculating the 12-month holding period, the investor may be able to tack on the holding period from his or her relinquished property.  Again, any investor in this situation needs to consult a qualified CPA or tax attorney.

Remember also that there is no bright-line test for how long a property has to be held to qualify as “held for investment” for purposes of section 1031.  There is no 2-year rule, 1-year rule or any other hard and fast rule.

In summary, the investor is treated as having sold the TIC interest in an amount equal to his or her share of the non-recourse debt.  The investor will recognize gain or loss on this deemed sale based on his or her adjusted tax basis.  In addition, the investor must determine his or her holding period.

The good news is that for investors facing a large tax bill, they may be able to defer the tax by effectuating another 1031 exchange.  Click here for more information about “coffin or “no equity” exchanges.

For more information about these issues, or to ask questions about a specific scenario, please contact Alexandra L. Hart, CES® by e-mail at AHart@AllStates1031.com or by phone toll-free at 877-395-1031 ext. 217.

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Posted in 1031 Exchange Basics, 1031 News, FAQs, Other, Qualifying Properties, Tenants-in-Common

How To Purchase 1031 Replacement Property at an Auction

Monday, February 15th, 2010 by Moore McLaughlin

Alexandra L. Hart, CES® at All States 1031 Exchange Facilitator, LLC has been asked several times recently about how to buy replacement property at an auction.  While there is certainly nothing in section 1031 that specifically prohibits or disqualifies such replacement property, the real problem lies in the process and logistics of the auction process.  Most of the auctions are being held in connection with a mortgage foreclosure.

AuctionAt most auctions, the bidders must show a certified check in a certain minimum amount, such check being evidence of the ability to make a deposit payment.  Other than proof of ability to pay, and proof of identification, very little is required.  Standard purchase and sale agreement are not typically used.  The issues affecting the 1031 exchange include meeting the identification rules, assignment to the qualified intermediary of the right to buy the replacement property, and potential constructive receipt and boot issues.

In many auctions outside the 1031 arena, the bidders will bring a certified check payable to themselves.  If they are the successful bidder, they will endorse the check to the seller or the auctioneer.  In the 1031 world, if the QI issues a certified check payable to the exchanger, and then the exchanger endorses the check to the auctioneer, the IRS will likely assert that such amount was received by the exchanger and taxable as boot.  Furthermore, the payment could possibly disqualify the entire exchange as a distribution in violation of the specific restrictions (known as the g(6) limitations (see Treasury Regulation Section 1.1031(k)-1(g)(6)) on payments from the exchange account.  In other words, issuing a check payable to the exchanger is not a good idea.

One alternative is, prior to the auction, ask the auctioneer for the name of a title company they trust and have the QI place the exchange funds with them subject to the acceptance of the bid.  The exchanger can take blank assignment of contract documents with them to the auction to be executed in the event that they are the successful bidder.

Another alternative is to have a certified check issued by the QI to the auctioneer to be used in the event of a successful bid.  Otherwise, the check is returned to the QI.

Or, if the exchanger is trading up in value, the exchanger can use his or her own funds.

Other solutions could be found in particular situations.  If you are contemplating purchasing a replacement property through the auction process, be sure to contact Alexandra L. Hart, CES® or F. Moore McLaughlin, Esq., CPA, CES® to determine the best alternative.  You can reach Alexandra at AHart@AllStates1031.com or toll-free at 1-877-395-1031 extension 217.


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Posted in 1031 Exchange Basics, Qualifying Properties

1031 Exchanges Become More Valuable in Rhode Island

Sunday, December 13th, 2009 by Moore McLaughlin

1031 exchanges gained significant value recently in Rhode Island thanks to the state legislature and the Governor.  The leaders of Rhode Island determined that raising the Rhode Island tax rate on capital gains from 1.67% to 9.9% was good for the economic viability of the state.  These leaders did not really explain the basis for such a determination, they just passed the bill.  This enormous rate increase will take effect for sales after December 31, 2009.

So, in order to avoid this additional tax, a 1031 exchange should be considered.  See our website for the basics of 1031 exchanges and the types of properties that are eligible.  But, for the right types of properties and for the right investor, the 1031 exchange will allow the Rhode Island tax to be deferred.

For more information on the Rhode Island tax, contact All States 1031 Exchange Facilitator, LLC owner F. Moore McLaughlin, IV, Esq., CPA, CES at 877-395-1031 or by e-mail at fmm@AllStates1031.com.

