|
Fagan & Rawlings is one of the foremost experts on 1031 Exchanges. We offer securitized real estate for 1031 Exchange purposes to accredited investors throughout the country. Tenancy-in-Common is a form of undivided fractional ownership of real property. Since 2002 the 1031 TIC market has seen rapid growth. With an ever increasing number of 1031 TIC sponsors available to choose from, identifying a replacement property can be a daunting task. We have relationships with several industry leading 1031 TIC sponsors throughout the nation. We carefully research every 1031 TIC offering and recommend only the most appropriate investments to our clients. If you are the owner of highly appreciated real estate and are considering a 1031 Exchange please visit our dedicated 1031 Exchange website. WHAT IS IRC SECTION 1031?
Section 1031 of the Internal Revenue Code allows an owner of investment property
to exchange property and defer paying federal and state capital gain taxes (up to
15% Federal, 25% depreciation recapture and applicable state taxes) if they purchase
a “like-kind” property following the rules and regulations of the Internal Revenue
Code. This allows investors to use all of the sale proceeds to leverage into more valuable
real estate, increase cash flow, diversify into other properties, reduce management
or consolidate holdings.
WHAT IS “LIKE-KIND” PROPERTY?
There is some confusion regarding what type of property qualifies for a §1031 tax
deferred exchange. The Internal Revenue Code Section 1031 states 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 if such property is exchanged solely for property
of like kind which is to be held either for productive use in a trade or business or for
investment.” “Like-kind” property can include, but is not limited to, any of the following,
provided it is held for investment:
• Single Family Rental
• Duplex
• Apartment
• Commercial Property
• Raw Land
For example, raw land can be exchanged for a single family rental, or apartments or a
commercial building. Properties can be exchanged anywhere within the United
States.
DOES AN EXCHANGE NEED TO BE SIMULTANEOUS?
No, contrary to what some property owners envision, a §1031 tax deferred exchange
is rarely a two-party swap. Most exchanges are delayed exchanges, whereby the Exchanger
has 180 days between the sale of the relinquished property and the closing
of the replacement property. They must identify the potential replacement property
(or properties) within 45 calendar days from closing on the relinquished property.
WHEN IS A §1031 EXCHANGE APPLICABLE?
It is applicable whenever a property owner intends to SELL any property that is not
their primary residence (and falls under the definition of “like-kind”) and plans to
BUY another “like-kind” property within 180 calendar days following the closing of
the relinquished property.
Paramount to any exchange is a competent and experienced Qualified Intermediary.
Asset Preservation is the entity which structures, guides and documents the exchange
transaction from beginning to end. Frequently, one of the most difficult components of a 1031 exchange is identifying a replacement property within the first 45 days following the sale of the relinquished property. The IRS is very strict in not allowing extensions. We typically recommend indentifying at least one TIC or tenant in common property at least as back up replacement property to insure your ability to execute your exchange within the given time frame.
1031 Exchange time limits are very important. This is a crucial step to executing any 1031 Exchange and must be taken extremely seriously.
There are 2 simple timelines that apply for anyone executing a 1031 tax deferred exchange should abide by and know:
The Identification Period: This is the crucial period during which the party selling a property must identify other replacement properties that he proposes or wishes to buy. It is not uncommon to select more than one property. This period is scheduled as exactly 45 days from the day of selling the relinquished property. This 45 days timeline must be followed under any and all circumstances and is not extendable in any way, even if the 45th day falls on a Saturday, Sunday or legal US holiday.
The Exchange Period: This is the period within which a person who has sold the relinquished property must receive the replacement property. It is referred to as the Exchange Period under 1031 exchange (IRS) rule. This period ends at exactly 180 days after the date on which the person transfers the property relinquished or the due date for the person's tax return for that taxable year in which the transfer of the relinquished property has occurred, whichever situation is earlier. Now according to the 1031 exchange (IRS) rule, the 180 day timeline has to be adhered to under all circumstances and is not extendable in any situation, even if the 180th day falls on a Saturday, Sunday or legal (US) holiday. The §1031 exchange begins on the earliest of the following:
1. the date the deed records, or
2. the date possession is transferred to the buyer,
and ends on the earlier of the following:
1. 180 days after it begins, or
2. the date the Exchanger's tax return is due, including extensions, for the taxable year in which the relinquished property is transferred.
The identification period is the first 45 days of the exchange period. The exchange period is a maximum of 180 days. If the Exchanger has multiple relinquished properties, the deadlines begin on the transfer date of the first property. These deadlines may not be extended for any reason.
A deadline that falls on Thanksgiving, Christmas, or New Year's Day does not permit extension.
Identified replacement property that is destroyed by fire, flood, hurricane, etc. after expiration of the 45 day Identification Period does not entitle the Exchanger to identify a new property.
Failure to comply with all of these deadlines may result in a failed 1031 exchange. 1031 Exchange Rules require property owners to identify like kind investment properties for replacement within 45 days of the close of escrow on the relinquished investment property. Furthermore, all replacement investment properties must be acquired within 180 days of close on the relinquished investment property.
In addition to the 1031 Exchange timeline all 1031 exchanges must comply with one of the follow three rules:
The Three-Investment Property Rule - This rule allows the exchanger to identify up to, but no more than 3 potential investment properties as qualified replacement investment properties within the allotted time frame.
The 200% Rule - In the event that three or more like kind investment properties serve as replacement investment properties, the aggregate value of said investment properties can not exceed 200% of the value of the investment property sold.
The 95% Exception - Finally, in the event that rules 1 and 2 do not apply to the exchange, the Ninety-Five Percent Rule takes precedence. This rule dictates that the aggregate value of the acquired investment properties must account for at least 95% of the value of the relinquished investment property when sold. This means that in order to engage in a 1031 exchange, foregoing all capital gains on the transaction, the property owner must reinvest at least 95% of the proceeds involved in the transaction.
Many 1031 exchangers prefer buying investment property as tenants in common because of the ease of completing the transaction and closing on investment properties.
To fully defer all capital gains taxes, all 1031 exchanges must also meet four basic requirements:
1. 100% of all proceeds from the sale of the first investment property must be reinvested into the second, replacement investment property.
2. The amount of equity ( investment property value minus loan value) of the replacement investment property must be equal to or greater than that of the relinquished investment property.
3. 1031 Exchange Requirement: By law, you must use an independent third party, called a Qualified Intermediary, to hold the proceeds of the sale. The Qualified Intermediary also will prepare the legal documents required to link together, as a qualified exchange, the sale of the old investment property and the purchase of the new investment property.
4. 1031 Exchange Requirement: exchanged investment properties must be like kind. For an investment property exchange this means real-investment property for real-investment property, but not necessarily land for land or a rental house for another rental house.
It is often difficult in the short 45-day time frame to locate an investment property that has the right purchase price, debt ratio, and closing schedule to meet the 1031 Exchange Requirements-and then arrange any financing that may be necessary. Because there is a steady supply of tenants in common investment properties available they are an ideal solution for exchangers seeking management free 1031 exchange properties with steady income.
|
1031 Exchange 
