1031 Exchange Blog

1031 EXCHANGE GENERAL

1031 Exchanges Support Small Businesses

07/15/21

Starting and growing a small business is no easy task. There are many challenges and obstacles to overcome, and it ...

Body:

Starting and growing a small business is no easy task. There are many challenges and obstacles to overcome, and it can create more financial hardships than it makes good fortunes. But when a small business grows and flourishes, 1031 exchanges provide support to small business owners needing a larger workspace, to relocate to a more prominent area for their business offerings, or an expansion to different properties. So, what's stopping small business owners from continuing the upward trajectory they have invested in?

One reason could be taxable gains. Taxable gains are profits from the sale of any asset and subject to taxation. So, suppose a small business owner of a salon, restaurant, or bakery wants to sell their current property and buy a bigger one. In that case, they might hesitate to do so because if they receive the money from the sale of the old property, the IRS views that as receiving the sale's profit and will tax that money. The sale will still be taxed even if the money from the sale all went towards a new property, your business, and you received no monetary gain.

<h2>How Do 1031 Exchanges Support Small Businesses?</h2>

Section 1031 of the Internal Revenue Code is a beneficial strategy allowing the owner to defer their gain by structuring the property sale and purchase as an exchange. By deferring taxes owed to the government, more cash is available to buy new property. The intended purpose of a <a href="https://www.accruit.com/property-owners/1031-exchange-explained" title="1031 Exchange Explained">1031 exchange</a> is to aid in the continuity of investment, allowing an investor, in this case, a business owner, to keep investing and growing their company.

Many myths and misunderstandings surround this section of the tax code; thoughts like only the wealthy can use it, an exchange must be costly, or it's a loophole that taxpayers should not utilize. These statements couldn’t be further from the truth. The benefits are not only to the business owner but expand to all areas of the economy and environment. Today, <a href="https://www.accruit.com/blog/primer-1031-exchanges-and-related-types-ex…; title="Start an Exchange with Accruit">1031 exchange real estate</a> investors choose more and more to invest in social impact projects benefiting neighborhoods and communities. With access to more capital, they also improve properties to make them more energy-efficient, helping the environment. Growth leads to the creation of more jobs and opportunities.

Navigating the business world and trying to grow a company or a brand is a part of being a business owner. What doesn’t have to be, is struggling to invest in your future.

<h2>1031 Exchange Advantages</h2>

There are many benefits to leveraging 1031 exchange; however, some costs and considerations are present that taxpayers should consider when contemplating whether or not to execute an exchange. Taxpayers should always consult with their independent tax and legal professionals when contemplating whether or not to execute a <a href="https://www.accruit.com/blog/support-section-1031-kind-exchanges" title="section 1031 exchanges">Section 1031 exchange</a>.

Metatags:

Title:

1031 Exchanges Support Small Businesses

07/15/21

Starting and growing a small business is no easy task. There are many challenges and obstacles to overcome, and it ...

How 1031 Exchanges Can Help Save the Environment | Reduce, Reuse, and Exchange

07/12/21

The country’s hot real estate market is leaving more and more people with significant potential taxable gains if they ...

Body:

The country’s hot real estate market is leaving more and more people with significant potential taxable gains if they were to sell. Farmers, business owners, and real estate investors can benefit from the tax-deferred exchanges from section 1031 of the tax code when they make the decision to sell and buy “like-kind” property. Of course, there can be hesitations to sell the property at a significant gain due to the tax implications some believe they will incur. But, when that gain goes towards the continuity of investment, specifically a business investment, section 1031 can defer it.

<h2>1031 Exchanges FAQs</h2>

In A frequently asked question about 1031, or like-kind exchanges (LKEs), is what does tax-deferred mean? When utilizing a like-kind exchange, you are selling and buying real estate to support your business or investment portfolio. By using the required third-party Qualified Intermediary (QI), the taxpayer will defer the gain on sale and be able to reinvest the proceeds in another property to grow their business or portfolio. The taxes are paid only when the taxpayer receives the gains from the sale of a property. By deferring the taxes owed to the government, more cash is available to reinvest in a new property.

