1031 Exchange FAQ

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Common 1031 Exchange Questions

In my 1031 Exchange, do I have to purchase 3 replacement properties?

My 1031 Exchange period ends tomorrow, how soon can I get my money back?

What is boot and how is it treated in a like-kind 1031 Exchange?

Can I include jewelry as part the Replacement property purchase in a 1031 Exchange?

Does improved land for unimproved land qualify as a 1031 exchange?

What qualifies as Real Estate held for investment?

Real Estate held for investment is one of the 4 classifications of Real Estate that the IRS has said qualifies for 1031 Exchange. Typically, this almost always land. Investment real estate is a capital asset (IRC Section 1221). It's property held primarily for appreciation of value due to location, passage of time and other factors outside the activities of the owner. It is treated as a portfolio investment asset. Even if purchased with the idea you might someday develop the property, if you don't develop it (for any reason), the property will not lose its classification as investment property.

Related Info: investment, estate, real, qualifies, develop, asset, owner

The guy building my 1031 Exchange property wants to include his paving services as part of the exchange. Will that work?

Be very careful not to get caught in a 1031 exchange for services trap. The transfer of Relinquished Property won't qualify for §1031 treatment if it's transferred in exchange for services. This includes all production services. You will need to write up and itemize his services in a separate contract. Be sure to discuss the tax rate for those services with you CPA or tax advisor as there may be actionable tax items here.

Related Info: services, work, paving, include, wants, building, contract, itemize, discuss, production, advisor

How do I figure my 1031 Exchange Closing Costs?

Your Title/Escrow/Mortgage/Closing company can help you figure out your 1031 Exchange closing costs. Be sure to choose a Qualified Intermediary with competitive rates and secure funding. Check out our 1031 Exchange Fee Schedule for more information.

We also recommend that you remind your closer and real estate agent that  selling expenses can offset against boot received. Factoring in this offset is critical when the exchange is originated and in the planning stages. Selling expenses paid in connection with a §1031 exchange are treated as cash boot paid and offsets any boot received. Selling expenses include brokerage commissions and other closing costs such as title policy fees, escrow fees, and recording fees.

Related Info: costs, closing, figure, boot, fees, selling, expenses, offset

How secure are my 1031 Exchange funds?

The security of your funds is not something you should have to worry about while completing your 1031 Exchange. For over 20 years now the safety of client proceeds is of highest importance to us.  Here's what we're doing about it.

There are two primary areas of concern:

1. The Bank where client funds are deposited (Riverview Community Bank).
2. The Qualified Intermediary (Realty Exchangers, Inc.).

1.) The Bank: Although our bank is considered strong and very well capitalized the only real safety for bank accounts today is "FDIC" (Federal Deposit Insurance Corporation) insurance. Riverview has qualified for the FDIC's Transaction Account Guarantee Program and ALL OF REALTY EXCHANGERS ACCOUNTS ARE NOW "FDIC" INSURED. Unlike previous "FDIC" insurance there is no upper limit on the amount.

2.) The Qualified Intermediary: As we have seen, with all the recent bankruptcies and business failures, neither size, a prestigious name, belonging to a trade group, or hiding behind a title company or other large entity, will assure the safety of your funds. We are Licensed, Insured, and Bonded but none of that will really protect you either. The only real protection is a QUALIFIED ESCROW AGREEMENT. This is a separate signed agreement between you, us, and the bank, which requires you to approve in writing any withdrawal of your 1031 funds. At the same time it keeps control of the 1031 funds with Realty Exchangers, Inc. thereby meeting the IRS's §1031 requirements (see note below). Unless otherwise requested ALL EXCHANGE ACCOUNTS WILL NOW INCLUDE A QUALIFIED ESCROW AGREEMENT.

Note: The Qualified Escrow Agreement is signed by all parties at the time of closing of the relinquished property. When the 1031 funds are wired into Realty Exchangers account the bank places a hold on the account. Then when the exchanger is ready to close on the replacement property a form is signed by the exchanger (you) that authorizes the bank to release the specified amount to that escrow as requested by Realty Exchangers wiring instructions. Quite simply, the exchanger will have to authorize any use of their 1031 funds.

We want you to feel secure and able to devote your full attention to the structure and completion of your 1031 exchange knowing that your funds will be there when you need them.

Related Info: funds, secure, bank, realty, exchangers, escrow, agreement

Can I use my 1031 Exchange Proceeds to make improvements on my replacement property?

