Tag: Internal Revenue Code section 1031

1031 Exchanges for Farms (Farmland) and Ranches

With the recent increase in land prices for farmers and ranchers, a 1031 exchange can be a tremendous tax savings opportunity.   The current increase in the capital gains rates to 20% plus the healthcare tax of 3.8% will warrant prudent tax planning by today’s family farm.

A 1031 exchange allows for real property held for use in investment, trade or business to be exchanged for other like kind property and can result in a complete deferral of all taxes due, including state and local taxes.  This means that the disposition of farmland and subsequent purchase of new investment real estate can be virtually tax free.  1031 exchanges are sometimes called Starker Exchanges based on the court case that helped define the regulations.

Recently, we were involved in an exchange of farmland in Southern Michigan.  Approximately 100 acres were sold at a fair market value of $11,000 per acre and exchanged into a new parcel that was more advantageous for farming in regards to proximity and ability to grow certain crops.  All sales proceeds were invested into the new farmland.  Not only was the tax deferred, but more profitable crops could be grown, and it was closer to the main farm.

One of the benefits of 1031 is that like kind real estate can mean almost any type of investment real estate.  For example, farmland can be sold and other investment real estate can be purchased.  Other examples of like kind real estate include rental houses, duplexes, condos, TIC interests, ranch land or commercial property.

Another recent example involved a large chicken farm in southern Iowa.  The farmers were able to secure a buyer and the purchase price was allocated between the land value and the business.  The business portion is taxable immediately, while the land was sold using a 1031.  The land proceeds were reinvested into tillable farm land.  The older couple now owns solid rental property that they will rent to local farms.  No tax is due on the land sale, assuming that land of greater value is purchased.

There are other opportunities for farmer in deferring the taxes on their land sales or land rights.  Some the choices include:

  1. If there is a homestead on the property the house can be separated to take advantage of the Section 121 home sale rules to eliminate $250,000 per person or $500,000 per couple.
  2. There are states that consider water rights real property; these rights can be exchanged for income producing real property.
  3. Mitigation credits can be exchanged for other mitigation credits, which can make certain land more valuable to developers.
  4. Certain land has mineral rights that can be exchanged because they are a separate deed on the property.
  5. Unused land with timber or forest can be exchanged for other real estate.
  6. Easements can also be exchanged for other easements to grant rights to certain properties.

The final 1031 example involves ranch land in Colorado.  An older couple was able to sell their ranch land that had an appreciated price from the original purchase.  They had over $10,000,000 in gain.  The proceeds were exchanged for new investment property in Florida.  The tax on the gain would have been approximately $2,843,000.00.  The new property was a large commercial rental property that included all NNN leases and had great cash flow since there was no debt.  The couple was able to keep over $2.8M in their pockets and invest it in appreciating real estate.  This is the power of a 1031 exchange.

Please note there are several rules that need to be followed in a 1031 exchange.  Please request our 1031 Exchange Guide for more information.

Because of today’s economy, many farmers have had their wealth increase quite a bit over the last ten years.  Never has tax planning been more important with the current set of tax laws.  If you have questions about 1031 exchange, feel free to contact Dave Owens at 239-333-1031 for a free consultation.

Dave Owens, CPA, CES is the President of 1031 Tax Free Strategies LLC, in business since 1997 with offices in Chicago, IL and Fort Myers, Florida.

Cross Sector Real Estate Outlook

I found this report from Jones Lang Lasalle, a professional services and investment management company specializing in real estate, to be very informative for Real Estate Investors and Real Estate Professionals alike.  This report is a study on the Real Estate Outlook crossing the Residential and Commercial sectors.

Click on the picture for a full copy of the report:

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Mike Cathell,
Broker/Owner, Investment Property Consultant
Real Estate Services of SWFL, LLC

Cell:  (239) 770-6250   Fax:  (239) 220-5508
Email:  InvestSWFL@gmail.com

 

 

A Special Message from Dave Owens on 1031 Exchanges

Dear Friends,

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It is almost unbelievable the rollercoaster ride we have had the last 6 years in the real estate market. Over the last year and a half the 1031 industry has seen an enormous rebound. I am literally shocked! It was like the business was turned off and suddenly it turned back on. For 17 years we have been specializing in safe, secure 1031 exchanges.

 

As a trusted professional to your clients, I am sending you some great information on 1031 exchanges. 1031 exchanges offer great tax saving benefits. If you would like our complete 1031 exchange guide, please click on the download link. Remember our consultations are always free and you are welcome to call us any time. 