<h2>Environmental Benefits of 1031 Exchanges</h2>

Everyday more and more investors and companies are leveraging the benefits of the 1031 exchange to go "green" by investing in more energy-efficient buildings and properties that support renewable energy such as solar arrays and wind farms. Beyond the purely environmental benefits, companies and investors realize the added investment value and cost savings of these green investments. This includes lower ongoing energy costs, higher resale values, stable income production, and upfront and ongoing tax incentives.

There are various ways in which investment and environmental benefits can align:

<ul>
<li>An investor owns a business in Arizona, where they do not have the capital or desire to retrofit the business to be more-energy efficient. and have a significant gain if they sold and then moved to a new location. Using a like-kind exchange, the building owner can exchange their inefficient energy property for a more environmentally friendly building, which allows them to defer taxes on capital gains from their original property. </li>
<li>An investor cannot find an energy-efficient new building to purchase. Many real estate investors and companies are unaware that they can leverage a 1031 exchange to buy and make substantial improvements to that property over 180 days. In this case, the investor can leverage an improvement exchange to sell their current property and use the proceeds to purchase and then improve the new property to become more energy efficient.</li>
<li>An investor wishes to exchange into or out of a renewable energy source such as a wind farm in Massachusetts. The value of wind farms is primarily a function of the value of the lease, i.e., the rent or royalties, term, and strength of the lessee. Often, the sale prices can be considerable, which may cause a significant tax event to the seller. In many instances, the availability of a 1031 exchange can be the key to enabling a sale to take place by minimizing the tax burden to the seller.</li>
</ul>

So go ahead - go green and save some green at the same time.

Metatags:

Title:

How 1031 Exchanges Can Help Save the Environment | Reduce, Reuse, and Exchange

07/12/21

The country’s hot real estate market is leaving more and more people with significant potential taxable gains if they ...

Deferred Exchange and Deferred Action

07/08/21

Among the many ideas surrounding 1031 tax-deferred exchanges stands the idea that the benefits of a like-kind exchange can only be ...

Body:

<h2>Deferred Exchange and Deferred Action</h2>

Among the many of the ideas surrounding 1031 tax-deferred exchanges stands the idea that the benefits of a like-kind exchange can only be enjoyed by far and few, but that is not the case. Still, the reality of tax-deferred exchanges is that any US tax-paying person or entity can use section 1031 to exchange like-kind property, regardless of US citizenship.

<h2>Deferred Action for Childhood Arrivals</h2>

Deferred Action for Childhood Arrivals (DACA) is a United States immigration policy created in 2012 through an executive order by President Barack Obama. The policy was created as a stopgap measure to stop the deportation of people brought into the United States as children and did not have citizenship or legal residency status. Participation in the program comes with a range of benefits. For example, along with permission to remain in the country, recipients can also get work permits.

DACA recipients, often referred to as Dreamers, are not eligible for any federal benefits, like Social Security, college financial aid, or food stamps. Still, Dreamers are required to pay federal income tax. The IRS does NOT share taxpayer information with other government agencies. Therefore, DACA recipients should not be afraid to file their taxes. It may help them in any future immigration cases in which they are required to prove tax compliance, proof of income, or proof of residence.

<h2>Tax Deferred Exchanges </h2>

A <a href="https://www.accruit.com/property-owners/1031-exchange-explained" title="1031 Exchange Explained">1031 exchange</a>, also called a like-kind exchange, LKE, Starker Trust, or tax-deferred exchange, was first authorized in 1921 when Congress recognized the importance of encouraging reinvestment in business assets. Today, taxpayers use 1031 exchanges to increase cash flow by deferring taxes on gains realized through the sale of real estate, as long as they reinvest those gains in the replacement property. 1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business, or investment.” By structuring the sale and purchasing property as an exchange, the owner can potentially reduce the recognized tax gain to zero. By reducing the taxes owed to the government, more cash is available to purchase new property.