The rules about 1031 exchange are such that the proceeds from the sale of your property must be applied to purchase of your replacement properties. Let's run out this scenario and see where it goes. Just so you know this has actually happen but we'll remove the names to protect the not-so innocent from their foolish selves.
Let's say you sell your rental property as a 1031 Exchange. A month later you find another rental property that you want, so you identify that property as your replacement and begin working out a deal with the owner to purchase it. Upon inspection of the property you determine that you want to "gut" the house, removing the lathe and plaster and replace it with sheet rock. You also decide you want to replace the aging roof. So you make a deal with the property owner who wants to sell it in "as-is" condition that you will make improvements to the home as a 'partial payment" for the property. The owner agrees that the amount you spend will be deducted from the total purchase price of the property. So you take a "withdrawal" of $20,000 from your 1031 Exchange proceeds to purchase the materials you need to fix walls and roof of the home yourself and begin your work. After you've torn the house apart, you discover extensive water damage with has lead to rot and mold on all of the walls of the house. No you've decided not to purchase the house after all and you're stuck with a purchase of materials for a house that you don't even want. Plus you've already torn it apart and the property owner is going to sue unless you fix it! Yikes!
First off, it is important to understand that many of the aspects of this scenario should never have happened in the first place. If you Qualified Intermediary allowed you to withdraw funds from your 1031 Exchange proceeds "like a bank" you would be in extreme danger of allowing your Exchange to collapse. This becomes a constructive receipt issue as you should never have control over the money during the exchange period. The constructive receipt rules were put in place to prevent this type of scenario.

Also, 1031 Exchange proceeds are intended ONLY as the funds to outright PURCHASE your replacement properties, you cannot use them as some sort of down payment, that they can be a partial payment (which you'll kick in some more of your own money) at the time of closing.

Further, common sense is often mis-placed when we spot a "good deal" on a property we think we must have. In the above scenario, a proper home inspection should have happened before any deal was struck and an attorney should have been consulted to prevent this episode. People make mistakes, luckily there are rules to save them from themselves.

Related Info: replacement, improvements, proceeds, purchase, house, owner, payment, home

How does a 1031 Exchange work for partners in an LLC?

Most business partnerships that are selling business real estate or real estate held for investment purposes will qualify for 1031 Exchange. A very common situation is the single property held by two “partners.” Many joint owners of a rental income property consider themselves as partners when in fact they are tenants in common. In general, a partnership is formed when two or more persons (includes corporations) join together to conduct a business activity with the intent of sharing profits and losses. However, mere co-ownership of real estate maintained and leased or rented is not a partnership unless the co-owners provide services to the tenants other than the normal landlord activities.

Related Info: partners, work, estate, real, business, tenants, partnership

Can you do a 1031 Exchange with your son?

The IRS has laid out some specific rules regarding a 1031 Exchange with relatives. Careful review of our 1031 Exchange Knowledge Base regarding 1031 exchange with relatives reveals,
"Exchanging with a related party is OK - but to qualify for §1031 treatment, you must know exactly what an exchange with a related party really means and the rules for making it work.
There are two kinds of exchanges involving related parties. One is a direct swap between related parties. The other is an exchange involving a sale of the Relinquished Property and the acquisition of a related parties property.
First, let’s look at the direct swap. It may qualify for 1031 treatment but a special 2-year rule applies that could result in triggering the gain when you least expect it. This rule affects all like-kind exchanges between related parties including reverse exchanges. Under this rule if you or the related party disposes of the property within 2 years after the exchange, the exchange is disqualified and gain or loss will be recognized for both you and the related party as of the original date of the exchange.
Some exchanges involving related parties are not subject to this unforgiving rule. These exchanges do not involve the direct swap of properties between related parties but related parties are involved. Here is an example of this frequent kind of exchange:
You are the owner of a property you want to sell. Your daughter owns the property you wish to acquire. She is not interested in your property but is willing to sell her property. You find a buyer for your property (Relinquished Property) but before closing the transaction enter into an exchange agreement with your Qualified Intermediary. As part of the exchange, you purchase your daughter’s property as your Replacement Property. Since you are the only party qualifying for §1031 exchange treatment, the exchange is not subject to the 2-year rule. Daughter has a taxable sale.
Before the 2-year rule, taxpayers used the exchange with a related party to sell highly appreciated real estate without recognition of gain. Here is a Parallel Point illustrating how taxpayers used the exchange with related parties to sell highly appreciated property without recognition of gain."