 

Regards,

Dave Owens, CPA, CES

Owner of 1031 Tax Free Strategies

 

Is It Really Worth It to Do a 1031 Exchange? Yes!

A common statement we hear from a number of people is “I am not even going to bother doing an exchange.  I’m just going to cash out, pay my 15% and move on.”  What these individuals do not realize is that they could be subject to not only capital gains tax but state tax and depreciation recapture.  It’s no secret that capital gains tax will most likely increase from the current 15% to between 20-30%.  This could pose a big financial burden on taxpayers who sell investment property that has a substantial gain.  Add to that the potential for 25% depreciation recapture and applicable state taxes, and the end result is that the taxpayer ends up paying more in taxes than they anticipated.

During the economic downturn, the number of taxpayers utilizing a 1031 exchange was few and far between.  Investors with fairlyWrite measurable goals new properties had little or no gain to defer.  In fact, a number of properties decreased in value.  These days, it appears that things are starting to come full circle.  More and more investors are utilizing the exchange again to save valuable tax dollars.  Taxpayers with older properties that have significant appreciation are taking advantage of the current prices of real estate.  For example, they are exchanging from vacant land to rental properties, or vice versa.

1031 is a section of the tax code which states that if you sell a piece of business use or investment real estate and purchase another piece of business use or investment real estate, you can defer not only all of capital gains, but also any applicable state and depreciation recapture taxes.  This tax code is geared specifically for the investor.  This means that one cannot exchange a primary or second home.  The property must be held for investment or business use.  The IRS has set forth specific rules to ensuring that the taxpayer has a viable 1031 exchange.  Here are the main rules:

  • The property involved must be held for business or investment use. All real estate is considered like-kind.  In other words, vacant land can be exchanged for commercial property, etc.
  • A Qualified Intermediary (QI) must be used to facilitate the entire transaction.  The QI is an independent third party whose only role is to facilitate the exchange and ensure that the IRS guidelines are followed.  The QI cannot be an agent or relative of the Exchanger (ie.  Attorney, Realtor, CPA, etc.).
  • In order to defer all of the capital gains and any other applicable taxes, the Exchanger must purchase a property that is equal to or greater than the Net Selling Price (NSP) of their relinquished property.  The Net Selling Price is the contract sales price minus Realtor Commissions and title closing costs.
  • The Exchanger has a total of 180 days to complete the exchange.  This means that he or she must close on all intended purchases within 180 days of closing on the sale of the relinquished property.
  • Within the first 45 days of that 180 day period, the Exchanger must identify up to 3 possible replacement properties for the exchange.  Only what has been identified by day 45 will qualify for the exchange.  No revocations or changes can be made once it is beyond the 45th day.

If the taxpayer follows these rules, they can almost guarantee a flawless exchange. An exchange can offer not only substantial tax benefits, but also provide an opportunity to diversify one’s portfolio.  Every situation has its own unique characteristics, so it is very important that taxpayers consult their tax advisors before embarking on a tax-deferred exchange.

1031 Tax Free Strategies has been serving as a Qualified Intermediary for 1031 Exchanges for over 15 years.  Please feel free to contact us anytime at 239.333.1031 with any questions that you may have regarding the exchange process.

 

Written by: Dave Owens, Managing Member of AdvantaIRA Trust, LLC.

Real Estate Investing Using a Self Directed IRA

I have been sending clients to AdvantaIRA for several years for Self-directed IRA’s and 1031 exchanges.  Here is a recent video featuring Kelsy Dineen, Senior Advisor, discussing the advantages of using an IRA for Real Estate and other investing.

Real Estate Investing Using a Self Directed IRA

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If you are looking for investment properties in SW Florida, give me a call.

Mike Cathell,
Broker/Owner, Investment Property Consultant
Real Estate Solutions of SWFL, LLC

Cell:  (239) 770-6250   Fax:  (239) 220-5508
Email:  InvestSWFL@gmail.com

Vacation Homes and 1031 Exchanges

Until several recent rulings, it has been difficult to determine what the IRS expects when it comes to Vacation homes and how they are treated in the context of the 1031 exchange.  Thanks to Revenue Procedure 2008-16 and Moore v. Commissioner, we now have clear guidelines as what would qualify and what would not.  In order for your vacation home to qualify for 1031 treatment, the following criteria must be met:

During the 24 months prior to the sale of your vacation home:

  1. You must show that you have rented the property at fair market value for at least 14 days each year.

  2. You must not use the property personally for more than the greater of 14 days or 10% of the number of days the property was rented each year.