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Posted in 1031 Exchange Basics, 1031 News, Qualifying Properties

Non-Resident Tax Withholding and 1031 Exchanges

Monday, November 23rd, 2009 by Moore McLaughlin

Because we handle 1031 exchanges in every state, we are frequently asked about the tax laws of individual states.  Alexandra L. Hart, CES® and I always encourage exchangers to seek tax and legal advice from their own professionals, who are generally more knowledgeable about local laws and the exchangers’ particular circumstances.  One of the most frequently asked questions involves non-resident tax withholding.Non-Resident Withholding

In many states, when an individual or entity that is not a resident of the state is selling real property, the state may impose a capital gains tax or other income tax.  Because the seller is not a resident of the state, the state assumes that the seller will not file a tax return for that state.  Once the property has been sold, the seller may have no further contacts within the state.  If the seller does not voluntarily file a tax return and pay the tax, the state may never collect the tax. 

As a measure to make sure all taxes are collected, most states have implemented a mechanism whereby the closing attorney or escrow company is required to withhold a portion of the sales proceeds and remit them to the state.  In most cases, the amount required to be withheld is based on the gross selling price, not the actual amount of the gain.  The reason for this technique is to make sure the taxes are collected, but without requiring an inquiry into the tax basis and other tax attributes of the seller.  If too much is withheld, the seller can file a non-resident income tax return and claim a refund, if one is due.

Many states recognize 1031 exchanges and adopt the federal tax rules.  As a result, exchangers who complete a valid 1031 exchange, with no boot, will owe no taxes to the state.  If taxes are withheld and then later returned to the exchanger, then such amounts could be treated as boot, and subject the exchanger to tax; which is quite a bad outcome.

To ameliorate this Catch-22 scenario, states typically allow an exchanger to provide a statement or certificate at the closing which relieves the closing agent from the requirement to withhold any amounts for taxes.  In Rhode Island, the form is known as Form 71.3.  Other states have similar forms or processes.  Some states require the seller to request the certificate days or weeks in advance of the closing.

So, if you are selling real estate located in a state in which you or the selling entity is not a resident, call us or check with your tax professional to determine whether non-resident withholding is required and, if it is, whether an exception exists for 1031 exchanges. Please click here to find some of the state non-resident withholding forms. Or click here for links to the various state websites.

Please contact us with any questions you may have.  You can reach Alexandra L. Hart CES® at 877-395-1031 or by e-mail at AHart@AllStates1031.com.

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Posted in 1031 Exchange Basics, Choosing a Qualified Intermediary, FAQs

Dealer Property defined in Oregon case

Sunday, October 18th, 2009 by Moore McLaughlin

In order for property to qualify under section 1031, the property must be held for productive use in a trade or business or held for investment.  Property that is held primarily for sale is disqualified under section 1031.  One of the most uncertain areas of the law under section 1031 is whether a particular piece of property is held for investment.  The IRS has never given any hard-and-fast rules.  Taxpayers must rely on a hodge-podge of cases and rulings.

A recent case from a state court in Oregon addresses the issue of whether a parcel is held for investment or held primarily for sale. In Bahr v. Oregon Department of Revenue, Oregon Tax Court - Magistrate Division, TC-MD 080525B (2009), the Oregon Tax Court ruled that a bulk sale of raw land, originally acquired for investment, which was subdivided into lots, partially improved and sold to a builder was held as an investment and therefore qualified for tax deferral under Oregon law which follows IRC §1031 for state income tax purposes.Oregon

In Bahr, taxpayers (a husband and wife) were in an informal partnership with their sister and brother-in-law.  In 1996 the partnership acquired five acres of raw land in a §1031 exchange for a duplex.  At the time of this initial exchange the partnership was considered an investor in the property.   In 2001-2002 the other partners built a personal residence on a portion of the property.  In March 2004 partnership applied to subdivide the land into 27 individual lots.  At the time this application was submitted, the partnership agreed to sell 22 of the lots to a developer.  The partnership’s subdivision application was approved in 2004.  Pursuant to their agreement with the developer, the partnership immediately began infrastructure improvements on the lots including placing roads, underground utilities, excavation, engineering, permits and other indirect costs.  The first lots were sold to the developer in early 2005.  The decision implies that the taxpayers acquired replacement property in an otherwise valid §1031 exchange to defer gain on the lots sold to developer. 

The Oregon Department of Revenue argued that the partnership’s investment intent changed after it received the offer from the developer and subdivided the land into individual lots.   Accordingly, it asserted that the land was held “primarily for sale” as opposed to for “investment” thus disqualifying it from §1031 treatment.

In determining whether the land was held primarily sale the court listed factors considered in §1221 (capital gain) cases: (1) purpose for which the property was initially acquired; (2) purpose for which the property was subsequently held; (3) extent to which improvements, if any, were made to the property by the taxpayer; (4) frequency, number and continuity of sales; (5) extent and nature of the transactions involved; (6) ordinary business of the taxpayer; (7) extent of advertising, promotion or other active efforts used in soliciting buyers for the sale of the property; (8) listing of the property with brokers; and (9) purpose for which the property was held at the time of sale.  The court concluded based on the length of time the property was held and the taxpayers’ lack of experience in subdividing and selling lots that these factors weighed in favor of investment intent.  The court appeared to weigh heavily that the taxpayers engaged in the development activities to maximize their return on their initial investment and that they only did the minimum necessary to complete the sale.