Related Info: , related, parties, party, rule, exchanges, gain

Can I 1031 Exchange a property with my husband?

This is from our 1031 Exchange Knowledge Base article regarding transfers between spouses.
"No gain or loss is recognized on a transfer of property from an individual to a spouse. If the transfer is incident to a divorce, no gain or loss is recognized on a transfer of property to a former spouse. There is no gain or loss even if the transfer is in exchange for the release of marital right or for other considerations or the transferred property is subject to liabilities that are more than the property's adjusted basis and it was not transferred in trust.
Any transfer of property to a spouse or former spouse not subject to gain or loss is treated as a gift and is not considered a sale or exchange. There are no gift taxes if the transfer is made within a certain three-year period. This period starts two years before the divorce and ends one year after the divorce—a total of three years. If the transfer is made at any other time, it is subject to the gift tax. However a transfer under a property settlement agreed on before the divorce, and approved more than two years later by a divorce court, is subject to the gift tax."

Related Info: husband, transfer, spouse, divorce, gain, loss, gift

Can I 1031 Exchange a rental property and purchase a primary residence with the proceeds?

No. 1031 Exchange rules require that the relinquished property and the replacement property be of like-kind. What this means is that they both must be either a business property such as a rental or an investment property, such as land. The sale you mention will incur the capital gains tax. If your goal is to defer those taxes, your 1031 Exchange replacement property must be of like-kind qualify for IRS 1031 Exchange.

Related Info: proceeds, residence, primary, purchase, rental, like-kind, replacement, gains, capital, incur, goal

Can a farmer take 1031 Exchange money from an agricultural easement and buy another farm?

The sale of an easement gets special treatment under federal tax rules. It works like this: The sales price of an easement is not treated as income. Instead, it reduces the basis of the underlying land. If the sale price of the easement is more than the cost basis of the entire parcel of land, the difference is treated as long-term capital gain and the farmer has a zero-basis in his farmland.

Example: You are a farmer and your farmland has a federal tax basis of $50,000. You sell an easement to the power company (or anyone) for $3,000. You pocket the $3,000 tax-free and the cost basis of your farmland is reduced to $47,000.

This is a mandatory rule so farmers can do anything they want with money.

This is a great tax benefit that all farmers should know about.

Related Info: farm, easement, agricultural, money, farmer, basis, farmland, sale, land, cost

I sold a property last month, is it too late to 1031 Exchange it now?

 Hi, I am interested in determining if I can qualify for a 1031. I sold a property on Sept 22, 2011. I did deposit the cash into my bank account. I am now bidding on another property and could close before the end of the month. The properties are both investment properties. Can I still qualify? Can you assist me in the transaction? Thank you.

1031 Exchange must happen at the time of closing. Because your property has already closed, you now have access to the funds, this means you cannot 1031 Exchange. However, there are times when you have closed sale on a property but the money is still in escrow and out of your control. If that is the case, there may still be time to setup a 1031 Exchange. Check out http://www.realtyexchangers.com for more information.

Related Info: month, closed, properties, time, qualify, money, sale

How do we 1031 Exchange our vacation home?

Vacation homes or your second home are tricky when it comes to 1031 Exchange. If they are not held as a rental they are classified as real estate held for personal use which does not qualify for 1031 Exchange. However, under the rules of §280, a dwelling unit held for both personal use and rental purposes must take a use test each tax year to determine its tax classification for that tax year:

The property is treated as real estate held primarily for personal use and treated as an asset not held for profit if the owner's personal use is more than 14 days or 10% of the total rental days, and the unit is rented for one day or more during the tax year. Does not qualify for §1031 treatment.

The property is treated as rental property if the owner's personal use is no more than 14 days or 10% of the rental days during the tax year and the property is rented more than 14 days during the tax year. May qualify for §1031 treatment.

Related Info: home, vacation, rental, personal, qualify, treated, estate, real

My dad did a 1031 Exchange last year. Before he died he gifted the property to me. Will I have capital gains tax?

When you dad did his 1031 Exchange last year, did intend to gift it to you? If not there have been court cases that stipulate that you, as an heir, would be subject to Capital Gains, though we cannot anything about any other taxes!

We write write about this on our 1031 Exchange Information Center.

