Property that Cannot Be Exchanged Under Section 1031

The Tax Cuts & Jobs Act that was passed late last year and went into effect in early 2018 made numerous changes to the rules governing section 1031 – particularly what can and cannot be exchanged in a 1031 transaction. In this article, we are going to talk about a few types of property that cannot be exchanged under Section 1031 of the Internal Revenue Code.

Non Like-Kind Property

All property involved in a 1031 exchange needs to be like-kind. That means any non like-kind property is not eligible. How do you determine like-kind? Thankfully, the definition is pretty broad when it comes to real estate. But make sure you are only exchanging property that is used for investment or business purposes.

Personal Property

The Tax Cuts & Jobs Act which went into effect earlier this year effectively restricted 1031 exchanges to real property. That means that many items of personal property that were once eligible for 1031 treatment, can no longer be exchanged in such transactions. Here are a few examples of personal property items that can no longer be exchanged:

• Aircraft

• Artwork

• Business Equipment

• Coins & Precious Metals

• Livestock

Is a 1031 Exchange Right for You?

Looking for help with you 1031 exchange of real estate? Our qualified intermediaries are ready and able to walk you through every step of the process – from selling your relinquished property to closing on your new replacement property. At CPEC1031 our intermediaries have over two decades of experience facilitating exchanges in Minnesota and across the country. Contact us today at our downtown Minneapolis office to set up an appointment with one of our intermediaries and see if a 1031 exchange is right for you!

•  Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

Property that Doesn’t Qualify for 1031 Exchange Treatment

The first question many taxpayers have when they're considering a 1031 exchange is: "does my property qualify?" Here is a quick breakdown of property that does not qualify for 1031 deferred exchange treatment.

Disqualified 1031 Property

Anything that's not used for investment or business purposes or used in one's trade does not qualify for 1031 treatment because section 1031 is only for that which is used in investment, business, or trade. Certain assets are also excluded specifically such as stocks, bonds, and evidences of indebtedness. Partnership interests are also excluded, although there are some exceptions. If you want to do a 1031 exchange, you need to stay inside of the strike zone for 1031 exchanges. For more information check out: The 1031 Strike Zone - Does My Property Qualify?

Troublesome Property Types

Some of the troublesome issues and types of properties to look out for are:

• § 1031s with lake cabins or second homes that may have been used for personal use.

• § Flip and rehab properties that may have been held primarily for re-sale.

• § Buying sheriff certificates and foreclosed properties subject to long redemption right.

• § Partnership interests, stock in corporations and cooperatives.

Finally, bear in mind that foreign property is not-like kind to US property.

• Start Your 1031 Exchange: If you have questions about what types of property qualifies for 1031 treatment, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Maximum Leverage? Looking at Loan-to-Value Ratios by Property Type

Note: In this article, we hear from guest contributing blogger Kip Dunkelberger (kdunk@venturemortgage.com), the President and CEO of Venture Mortgage Corporation.  Kip leads this trusted, dynamic commercial real estate mortgage banking firm, and he himself is known as an experienced and resourceful problem solver in the realm of commercial real estate financing.  

Lenders evaluate commercial real estate largely based on the current and potential income generated by the property, the ease of finding replacement tenants (as applicable), and the degree to which the property is stabilized. With that in mind, let’s take a look at several property types and the general LTV ratios you can expect from potential lenders.

Remember that each piece of commercial real estate is a unique entity, and loan-to-value ratios can vary for a number of reasons: the examples below are presented in good faith only as general guidelines.

Multifamily

Multifamily properties have the distinct advantage of having tenants that are relatively easy to replace in the grand scheme of things. A single-tenant industrial building has a very limited, specific market of potential tenants, making it a riskier proposal in the eyes of a lender than a stabilized apartment building with thousands of potential tenants within a 5 mile radius on any given day. Therefore, owners of multifamily commercial real estate enjoy some of the highest LTV ratios in the market, and can push this ratio up to 85% in some cases, though 75 to 80% is more common.

Specialty/Recreational Properties

The income potential for these properties is largely seasonal and can be volatile, which can cause some lenders to be reluctant to lend on this type of commercial real estate at all. That is not to say all hope is lost: there are several lenders who are familiar and comfortable lending on these properties, and a commercial mortgage banker is a good option to assist borrowers in assessing the lay of the land in sourcing capital for these loans. However, because of the potential swings in income and the risk of drastic changes in the operating stability of these properties, borrowers should expect to see a cap of 50% LTV. Some very stable assets with a long history of good operation (and the documents to support such a history) could possibly push the LTV higher, perhaps to 55 or 60%, but that is relatively rare.

Borrowers should also be aware that valuation of these properties tends to be quite conservative, which could further reduce the potential loan size.

Retail (Strip/Center)

The retail sector of commercial real estate has seen some challenges in the past decade, but remains in relatively high esteem in the eyes of most lenders. It should be noted that retail centers are valued more highly (and have the corresponding higher LTV potential) if they contain one or more national, stable tenants (i.e., Walgreens, AutoZone, Caribou Coffee, Toys R Us, and the like) who will increase customer traffic for the lesser-known tenants and are unlikely to abruptly vacate or go out of business. Lenders also like to see leases with many years remaining for each tenant at the time of origination, which assures them that a property that is currently operating well will not lose half its tenants shortly after closing, and the higher the occupancy rate, the better. A stable retail strip center with low vacancy and good tenants can expect about a 70% LTV ratio, with very well-performing properties able to reach closer to 75% LTV.

Triple Net Leased National Single Tenant Retail

Perhaps the holy grail of leases, the true NNN or triple net lease obligates the tenant to be responsible for taxes, insurance, maintenance, capital expenses, and any other operating expenses associated with a subject property. The owner, in essence, only collects rent and pays the debt service to the lender. When combined with a long lease and a national, publicly traded company as the tenant (Wal-Mart, Best Buy, Aldi, Nordstrom, etc.), lenders are quite comfortable with LTVs up to 85% for these properties; in some cases, special loan programs offer the opportunity for a 90% LTV if the tenant has an especially good credit rating.

Here, we’ve looked a just a few of the many property types in commercial real estate and the range of loan-to-value ratios for each. We’ve explored the reasoning behind the LTV spectrum from the lender’s perspective, and we’ve advised that seeking a consultation with an experienced commercial mortgage banker can provide you with advice regarding the best lender for your property type, situation, and objectives. When it comes to commercial real estate financing, remember that tenants and cash flow are keys to a stabilized, well-performing property that makes lenders comfortable with a potential investment and allow borrowers to maximize their leverage. 

If you have questions about obtaining a mortgage or financing for a reverse exchange or any other commercial real estate investment, you are invited to call Kip Dunkelberger at (952) 843-5125, or email him at kdunk@venturemortgage.com.

Find Venture Mortgage online:

www.venturemortgage.com