Because the case was decided by the Oregon Tax Court this decision cannot be used as authority in IRS audits, and it is presumably of little precedential value outside of Oregon.  However, it does show that according to this court at least, subdivision of land, even coupled with substantial land improvements, is arguably not enough to convert a property owner from an investor into a dealer where there was no actual building, active marketing of the subdivided property, or establishment of a sales organization.

Please contact attorney F. Moore McLaughlin, owner of All States 1031 Exchange Facilitator, LLC, by e-mail at fmm@allstates1031.com or Alexandra L. Hart by e-mail at ahart@allstates1031.com for more information about this case or about a particular scenario.

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Posted in 1031 Exchange Basics, 1031 News, Qualifying Properties

Dispelling 1031 Myths, part 1

Monday, August 10th, 2009 by Moore McLaughlin

ufoOver 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.

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Posted in 1031 Exchange Basics, 1031 myths, FAQs, Tenants-in-Common

Estate Planning and 1031 Exchanges

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.

Estate PlanningThe 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 office-buildingand 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. 

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.

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The Continued Popularity of 1031 Exchanges Among Baby Boomers

Monday, July 6th, 2009 by Moore McLaughlin

Mark TwainI have read some recent posts on various websites proclaiming that 1031 exchanges are dead among Baby Boomers.  As Mark Twain wrote from London after reading his own obituary, “The reports of my death are greatly exaggerated.”  In fact, the baby boomers may be the demographic group that uses 1031 exchanges most frequently.  The reasons are fairly obvious.  Wealth is not accumulated overnight, usually.  It takes time.  The older you are, the more time you have had to accumulate wealth.  Plus, those with wealth tend to have better tax and investment advisors who can teach them all the tricks.

But, most importantly, many baby boomers have undertaken extensive and appropriate estate planning and therefore understand the value of 1031 exchanges in an integrated estate plan.  Exchangors can acquire the replacement property or properties and hold them until death.  At this point, their heirs receive a stepped-up basis in the property and the capital gains tax has been completely avoided.

Some promoters are pitching a new product called a deferred sales trust.  Looking beyond whether these types of structures actually achieve the touted tax results, and whether the funds are truly safe, and whether the return on the investment is reasonable, the tax results, especially compared to 1031 exchanges, must be analyzed.  The premise behind the deferred sales trust is that the taxpayer sells the property and effectively receives an installment obligation, thereby allowing the gain to be recognized in future tax years when the payments are received.  Two important tax consequences result from this structure.

First, as gain is recognized in subsequent years, the tax is imposed on these gains based on the tax rates in effect at the time.  Since long-term capital gains rates are at historic lows right now, there is no where to go but up.  So, a present value tax calculation should include the possibility that tax rates will increase.  In Rhode Island, the tax rates on long-term capital gains recently increased from 1.67% to 9.9%, effective beginning in 2010.  For federal tax purposes, President Obama campaigned on a pledge of higher taxes.  As a result, the tax bite on an installment sale will not be insignificant.

Second, payments under installment sale notes are generally treated as income in respect of a decedent when received by the estate of a decedent.  No step-up in basis is allowed.  Thus, the estate or the heirs will pay the income tax.  Not the case with 1031 exchange replacement property.  Replacement property received by an estate or heirs steps-up the basis to its current fair market value.  If the heirs or the estate sells the property at that value, no tax results.  Not the case with installment sale notes.

Another important feature of 1031 exchanges for baby boomers, and other real estate investors, is the ability to exchange into qualifying replacement properties that require little or no active owner involvement.  Many Tenant-In-Common investments are available whereby exchangors can buy a fractional interest in a property and have the property professionally managed for them.  Single-tenant triple-net properties are also available, as are shopping malls with triple-net tenants.  An exchangor should consult with a professional in searching for the various options that are available.  Or, visit the Property Exchange web page sponsored for free by All States 1031 Exchange Facilitator, LLC.

For these reasons, as well as many others, the 1031 exchange often makes more sense than the deferred sales trust.  In any event, consult with a tax attorney, preferably one who is also a CPA and a Certified Exchange Specialist, who can explain the differences and help you decide which option makes the most sense for a particular person and scenario.

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Posted in 1031 Exchange Basics, 1031 News, Qualifying Properties, Tenants-in-Common

Is it too late to do a 1031 exchange?

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

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Posted in 1031 Exchange Basics, Choosing a Qualified Intermediary, FAQs, Qualifying Properties