Your intention to eventually give away property you receive in an exchange will not defeat the exchange if the exchange is not a part of the gift transaction. In one case, the gift of a ranch received in an exchange was made to the taxpayer's children 9 months after the exchange. His general desire at the time of exchange was to eventually transfer it to his children and was not, in the court's view, inconsistent with his intent at that time to hold the ranch for productive use in business or for investment. He had no concrete plans to do so at the time of exchange.

Related Info: gains, capital, gifted, died, time, gift, children, ranch, desire, transfer

Can my brother be the Qualified Intermediary in my 1031 Exchange?

Your brother is considered an "agent of the exchanger" and cannot qualify as a Qualified Intermediary for your 1031 Exchange.

A person is a disqualified person if:

The person is an agent of the exchanger at the time of the transaction.
The person and the exchanger bear a relationship described in Section 267(b) or Section 707(b). However, you must substitute “10 percent” for “50 percent” each time it appears in those Sections.
The person and a person who is an agent of the Exchanger at the time of the transaction bear a relationship described in (2) above.

These people are treated as agents of the exchanger: A person who has acted as the exchanger’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties. However, the regulation disregards certain services for purposes of determining if an agency relationship exists. Performance of services with respect to exchanges of real estate intended to qualify under §1031 is not taken into account.

Related Info: brother, person, exchanger, time, agent, relationship, services

The seller of my 1031 Exchange Replacement Property wants an Earnest Money Deposit. What do I do?

Treat the purchase of your 1031 Exchange Replacement Property as a regular sale and if the seller requires an Earnest Money Deposit, use funds from your own bank account. DO NOT use any of your protected 1031 Exchange Proceeds for an Earnest Money Deposit.  The reason for this is because what if the deal falls through? You would be in constructive receipt of your funds, which would negate your 1031 Exchange. Better to use your own money, then have the Closing company refund you your deposit after the sale closes.

Related Info: money, deposit, earnest, wants, replacement, seller, sale, funds, receipt

What are the legal fees associated with a 1031 Exchange?

As with any sale of real estate, often tax payers will consult an attorney to facilitate the creation of a Purchase and Sale Agreement for their 1031 Exchange. The fees associated with paying at attorney varies, though most have standard rates. A simple phone call to your attorney can help with this question. There should be no other legal fees associated with your exchange unless you are having an attorney facilitate the closing of sale on the property. Again, this is a question for your attorney and a simple phone call should suffice.

Related Info: associated, fees, legal, attorney, sale, facilitate, phone

Where do I report my 1031 Exchange on the IRS Form 1040?

The form to use for reporting your 1031 Exchange to the IRS is the Form 8824. Your CPA or Tax Advisor knows about this form and will be happy to discuss how to fill it out with you. The form is available from the IRS web site at this address. A quick review of this form will help you organize your documents when it is time to file your return.

Related Info: 1040, form, report, review, quick, organize, documents, return

My dad died before he finished his 1031 Exchange. What do I do?

We hope your father did some decent estate planning and we hope that you are one of his heirs. This makes the 1031 Exchange title issue easier to solve.  The IRS has said that "If the exchanger dies after the exchange is commenced but before it’s completed, the exchanger’s estate may complete the exchange." You will need to work with your attorney and do changes to the title. Just remember that all of the same rules for 1031 Exchange apply in this circumstance.

Related Info: finished, died, title, hope, estate, work, complete, exchangers

I was told I have to claim my 1031 replacement property the same day I sell my property. Is that right?

If by claim you mean identify your 1031 exchange replacements when you sell your relinquished property, no this is not true. When you sell your property you have 45 days to identify your replacements. You do not have identify your replacements on the same day you sell your property, though some people have done it that way, this is not a necessity.

If by claim you mean purchase your replacements when you sell your property, you don't have to do that either, though some customers have found it advantageous to do so.

Related Info: replacement, claim, replacements, identify, found, advantageous, customers

I just sold my rental property. Is it too late to turn it into a 1031 Exchange?

Chances are, YES, it is too late to 1031 Exchange a property once that property has already sold, title has changed and you have access to the funds. Careful planning with your tax advisor is paramount. Next time you are planning to sell a business or investment property be sure to discuss it immediately with your tax advisor or contact your friendly 1031 Exchange Qualified Intermediary at 800-570-1031.  The 1031 Exchange rules were written by the IRS and designed to be easy to follow.