<h2>Dreamer Eligibility</h2>

There are many questions asked in regards to 1031 exchanges, a DACA recipient may wonder if their legal status permits the use of section 1031, and the answer is yes. As long as a Dreamer pays their federal taxes as required, they may exchange like-kind property using a 1031 exchange. The benefits to a like-kind exchange are open to various individuals and organizations, and properties both in the United States and internationally. Keep in mind that for two properties to remain “like-kind,” they both must be domestic. This creates several new opportunities for Dreamers to begin growing their wealth and their businesses.

Metatags:

Title:

Deferred Exchange and Deferred Action

07/08/21

Among the many ideas surrounding 1031 tax-deferred exchanges stands the idea that the benefits of a like-kind exchange can only be ...

1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

1031 exchange explained

07/01/21

Back in 1921 Congress concluded that an investor simply switching from one property to another was only continuing the same investment ...

Body:

When you sell a piece of real estate the value of which has appreciated overtime, you have to pay a lot of taxes. After all you can’t really fully benefit from your real estate investment without paying taxes, can you? Actually, you can.

Back in 1921 Congress concluded that an investor simply switching from one property to another was only continuing the same investment and should not incur a taxable event. They called this a <a href="https://www.accruit.com/blog/understanding-like-kind-requirement-1031-e…; title="like-kind exchange">1031 like-kind exchange</a>. So, when you sell a piece of real estate and purchase a new one of at least equal value, you can defer tax payments. The key, follow the regulations.

First, choose a <a href="https://www.accruit.com/property-advisors/your-trusted-qualified-interm…; title="qualified intermediary">qualified intermediary</a> or ‘QI’ such as Accruit, to process the exchange of properties. Next, transfer the property your relinquishing through the QI to the buyer. The QI holds the funds on your behalf for the time of sale to the time of purchase. Within 45 days, settle on possible new properties and within 180 days close on the replacement property which the QI acquires with the money held from the initial sale. The new property is transferred through the QI to you investor completing the task exchange between you and the QI.

When you partner with a trustworthy and experienced QI <a href="https://www.accruit.com/property-owners/1031-exchange-explained" title="1031 Exchange Explained">1031 exchanges</a> allow you to defer taxes that can otherwise eat up to a third of your profit. To speak to the leader in 1031 exchanges contact <a href="https://www.accruit.com/contact-us" title="Start an Exchange with Accruit">Accruit</a> today.

Metatags:

Title:

1031 Exchange Explained by Accruit - Your Trusted Qualified Intermediary

1031 exchange explained

07/01/21

Back in 1921 Congress concluded that an investor simply switching from one property to another was only continuing the same investment ...

Holding Periods in a 1031 Exchange

1031 Exchange Qualified Intermediary

06/24/21

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are do's ...

Body:

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are do's and dont's, and several gray areas of which taxpayers should be aware. A Qualified Intermediary (QI), like Accruit, is accustomed to dealing with all types of complex exchanges, and wants to make sure that the complexity of an exchange doesn't deter you from considering one. Your QI will help you put the pieces together to process an exchange successfully.

For the taxable gain to be deferred, specific key requirements must be satisfied:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-listid="2" role="listitem">
Properties Must Be Exchanged 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-listid="2" role="listitem">
There Must Be No Constructive or Actual Receipt of Exchange Funds 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-listid="2" role="listitem">
Properties Must be "Like-Kind"  
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-listid="2" role="listitem">
Exchange Must Be Equal or Up in Value  
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="Symbol" data-leveltext="" data-listid="2" role="listitem">
Taxpayer Must Follow Exchange Time Limit & Identification Requirement   
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-listid="2" role="listitem">
Properties Must Be Held for Business or Investment Purposes:
</li>
</ul>

The relinquished property and the replacement property must be held for business or investment purposes. For example, a sale of business property is not required to be replaced with other business property; it can be replaced with investment property or vice versa.

There are no standard or specific 1031 exchange holding periods by which a taxpayer must abide for property to meet the definition of "like-kind" or held for investment or business use. The only exception is Section 1031 of the Tax Code, with certain limited exceptions, prohibits exchanges where the taxpayer intends to acquire replacement property from a related party.

