1031 – Making Life a Little Less Taxing

Section 1031 of the Internal Revenue Code is one of the last great tax shelters available to investors today. When investment real estate is sold, the seller is responsible for paying capital gains taxes. In some cases, capital gains can be as high as 25 percent. By performing a 1031 exchange, investors can defer payment of these taxes.

As the name suggests, a 1031 exchange is the process of the property for sale being exchanged for a new piece of investment property. As long as this transaction is a “trade up” in value and debt, taxes are completely deferred.

By deferring taxes using a 1031 exchange, the wise investor is able to:

Increase cash flow;
Purchase property in a more favorable area; or
Diversify or consolidate property.

Real estate investors, now is your chance to build wealth with a 1031 exchange. 1031 Exchanges are easy and economical to complete.

Learn more about the types of exchanges available and, the applicable rules. Get started with your 1031 exchange today by calling us or by clicking the icons above.

DISASTER EXTENSIONS & CORONAVIRUS (COVID-19)

Midland 1031 has had numerous inquiries regarding the Coronavirus (COVID-19) outbreak and the potential impact on the 45-day identification and 180-day exchange deadlines in an IRC Section 1031 exchange. We now know that the IRS has issued Notice 20-23, announcing deadline relief for both 1031 like-kind exchanges and opportunity zone investments that are already underway.

1031 Like-Kind Exchanges: If an investor has taken the first step of a like-kind exchange by selling the relinquished property, and either the 45-day or 180-day deadline falls between April 1 and July 15, the deadline has been extended to July 15, 2020.

Opportunity Zones: If an investor who sold a capital asset planned to roll over the gain into an Opportunity Fund and the 180-day deadline falls between April 1 and July 15, they can make the investment as late as July 15, 2020.

Sole Proprietors’ Quarterly Taxes: Second quarter payments can now be made July 15, 2020. The IRS had already pushed first quarter payments to July 15. Any quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can wait until July 15 to make that payment without penalty.

Click here to learn more about tax relief in disaster situations.

Exchangers and their advisors should carefully review any IRS notices regarding extensions and make determinations regarding extensions accordingly.

1031 Exchange FAQs

Will My Vacation Rental Qualify For A 1031 Exchange?

Vacations rentals qualify for a 1031 exchange if they have been rented at fair market rates for at least 14 days each 12 month period for at least 2 years prior to the sale. In addition, personal use of the vacation rental can not exceed 14 days (if rented 14 days) or 10 percent of the number of days rented each year during this period.

How Do I Calculate My Capital Gains?

To get an idea of what your capital gains might be, please use our online capital gains calculator found here. We always recommend that you consult with your CPA or tax advisor to officially calculate your capital gains.

What Are The Timing Rules?

There are two important timing rules when it comes to 1031 exchanges, the 45 day rule and the 180 day rule. You have 45 days to identify your replacement properties and you must close on all intended properties within 180 business days. The timeline starts the day you close on your current investment property. You must contact Midland 1031 before closing.

What Is The Most Common Pitfall To Avoid?

Failing to obtain the services of a QI prior to closing. We are often contacted by taxpayers looking to set up the exchange after they have closed on the sale of their relinquished property (or after closing the purchase of the replacement property in the case of a reverse exchange).

Unfortunately, the option to perform the exchange is no longer available once the taxpayer has closed and has constructive receipt of the proceeds. If you are considering a 1031 exchange, it is imperative that you consult with a QI before closing on any transactions.

Am I able to purchase my replacement property before having closed on my relinquished property?

Yes, this is known as a Reverse Exchange.

What if the replacement property I am looking at is well below my Net Selling Price, but needs a significant amount of work? Could I somehow use those improvements towards my exchange value?

Yes, this is known as an Improvement Exchange.

To learn more about the types of exchanges, click here.

What Is The Same Taxpayer Requirement?

The taxpayer that holds title to the relinquished property is the taxpayer that must acquire and take title to the replacement property. For example, if a partnership owns the relinquished property, then the partnership is the taxpayer that is completing the exchange, not the individual partners. There must be a continuity of taxpayer from beginning to end.

You mentioned that there must be continuity of taxpayers from start to finish. Will I ever be able to make changes to the taxpayer on title?

Because of the same taxpayer requirement in a 1031 Exchange (the same taxpayer on the title of the relinquished property needs to acquire the replacement property), many exchangors want to know when it is safe to change the title on the deed of the replacement property. This is often the case where only one spouse completed the exchange but now wants to add the other spouse or it could be a case where an individual wants to add other partners or change the title from one entity to another.

The tax code does not specifically address the holding period requirement before changing ownership. However, Section 1031 requires that the property you sold and the property you purchase to be held for investment or business use purposes and the taxpayer that did the exchange must continue to hold the replacement property for investment or business use. If the taxpayer on title changes shortly after you complete the exchange, the IRS may see this as inconsistent and it could jeopardize the exchange. Remember, the burden of proof falls on the taxpayer to prove their intent with the property before and after the exchange.

Many tax advisors suggest that the exchange be ‘old and cold’ before you consider transitioning the property into new ownership. How much time is enough to be considered ‘old and cold’? Conservatively speaking up to two years may be a good rule of thumb, although some tax advisors may be fine with a year and a day.

Not all 1031 Exchanges are alike so it is important to seek advice from a tax professional before you change ownership of a 1031 replacement property.

Are There Any Other Benefits To A 1031 Exchange Besides Tax Deferment?

Yes! Here are 5 benefits of doing a 1031 exchange besides tax-deferment:

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