It should be noted that if you sell your property and have not yet taken title and haven't had access to the money, it is possible to contact your closing company and reverse your sale before the title changes. Your attorney can be off help in this situation as well.

Related Info: rental, title, access, advisor, planning, closing, money

What information is requested on Form 8824 for 1031 Exchange?

The following information is requested on IRS Form 8824 for IRS 1031 Exchange. We recommend that you review this with your CPA or tax advisor.
Information on the Like-Kind Exchange

Description of like-kind property given up:
Description of like-kind property received:
Date like-kind property given up was originally acquired (month, day, year)  . . . . . . 3  MM/DD/YYYY
Date you actually transferred your property to other party (month, day, year)   . . . . . 4  MM/DD/YYYY
Date like-kind property you received was identified by written notice to another party (month, day, year). See instructions for 45-day written identification requirement  . . . . . . . 5  MM/DD/YYYY
Date you actually received the like-kind property from other party (month, day, year). See instructions 6  MM/DD/YYYY
Was the exchange of the property given up or received made with a related party, either directly or indirectly (such as through an intermediary)? See instructions. If “Yes,” complete Part II. If “No,” go to Part III  . . . Yes NoPart II Related Party Exchange Information

Name of related party Relationship to you Related party’s identifying number Address (no., street, and apt., room, or suite no., city or town, state, and ZIP code)
During this tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange), did the related party sell or dispose of any part of the like-kind property received from you (or an intermediary) in the exchange or transfer property into the exchange, directly or indirectly (such as through an intermediary), that became your replacement property? . . . . . . . . . . . . . . Yes No
During this tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange), did you sell or dispose of any part of the like-kind property you received?  . . . . . . Yes No
If both lines 9 and 10 are “No” and this is the year of the exchange, go to Part III. If both lines 9 and 10 are “No” and this is not the year of the exchange, stop here. If either line 9 or line 10 is “Yes,” complete Part III and report on this year’s tax return the deferred gain or (loss) from line 24 unless one of the exceptions on line 11 applies.
If one of the exceptions below applies to the disposition, check the applicable box:
a The disposition was after the death of either of the related parties.
b The disposition was an involuntary conversion, and the threat of conversion occurred after the exchange.
c You can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax avoidance as one of its principal purposes. If this box is checked, attach an explanation (see instructions).
For Paperwork Reduction Act Notice, see page 4 of the instructions.

Part III Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received

Caution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property, see Reporting of multi-asset exchanges in the instructions.
Note: Complete lines 12 through 14 only if you gave up property that was not like-kind. Otherwise, go to line 15.
Fair market value (FMV) of other property given up  . . . . . 12
Adjusted basis of other property given up  . . . . . . . . 13
Gain or (loss)  recognized on other property given up. Subtract line 13 from line 12. Report  the gain or (loss) in the same manner as if the exchange had been a sale  . . . . . . . . . 14
Caution: If the property given up was used previously or partly as a home, see Property used as home in the instructions.
Cash  received,  FMV  of  other  property  received,  plus  net  liabilities  assumed  by  other  party, reduced  (but not below zero) by any exchange expenses you incurred (see instructions)  . . 15
FMV of like-kind property you received  . . . . . . . . . . . . . . . . . . . 16
17  Add lines 15 and 16  . . . . . . . . . . . . . . . . . . . . . . . . . 17
18  Adjusted  basis  of  like-kind  property  you  gave  up,  net  amounts  paid  to  other  party,  plus  any exchange expenses not used on line 15 (see instructions)  . . . . . . . . . . . . . 18
Realized gain or (loss).  Subtract line 18 from line 17  . . . . . . . . . . . . . . 19
Enter the smaller of line 15 or line 19, but not less than zero  . . . . . . . . . . . . 20
Ordinary income under recapture rules. Enter here and on Form 4797, line 16 (see instructions)  21
Subtract  line  21  from  line  20.  If  zero  or  less,  enter  -0-.  If  more  than  zero,  enter  here  and  on Schedule D or Form 4797, unless the installment method applies (see instructions)  . . . . 22
Recognized gain.  Add lines 21 and 22  . . . . . . . . . . . . . . . . . . . 23
Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions  . 24
Basis of like-kind property received.  Subtract line 15 from the sum of lines 18 and 23  . . 25Part IV Deferral of Gain From Section 1043 Conflict-of-Interest Sales
Note: This part is to be used only by officers or employees of the executive branch of the Federal Government or judicial officers of the Federal Government (including certain spouses, minor or dependent children, and trustees as described in section 1043) for reporting nonrecognition of gain under section 1043 on the sale of property to comply  with the conflict-ofinterest requirements. This part can be used only if the cost of the replacement property is more than the  basis of the divested property.
Enter  the  number from  the  upper  right  corner  of  your  certificate  of  divestiture. (Do  not  attach  a copy of your certificate. Keep the certificate with your records.)  . . . . . . . . . .
Description of divested property
Description of replacement property
Date divested property was sold (month, day, year)  . . . . . . . . . . . . . . . 29  MM/DD/YYYY
Sales price of divested property (see instructions). . . . . . 30
Basis of divested property  . . . . . . . . . . . . . 31
Realized gain.  Subtract line 31 from line 30  . . . . . . . . . . . . . . . . . 32
Cost of  replacement property purchased within 60 days  after date of sale  . . . . . . . . . . . . . . . . . . . . 33
Subtract line 33 from line 30. If zero or less, enter -0-  . . . . . . . . . . . . . . 34
Ordinary income under recapture rules. Enter here and on Form 4797, line 10 (see instructions)  35
Subtract  line  35  from  line  34.  If  zero  or  less,  enter  -0-.  If  more  than  zero,  enter  here  and  on Schedule D or Form 4797 (see instructions)  . . . . . . . . . . . . . . . . . 36
Deferred gain.  Subtract the sum of lines 35 and 36 from line 32  . . . . . . . . . . 37
Basis of replacement property.  Subtract line 37 from line 33  . . . . . . . . . . . 38