These same criteria hold true for the replacement property that you purchase should it also be a vacation home.

Here is an example:

John and Mary Smith own a Condo on Fort Myers Beach that they are getting ready to sell, and would like to do a 1031 exchange.  Here are the details on the property:

  1. Owned Condo for 7 years

  2. Condo has been in a Rental Program and rented 200 days each year

  3. Personal use is 17 days each year

Based on the criteria outlined, they cannot use the property more than 10% of the number of days that the property was rented each year, or 20 days.  Since they only used it for 17 days each year, they meet the criteria.

In addition to making sure that your personal use falls within the established guidelines, there some other steps you can take to support that your vacation property is a viable exchange property.  First, deduct any mortgage interest and property taxes on Schedule E as a business expense, as well as any repair costs, depreciation and miscellaneous expenses.  Next, make sure that it is clear from the beginning that your intention with this property is to treat it as an investment.  Finally, keep a log of what days you use it personally, what days you were doing work on the property, etc.   These are all easy steps to take to further ensure that your exchange is solid should you ever find yourself as the subject of an IRS audit.

 Theresa Knower, CISP, CES

Chief Operating Officer
AdvantaIRA Trust, LLC
1031 Tax Free Strategies, LLC
1520 Royal Palm Sq. Blvd. #320
Fort Myers, FL 33919
 
NEED A FORM? Advanta forms at: www.advantaforms.com

Partnerships: To Exchange or Not to Exchange

Believe it or not, there are investors out there with gain on properties that they have held for business use or investment.  When they reach a time that they feel is the perfect time to sell, they must come to terms with the fact that this gain will carry with it some hefty tax liability.  A 1031 Exchange is an ideal solution to this predicament.  What happens when the taxpayer is a partnership comprised of several partners who are not all on board with doing an exchange?  Let’s take a look at this example:

Real Estate Pros is a partnership that owns a rental unit on Fort Myers Beach.  The partnership is comprised of 3 individuals.  They got a great offer to sell their unit on the beach, and they have decided to accept.  When all is said and done, they are looking at over $75,000.00 in taxable gain.  Two of the partners determine that a 1031 exchange is the best option to defer the capital gains and depreciation recapture taxes.  The third partner does not want to invest in any other properties.  He would like to just cash out.  So what do you do?  How do you work it so that all parties are happy?   A popular question that comes up is, “What if we take the property out of the partnership and deed it into each of the partners’ names prior to closing on the sale?”  This is referred to as a drop and swap, where you are dropping title from the partnership entity into the individual names, and then doing the swap.  In theory, this sounds like the perfect solution.  Those that want to exchange can, and those that do not simply take their cash at closing and move on.  Unfortunately, because the property is owned by the partnership, there is no way to have some of the partners do a 1031 and others simply cash out.  It’s an all or nothing deal.  Either all of the partners agree to 1031, or none of them get to.  The drop and swap is a controversial topic.  Depending on who you talk to, some say that this is ok, and others will tell you that this will not work.

Let’s take a step back and look at the transaction from a distance.  The property in question has been owned by the partnership (and under the partnership’s tax id number) up until the time of the
“drop”.   Once title is dropped into the names of the individual’s, it is now under their personal tax id numbers.  When they go to sell the property, they are now selling under their own tax id numbers.  The issue is that they have not satisfied the “held for investment” requirement prior to the exchange, at least not under their tax id numbers.  One would think that since the partnership did satisfy the holding requirement, the individuals are covered.  This is not the case.  We are dealing with two different tax id numbers.  Once the individuals took title to the property, a new clock started.

These types of transactions of have come under a great deal of scrutiny by the IRS.   If you have no choice by to do a drop and swap, your first call needs to be to your tax and legal counsel so that you can be sure to implement several strategies that will hopefully help to lessen the odds of your exchange being disqualified.   For more information on 1031 Exchanges, call us at 239-333-1031 or visit www.1031company.com.

Theresa Knower, CISP, CES
Chief Operating Officer
AdvantaIRA Trust, LLC
1031 Tax Free Strategies, LLC
1520 Royal Palm Sq. Blvd. #320
Fort Myers, FL 33919
 
NEED A FORM? Advanta forms at: www.advantaforms.com