Related Party is defined in I.R.C. § 267(b) or 707(b)(1) and generally covers exchanges between family members as well as exchanges between other entities where there is a high commonality of ownership. Related Parties are discussed below.

Holding periods are, therefore, determined on a case-by-case basis regarding the taxpayer's genuine intentions based in part on:

<ol role="list" start="1">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Times New Roman" data-leveltext="%1." data-listid="3" role="listitem">
Reasons for acquiring, holding, and disposing of the property. 
</li>
</ol>

<ol role="list" start="2">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Times New Roman" data-leveltext="%1." data-listid="3" role="listitem">
The taxpayer's primary occupation. 
</li>
</ol>

<ol role="list" start="3">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Times New Roman" data-leveltext="%1." data-listid="3" role="listitem">
Previous 1031 exchange activity. 
</li>
</ol>

<ol role="list" start="4">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Times New Roman" data-leveltext="%1." data-listid="3" role="listitem">
Use of the property. 
</li>
</ol>

Generally, the longer the holding period, the better. However, a taxpayer who is disqualified from utilizing the benefits of Section 1031 would not then qualify merely because of a long holding period. What the Code, the courts, and the I.R.S. want to prevent is taxpayers holding property primarily for sale and attempting to defer their taxes utilizing Section 1031 (e.g., a builder of residential subdivisions).

<h2 paraeid="{4aed712f-9ef1-4e53-980d-68cf6d00ef1c}{102}" paraid="80163709">1031 Exchange Related Party Rules </h2>

When a taxpayer exchanges like-kind property with a related party, the exchange is subject to <a href="https://www.accruit.com/blog/1031-tax-deferred-exchanges-between-relate…; rel="noreferrer noopener" target="_blank">related party restrictions</a>, one of them being the Two Year Holding Period. When a taxpayer exchanges like-kind property with a related party, the exchange will at least qualify for tax deferral per Section 1031. However, the property received by either the taxpayer or related party must be held for at least two years before it is again exchanged or sold. If either party does not hold the property for at least two years, then the deferred gain or loss from the original exchange must be recognized. (Section 1031 (f))

Example: Mr. Jones owns an apartment building in Utah and wants to trade for a vacant rural lot in Wisconsin from his daughter Jane. Suppose either Mr. Jones or Jane sells or disposes of the property received from the exchange within two years. In that case, the deferred gain from the original exchange becomes fully taxable to Mr. Jones on the date of the subsequent disposition.

A taxpayer is well served by <a href="https://www.accruit.com/blog/1031-exchange-tips-selecting-right-qi" rel="noreferrer noopener" target="_blank">finding an exchange company</a> well-versed in the complexities surrounding 1031 exchanges and the tax law considerations associated with them. As with all matters concerning 1031 exchanges, it is highly advisable to consult with an independent professional regarding any proposed transaction's legal and tax consequences.

To learn more about the considerations for deferral state tax, we offer a free, no-obligation consultation with one of our subject matter experts.

Metatags:

Title:

Holding Periods in a 1031 Exchange

1031 Exchange Qualified Intermediary

06/24/21

Since 1921, the rules for qualifying and completing 1031 exchanges have gradually broadened and become less restrictive. Even so, there are do's ...

1031 Exchanges on Airbnb Rental Properties

1031 tax deferred exchange

06/23/21

A 1031 exchange allows you to defer various forms of taxes – including capital gains and depreciation recapture – when you sell a ...

Body:

Airbnb rental properties are becoming more and more common every day. These popular vacation home properties are used as a second source of income in many cases or as an exchange from more demanding business properties like those in the agricultural industry. Airbnb properties are eligible for a 1031 exchange and can be found all over the country, from Oregon to New York. As a result, it is common for clients to call a qualified intermediary, like Accruit  with 1031 exchange questions regarding sales of their former or future principal residences or vacation homes.