Related Info: 8824, form, requested, information, line, like-kind, instructions, gain, party, date

In a 1031 Exchange, what if the owner occupies one of the units of a 4-plex? Restrictions?

Remember, that a 1031 Exchange is for like-kind property. The dwelling  that the owner occupies,regardless of whether it's a home or an apartment, is not considered like-kind with the rest of the unit in the complex, it's considered real estate held for personal use, which has a different tax provision. What we are discussing here is what is called a Mixed Classification and if there is an exchange of the entire property, the personal dwelling becomes boot, which is subject to Capital Gains tax with no deferment.

Related Info: restrictions, 4-plex, units, occupies, owner, like-kind, personal, dwelling, entire, classification, becomes

In a 1031 Exchange, when is boot not taxable?

Nearly all boot is taxable. Many taxpayers forget that all of the costs that went in to selling your 1031 Exchange property are offset against any of the boot that you have received. If you have $10k in boot but it cost $11k to sell your property, you would have boot but none of it would be taxable because the $11k to sell your property would be written off. More reading about Boot can be found here!

Related Info: taxable, boot, $11k, found, cost, reading

Should I use 1031 Exchange to "flip" a property

Never. There are some 1031 Exchange "expert" bloggers out there who claim that there is precedence that shows people have purchased property with an intent for investment but turned around and "flipped" the property instead for profit. As a 20 year Qualified Intermediary, we have seen these types of schemes come and go.

It is commonly known that any property held "primarily for sale" or dealer property is not qualified for 1031 Exchange. Any attempts to create "wiggle" room on this statue is not serving your clients. What if you fail? Too much to risk, here.

While some may get away with it, we feel that claiming that it is possible to "flip" a 1031 property is confusing to most people. 1031 Exchanges are meant to be simple, easy and clear.

Related Info: flip, people, statue, serving, room, wiggle, attempts

My parents sold their business in Pennsylvania and bought a property in Florida under the 1031 exchange. They would like to add me to the deed of the house they bought but are not sure if this will effect the 1031. Please advise.

This should not be a problem, since the 1031 Exchange has already happened and it is over. Adding your name to the title should not be a problem, though the procedure should be discussed with your Tax Attorney or CPA.

Related Info: bought, house, effect, advise, deed, florida, problem, procedure, discussed, attorney, title, name

How do I write a "Cooperation Clause" for the 1031 Exchange property I am selling?

Here is a "cooperation clause" that you can have added to the purchase and sale agreement for the sale of your 1031 Exchange Relinquished Property.

