All States 1031 Exchange Facilitators logo
HOME | ABOUT US | BLOG | CONTACT US | RESOURCES | SITE MAP

THE 1031 PROPERTY EXCHANGE


SEARCH: 
1031 Exchanges Construction Exchanges Reverse Exchanges Tenants in Common 1031 Exchange News & Events

Posts Tagged ‘investment property’

Newer Entries »

FHA to improve condo lending guidelines

Monday, August 17th, 2009 by Moore McLaughlin

According to Dan Hartman, Senior Mortgage Advisor, Province Mortgage Associates, Inc. located in Providence, Rhode Island, the FHA will Dan Hartmanissue new guidelines affecting condo lending.  The new guidelines will be more favorable to allowing commercial space in the development, will reduce the minimum number of units required to just 2, and will permit phasing.  These and other changes will have a positive impact of those seeking to do 1031 exchanges.  Click here to read Dan’s full article.

While dealer property will not qualify for 1031 exchanges, many people own single condos that have been used to produce investment income, some people convert their primary residence to rental, and some people convert a vacation condo to rental.  Remember that pure vacation homes, and second homes, do not qualify for 1031 exchange treatment.  When buyers have more options for financing, they can more easily close on the condo of their choice.  Alexandra Hart and I see many situations where a seller and a buyer want to close a deal, but the buyer is unable to secure financing.  These new FHA guidelines could help condo buyers obtain financing more easily and close more deals.

Furthermore, the new lending guidelines may help finance a reverse or construction exchange.  Reverse exchanges are increasingly popular in the current market when it takes an exchanger longer than expected to close on the sale of their relinquished property.  In the meantime, the exchanger may need to act quickly to buy a replacement property that has just been reduced to a great price.  Another great tool in the current market is the construction or improvement exchange.  With a large inventory of short sale and foreclosure properties available, an exchanger may want to acquire a “rehab project” that is of a lesser value than their relinquished property.  Instead of paying tax on the “buy down” difference, they can put that money towards improvements to their replacement property tax-free.  Construction exchanges can also be used for demolition or if the exchanger wants to raw land and build a new structure.

If you are interested in learning more about these new FHA guidelines, or if you have any financing questions, please contact Dan Hartman directly at 401-263-8655 or by e-mail at DHartman@provincemai.com.

For more information about forward, reverse or construction 1031 exchanges or the types of property that qualify, please contact Alexandra L. Hart at 877-395-1031 ext. 217 or by e-mail at AHart@AllStates1031.com.

No Comments »

Tags: , , , , , , , , , , , , , , , , , , ,
Posted in 1031 Exchange Basics, Construction Exchanges, Qualifying Properties, Reverse Exchanges

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.

No Comments »

Tags: , , , , , , , , , , , , , , , , , , , , ,
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.

No Comments »

Tags: , , , , , , , , , , , , , , , , ,
Posted in 1031 Exchange Basics, FAQs, Qualifying Properties, Tenants-in-Common

Education is Key to Tax Savings

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 little-red-school-house1make 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.

school-booksI 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.

No Comments »

Tags: , , , , , , , , , , , , ,
Posted in 1031 Exchange Basics, Choosing a Qualified Intermediary, FAQs, Qualifying Properties, Tenants-in-Common, Test Your Exchange IQ

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.

3 Comments »

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

Thanks to Mike Hurney and MassRealEstate.net

Wednesday, July 1st, 2009 by Moore McLaughlin

Michael HurneyThanks to Mike Hurney and Mass RealEstate.net, sponsors of Investment Advisors, a real estate investors group that meets on the last Tuesday of every month in Peabody, Massachusetts.  Mike was kind enough to allow me to present an educational seminar last night to his group of new and experienced real estate investors.  My presentation covered 1031 exchanges, including construction and improvement exchanges, as well as estate planning, estate tax planning and asset protection planning for real estate investors.  The investors were particularly interested in how to structure the ownership of their investment real estate in order to provide the maximum protection against creditors.

My presentation followed a great discussion by Mike about the real estate investment cycle and how to recognize and prepare for proper timing.  Mike is an excellent speaker and extremely knowledgable about all topics relating to real estate investment.  The members of the investors group had many wonderful insights and provided many valuable tips.

If you are interested in learning more about real estate investing, I suggest you contact Mike about joining his real estate investors group.  You can reach Mike by e-mail at mreia@comcast.net.

He also authors an extremely informative blog.  Click here for his blog and click here for his website.  Be sure to watch his informative video on his website as well.

3 Comments »

Tags: , , , , , , , , , , , ,
Posted in 1031 Exchange Basics, 1031 News, Choosing a Qualified Intermediary

Recent question on what qualifies as Replacement property…

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/conservation??? 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.

