Build Wealth Through 1031 Exchanges

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)

 

Over the last week, 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 are not aware of any extensions of the 1031 exchange time deadlines at this time. Taxpayers currently in a 1031 exchange should plan to proceed as usual and follow the normal time deadlines until further notice.

An extension of the 1031 exchange 45-day and 180-day time deadlines requires a Presidentially declared disaster. In the event of a federally declared disaster, a taxpayer may be eligible for an extension of time deadlines in a 1031 exchange. Generally, to qualify for an extension, the deadline must fall on or after the date of the Federally declared disaster. Presidentially declared disasters are normally specific to affected areas which are generally specific counties identified in a published IRS notice. The IRS notices generally state which counties have been affected and the type and duration of relief that is to be provided. In the past, it has generally been the practice of the IRS to issue guidance shortly after a Presidential declaration acknowledging specifically what may qualify for disaster relief.

For exchangers to obtain extensions, the notice must specifically mention IRS Rev. Proc. 2018-58 section 17 (which supersedes IRS Rev. Proc. 2007-56, section 17), of which provides that an “affected tax-payer” may be eligible for a time extension for the later of 120 days or the date listed on the IRS Notice. If the 45-day period had expired before disaster declaration the exchanger would only be able to extend the 180-day deadline, unless identified property was substantially damaged. Click here to learn more about tax relief in disaster situations.

While some exchanges could potentially be eligible, other exchanges may not be eligible. Exchangers and their advisors should carefully review any IRS notices regarding extensions and make determinations regarding extensions accordingly.

 

Most recent developments:

 

The News Release issued by the CA Franchise Tax Board (FTB) extends the due date for multiple taxes, including non-wage withholding, to July 15, 2020. GAC has confirmed with the FTB that this extension includes filing of Form 593 and payment of real estate withholding. Questions can be directed to Patricia Carte at patricia.carte@ftb.ca.gov.

IRS Notice 2020-18 extended tax filing deadlines but did not include extensions of any 1031 deadlines. We are monitoring this situation closely and will update as new developments arises.

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 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.

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.

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:

Click here