For example:

<ul role="list">
<li aria-setsize="-1" data-aria-level="2" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-listid="2" role="listitem">
Under what circumstances can these dwellings be used as part of a <a href="https://www.accruit.com/property-owners/1031-exchange-explained" title="Start an Exchange with Accruit">1031 tax deferred exchange</a>?
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="2" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-listid="2" role="listitem">
Do they satisfy the requirement that both relinquished and replacement properties be held for investment or use in a business or trade?
</li>
<li aria-setsize="-1" data-aria-level="2" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-listid="2" role="listitem">
 Does some personal use trump the investment use of the property?
</li>
</ul>

<h2 paraeid="{bf27f491-d33f-4d3b-b534-bcdcc068a59d}{231}" paraid="663811619">Rules for Including a Vacation Property in a 1031 Exchange</h2>

Historically, determining whether a home that was both rented out and used by its owner could be eligible for 1031 tax deferral was difficult to ascertain. There was some case law, but that was a bit inconsistent. The IRS attempted to provide some definitive guidance regarding some of these questions in <a href="https://www.accruit.com/exchange-library/rev-proc-2008-16-exchanges-vac…; rel="noreferrer noopener" target="_blank">Revenue Procedure 2008-16</a>. As the IRS aptly put it:

“The Service recognizes that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. In the interest of sound tax administration, this revenue procedure provides taxpayers with a safe harbor under which a dwelling unit will qualify as property held for productive use in a trade or business or for investment under §1031 even though a taxpayer occasionally uses the dwelling unit for personal purposes.”

This revenue procedure made clear that for a relinquished vacation property to qualify for a 1031 exchange, the property has to be owned by the taxpayer and held as an investment for at least 24-months immediately before the exchange. Additionally, within each of the two 12-month periods before the sale, the property must be rented at fair market value to a person for at least 14-days.. The taxpayer cannot have used the property personally for the greater of 14-days, or 10% of the number of days in the 12-months that tenants had rented it.

The requirements for a property to qualify as a 1031 replacement property are  similar. The property has to be owned by the taxpayer for at least 24-months immediately after the exchange. Also, within each of the two 12-month periods after the exchange, the property must have been rented at fair market value for at least 14-days. The taxpayer cannot use the property personally for the greater of 14-days or 10% of the number of days in the 12-months the property had been rented. The taxpayer can use the relinquished or replacement property for additional days if the use is for property maintenance or repair.

<h2 paraeid="{b1146b4f-e7b4-4167-a9f6-d56ede7c456a}{12}" paraid="1429752824">1031 Exchanges and Mixed-Use Properties</h2>

At times, a taxpayer may own a home as the principal residence. Still, part of the property may have been used as an investment or connected with a business or trade, creating an eligible exchange component. This is known as a mixed-use property. An example might be a psychologist who sees patients in a home office. Another example might be a cabin in Oregon with a separate coach house that is rented out via Airbnb or another vacation rental site. It is common for a taxpayer to sell a three-flat where the taxpayer uses one unit as the principal residence. In these instances, §121 and §1031 can both be used to achieve total deferral. There is one caveat with exchanges of mixed-use properties. There is a tendency to give credit for prorated rent and security deposits to the buyer on closing statements. This causes the net amount of proceeds attributable to each property use component to be reduced proportionately. Technically, those credits only pertain to the eligible exchange portion of the property and should not appear as a credit on the personal residence portion of the sale.

In sum, a variety of circumstances surround a property that has been or will be eligible for <a href="https://www.accruit.com/blog/1031-exchange-explained-top-25-faqs-answer…; title="1031 Exchange Explained">1031 exchange</a> and may also have been used or will be used by the taxpayer as a principal residence or vacation rental home. Revenue Procedure 2008-16 provides rules regarding vacation homes and exchange eligible property. Likewise, there are rules under IRC §121 for converting exchange property into a personal residence and vice-versa. Thus, properties with both a principal residence component and an exchange-eligible one can benefit from both the deferral sections. Still, care should be taken to do proper accounting so that buyer credits affect the eligible exchange portion of the sale only.

Metatags:

Title:

1031 Exchanges on Airbnb Rental Properties

1031 tax deferred exchange

06/23/21

A 1031 exchange allows you to defer various forms of taxes – including capital gains and depreciation recapture – when you sell a ...

1031 EXCHANGE GENERAL

BLOG UPDATES