No Comments »

Tags: , , , , , ,
Posted in 1031 Exchange Basics, FAQs, Qualifying Properties

What is a 1031 Exchange?

Thursday, January 18th, 2007 by Moore McLaughlin

In a typical investment property sale, the property owner is taxed on any gain realized from the sale.  However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date or through proper tax planning, eliminated.  Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment.

For example:

Exchangor  sells property A in Massachusetts (a 3 family rental).  Exchangor paid $200,000 for property A when it was purchased 9 years ago. Exchangor is selling property A for $500,000.  Ignoring depreciation, Exchangor has a capital gain of $300,000 that he would have to realize and pay capital gains tax on without the section 1031 exchange. The approximate amount of tax Exchangor would pay on the sale is 15% for federal and 5.3% to Massachusetts which is $60,900.  Exchangor buys a ranch in New Mexico for $500,000. Exchangor completes his exchange and pays $0.

By entering into a section 1031 exchange with a Qualified Intermediary, such as All States 1031, he now has $60,900 that he can use to reinvest rather than handing it over Uncle Sam.

No Comments »

Tags: , , , , , ,
Posted in 1031 Exchange Basics, FAQs

Tax Planning Alert – Using Passive Activity Losses in a 1031 Exchange

Thursday, January 18th, 2007 by Moore McLaughlin

Owners of rental property who are not “real estate professionals??? and whose income is over $100,000 may have suspended passive activity losses. These owners should be aware of the treatment of these suspended losses if they are contemplating a 1031 exchange.

Passive Activities

Prior to 1986, a taxpayer could generally deduct losses in full from rental activities and trades or businesses regardless of his or her participation. This gave rise to significant numbers of tax shelters that allowed taxpayers to deduct non-economic losses against wages and investment income. The Tax Reform Act of 1986, added IRC § 469, which limits the taxpayer’s ability to deduct losses from businesses in which he or she does not materially participate and from rental activities.

In general, losses generated by passive activities can only be used to offset income generated by passive activities. The rental of real estate is considered a passive activity. There are some exceptions to the general rule including the following:

A. $25,000 Deduction: Rental real estate losses up to $25,000 may be deducted by an individual whose modified adjusted gross income (MAGI) is less than $100,000. To qualify for this offset, the taxpayer must actively participate (make management decisions), own at least 10 percent and not be a limited partner. The $25,000 exception is phased out at the rate of 50 cents for every dollar of MAGI over $100,000. Therefore, when MAGI exceeds $150,000, the $25,000 offset is not allowed.

B. Real Estate Professionals: A real estate professional may be able to deduct all current rental real estate losses regardless of how high his MAGI might be. To deduct losses without limit, the taxpayer must spend more than half of his time in real property businesses and work more than 750 hours a year and materially participate (works on a regular, continuous and substantial basis in operations) in each separate rental real estate activity.

So what happens to the losses if the real estate owner is not a real estate professional and the $25,000 deduction is phased out? The real estate owner has suspended passive activity losses (“PALs???) that can be carried forward indefinitely until there is passive income or an entire disposition in a fully taxable transaction.

1031 Exchanges and Passive Activity Losses

If a real estate owner disposes of his entire interest in a passive activity to an unrelated person in a fully taxable transaction, he may offset any gain with all passive activity losses allocable to the activity, not limited by the PAL rules. A fully taxable transaction is one in which all realized gain is recognized.

If the owner has substantial PALs that would offset the bulk of his gain, then the owner would better off selling the property outright and not doing a 1031 exchange. If the owner, however, has a substantial unrealized gain, his best option would be to do a 1031 exchange, using the PALs to offset boot recognized in the exchange. Alternatively, the owner could exchange the property to defer the gain and continue to carryforward the PALs until they can be used.

How or when is boot recognized in an exchange? The two most common examples are cash received at the closing of the property being sold or cash received at the end of the exchange because the real estate owner purchased a less expensive property. An example illustrates how this would work. A real estate owner decides to sell his rental property for $500,000. He has a tax basis of $100,000 and $50,000 of suspended passive activity losses. If he simply sold the property outright, his $400,000 gain would be reduced by the $50,000 of PALs, leaving him with a $350,000 taxable gain. If he opted to do a 1031 exchange, he could arrange to receive $50,000 at the closing, exchange the rest and fully defer the gain. The $50,000 cash boot would be taxable, but it would be reduced by the $50,000 in PALs resulting in no gain being recognized.

Real estate owners with significant PALs should consult with their tax advisors before doing an exchange.

No Comments »

Tags: , , , , , , , , , , , , ,
Posted in 1031 Exchange Basics, Qualifying Properties, Test Your Exchange IQ

Newer Entries »