1031 Exchange Blog
In this 1031 FAQ video, Jeff Peterson offers a few 1031 exchange estate planning tips. Watch more 1031 educational videos here.
Start Your 1031 Exchange: If you have questions about 1031 estate planning, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2016 Copyright Jeffrey R. Peterson All Rights Reserved
You may use your 1031 funds to pay certain customary “transactional items” that relate to the disposition of the relinquished property or to the acquisition of the replacement property and that appear under local standards in the typical closing statements as the responsibility of a buyer or seller (e.g. commissions, prorated taxes, recording or transfer taxes, and title company fees).
Because there is potential for ambiguity as to what is a customary or qualifying transactional item, oddball fees and questionable transactional expenses that may not customarily be paid as part of a closing in the locality where the properties are located, should be paid out-of-pocket (not from the 1031 funds) to eschew any potential challenge.
Page 12 of IRS publication 544 states that:
Exchange expenses are generally the closing costs you pay. They include such items as brokerage commissions, attorney fees, and deed preparation fees. Subtract these expenses from the consideration received to figure the amount realized on the exchange. If you receive cash or unlike property in addition to the like kind property and realize a gain on the exchange, subtract the expenses from the cash or fair market value of the unlike property. Then, use the net amount to figure the recognized gain.
Your qualified intermediary probably cannot be 100% sure that ALL of your transactional expenses will qualify to be paid from the 1031 funds. However, I suspect that your CPA or accountant will have a much better feel for what is a permitted typical cost or what is a qualifying expense. After all, your CPA or accountant is the person who will actually sign-off on your tax return and they probably know your specific tax-situation better than anyone else.
Start Your 1031 Exchange: If you have questions about closing costs in a 1031 exchange, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2016 Copyright Jeffrey R. Peterson All Rights Reserved
The Tax Court finally issued an opinion in the Estate of Bartell case on August 10th, almost 10 years following the initial trial. The case dealt with a non-safe harbor reverse construction exchange where the accommodator did not put any equity into the project, the accommodation period lasted for 17 months, and the taxpayer guaranteed the construction loan.
The IRS argued that the appropriate test for a non-safe harbor reverse exchange was whether the accommodator had the substantial benefits and burdens of ownership. The court, however, ruled in favor of the taxpayer on the basis that the accommodator had not acted as the taxpayer's agent.
This decision currently appears to be a major victory for taxpayers who want to accomplish construction exchanges lasting more than 180 days as well as reverse exchanges that might exceed 180 days. However, the IRS has 90 days to appeal this decision and it is likely to do so.
Affirmation on appeal is not certain. Anyone seeking to rely on this opinion must be careful to avoid both language of agency in the exchange documents as well as features that might suggest an agency relationship.
Note that this exchange occurred in the Ninth Circuit. The Tax Court relied heavily on the fact that Ninth Circuit cases have allowed wide latitude in structuring exchanges.
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
Do the properties that I receive title to (by closing on) within the 45 day identification period reduce the number of additional replacement properties that I may identify or designate in writing under the Three-Property Rule, 200% Rule, or 95% Exception?
Internal Revenue Code Section 1031(a)(3) imposes both the 45 day Identification requirement and the 180-day due-date for federal tax return exchange period.
Treasury Regulation 1.1031(k)-(c) provides information on how to make your identification of replacement property before the end of the identification period. It states that:
(1) In general. For purposes of paragraph (b)(1)(i) of this section (relating to the identification requirement), replacement property is identified before the end of the identification period only if the requirements of this paragraph (c) are satisfied with respect to the replacement property. However, any replacement property that is received by the taxpayer before the end of the identification period will in all events be treated as identified before the end of the identification period.
As the properties that you actually receive within the 45 day identification period are treated or deemed as identified, these ‘received properties’ must also be included in computing the various identification rules (e.g., the Three-Property Rule, 200% Rule or 95% Exception). This predicament is described in an illustration set out in Treasury Regulation 1.1031(k)-(c)(4)(iii) which states that:
For purposes of applying the 3-property rule, the 200-percent rule, and the 95-percent rule, all identifications of replacement property, other than identifications of replacement property that have been revoked in the manner provided in paragraph (c)(6) of this section, are taken into account. For example, if, in a deferred exchange, B transfers property X with a fair market value of $100,000 to C and B receives like-kind property Y with a fair market value of $50,000 before the end of the identification period, under paragraph (c)(1) of this section, property Y is treated as identified by reason of being received before the end of the identification period. Thus, under paragraph (c)(4)(i) of this section, B may identify either two additional replacement properties of any fair market value [*under the Three-Property Rule] or any number of additional replacement properties as long as the aggregate fair market value of the additional replacement properties does not exceed $150,000 [*under the 200% Rule]. *emphasis added
Remember that your 1031 proceeds from the disposition must be re-invested in like-kind properties within 180 days of the transfer of your first relinquished property. These properties will only be considered to be like-kind if they are properly identified according to Treasury Regulation 1.1031(k)-(c)(4) which imposes limitations on the number of properties which can be identified as potential replacement properties.
Start Your Exchange: If you have questions about 1031 identifications, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2016 Copyright Jeffrey R. Peterson All Rights Reserved
Many people are subject to US capital gains taxes on the sale of their foreign property. These folks may be surprised to discover that the US government collects taxes on income from many sources. This is true, even if the income is derived from the sale of foreign property. United States taxpayers (including non-citizen US residents) are required to report their earned income and file tax returns no matter where they derive their income.
An investor seeking to exchange into the United States, may be more surprised to learn that in order to qualify for tax deferral under Section 1031, the exchange must be of “like-kind property”; and, that in 1031(h), Congress wrote the law so that “property located in the United States and property located outside the United States is NOT considered to be “like kind.”
Start Your 1031 Exchange: If you have questions about 1031 boundaries with foreign properties, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2016 Jeffrey R. Peterson – All Rights Reserved