Buyer hereby acknowledges it is the intention of Sellers to complete a deferred exchange and qualify for treatment under Internal Revenue Code Section 1031. This exchange will not delay the closing (of escrow) or cause additional expense to Buyer. Seller's rights and obligations under this agreement may be assigned to a Qualified Intermediary (as defined in IRS Regulation 1.1031(k)-1) of Seller's choice for the purpose of completing the exchange. Buyer agrees to cooperate with Seller and the Qualified Intermediary in a manner necessary to complete this exchange.

Related Info: selling, clause, cooperation, buyer, complete, sale, agreement, seller's, defined

What type of property can I 1031 Exchange a Farm for?

Thanks for asking! If you farm qualifies for 1031 Exchange, the property will be considered as like-kind, according to the IRS. If the farm is considered like-kind, your qualify for 1031 Exchange with any other like-kind 1031 Exchange property. This includes other qualifying farms or ranches, raw or developed land (regardless of zoning), or rental properties such as duplexes or apartment complexes. The possibilities for 1031 Exchange Real Estate are nearly endless and depending on your needs a good 1031 Exchange Realtor can help you find just the right property.

Related Info: farm, type, like-kind, possibilities, complexes, apartment, duplexes

Can you 1031 Exchange with your own property?

In order to get 1031 Exchange treatment for your sale, THERE MUST BE AN EXCHANGE OF PROPERTIES with more than one party. Often, we get questions from people seeking advice about how to sell a property they own and use the proceeds to improve a property they already own. While this may be possible as a straight sale, in orde to get 1031 Exchange tax deferment benefits, the exchange must be with another party, other there is no exchange.

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Can I do a 1031 Exchange in Guam?

1031 Exchange allows US Taxpayers to sell their like-kind property and purchase like-kind property and defer their Capital Gains tax for the year they sold their property. It is an option that is available to US taxpayers selling and purchasing property in all 50 US States and the US Virgin Islands. Whiel Guam is an unincorporated territory of the United States, it does not receive the same tax treatment for 1031 Exchange that the US Virgin Islands receive, which means that real estate in Guam does not qualify for IRS 1031 Exchange, nor does any other real estate on foreign soil.

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I want to 1031 Exchange a land lot I just bought. My friend thinks it's dealer property. Is that true?

Excellent question and worthy of review! Most land is considered property that is held for investment and almost always passes the 1031 Exchange qualification test with the IRS. Does this land also have a house on it that you are living in? This could create a mixed classification scenario, check out our page on mixed 1031 exchange classifications at http://www.realtyexchangers.com/1031_Exchange_Information_Center/Topic_2_-_Qualified_Property.php#Mixed Classifications.

Perhaps a complete explanation of Dealer property is in order.

To be classified as dealer property, the property must be held at the time of sale or exchange as:

primarily for sale
to customers
in the ordinary course of business.

All three elements must exist at the time of sale or exchange or the property will not be classified dealer property. Primarily for sale means of the first importance. It does not have to constitute more than 50% of the purpose—it need only be the most important. The Supreme Court said, “If an owner acquires a property for rental or investment use, but also plans to sell the property and realize gain in any way he can if the original plan becomes unfeasible, he does not hold the property primarily for sale.”

All buyers of real estate are customers as the term is used here. The activity “in the ordinary course of business” must be directly related to the sale of that property. In addition, the activity must be “busy”. The two “busy” activities usually related to a sale or exchange are

sales activities related to the property, and physical improvements to the property.

Many people, including many IRS agents, misunderstand this activity. To be classified dealer property, there must exist a busy business activity directly related to that property. If you buy a parcel of land, subdivide it, and build houses for sale, there's no question you have dealer property. But if you buy a parcel of land, make no physical improvements, subdivide it by getting it rezoned and meeting other legal requirements, and sell it in the form of an unsolicited offer—you get capital gain treatment. The reason? No business activity related to the property.

If the property is listed with a licensed real estate broker, the sales activities of the real estate broker are not considered to be the sales activities of the owner.

The Tax Court has held the real estate activities of corporations owned or controlled by an individual cannot be attributed to him even though he may be engaged full-time as an officer of the corporation.

Licensed real estate brokers and salespersons ordinarily are not dealers. In Scheuber v. Com. 371 F2nd 996, it was held properties purchased by a licensed real estate broker (who intended ultimately to sell) and held for realization of appreciation in value over a substantial period of time were capital assets.

If dealer property is sold at a gain, the gain is taxed as ordinary income. If dealer property is sold at a loss, the loss is deductible as an ordinary loss.

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