<p>Exchangers often ask whether they can start a 1031 exchange by selling an investment property, and then sell a second investment property as part of that same exchange, after the 45-day identification period closes. The short answer is yes.</p>

<p>The typical 1031 Exchange transaction involves selling one property, identifying potential replacement properties within the 45-day Identification Period, and then acquiring one or more of those identified properties within the 180-day Exchange Period. The 1031 Exchange regulations provide that,<em> “If, as part of the same deferred exchange, the taxpayer transfers more than one relinquished property and the relinquished properties are transferred on different dates, the identification period and the exchange period are determined with reference to the earliest date on which any of the properties are transferred.”</em></p>

<p><strong>Consider the following 1031 Exchange scenario:</strong></p>

<ul>
<li>Exchanger transfers Relinquished Property A on June 1, 2023</li>
<li>The 45-day Identification Period ends on July 16, 2023</li>
<li>The 180-day Exchange Period ends on November 28, 2023</li>
<li>On July 16, Exchanger properly identifies Property Z as Replacement Property</li>
<li>On August 1, 2023 Exchanger disposes of additional investment property, Property B, as another Relinquished Property within the same exchange</li>
<li>Exchanger acquires the identified Replacement Property, Property Z, on September 1, 2023</li>
</ul>

<p>The above scenario is entirely permissible, since Exchanger has transferred both of the Relinquished Properties before acquiring the Replacement Property.</p>

<p>Similarly, Exchanger could have identified Properties X, Y &amp; Z during the Identification Period, and thereafter acquired Properties Y &amp; Z, provided both acquisitions were completed within the 180-day Exchange Period.&nbsp;</p>

<p>In the above scenario, Exchanger should be aware of the following considerations to ensure for full tax deferral:&nbsp;</p>

<ol>
<li>Property Z is worth equal or more than the combined value of Properties A &amp; B</li>
<li>All of the exchange cash generated by the dispositions of Properties A &amp; B are applied toward the acquisition of Property Z</li>
<li>Any debt retired upon the transfer of Properties A &amp; B was replaced with new debt or new cash in the acquisition of Property Z</li>
</ol>

<p>We continue to receive inquiries about potential real estate transactions involving federal and state grazing permits and leases and other special use permits that may involve the U.S. Forest Service (U.S. Department of Agriculture), Bureau of Land Management (Department of the Interior) and various state agencies, to name a few.</p>

<p>The typical situation arises when an Exchanger has sold a ranch or farm property along with Federal or State grazing permits and/or leases and the transfer of the permits and/or leases was included as part of the entire real property exchange transaction. Prior to December 2020, the conventional wisdom was that those Federal permits could be viewed as similar to long-term leases of 30+ years, which are viewed by the IRS as “like-kind” to fee ownership interests in real property and therefore qualified as part of the overall real property transaction. Typically, the Federal permits are issued for a term of from 10 to 12 years with provisions allowing for renewal as long as the permittee is in good standing with the agency. Many of those permits may have been held by the permittees for 50 years or more. However, there was no clear consensus on whether that interpretation would be upheld.</p>

<p>New 1031 regulations were issued in December 2020 by the IRS and Treasury that clarified which types of intangible real property interests might qualify as “like kind” real property for purposes of effecting a 1031 exchange and tax deferral on the transaction. Specifically, the new regs at § 1.1031(a)-3 state that “Under paragraph (a)(5) of this section, an intangible interest in real property of a type described in this paragraph (a)(1) is real property for purposes of section 1031 and this section.” The referenced paragraph (a)(5) goes on to state that interests such as leaseholds, options to acquire real property, easements, and stock in a cooperative housing corporation qualify as 1031 real property interests. The paragraph goes on to provide as follows: “Similar interests are real property for purposes of section 1031 and this section if the intangible asset derives its value from real property or an interest in real property and is inseparable from that real property or interest in real property.”</p>

<p>In a subsequent subparagraph, paragraph (a)(5), the IRS further clarifies “(ii) <u><em><strong>Licenses and permits</strong></em></u>. A license, permit, or other similar right that is solely for the use, enjoyment, or occupation of land … and that is in the nature of a leasehold, easement, or other similar right, generally is an interest in real property under this section.” The IRS then cites some examples, one of which is similar to grazing permits and reads as follows:</p>

<p>“Example 11: Land use permit. K receives a special use permit from the government to place a cell tower on Federal Government land that abuts a federal highway. Government regulations provide that the permit is not a lease of the land, but is a permit to use the land for a cell tower. Under the permit, the government reserves the right to cancel the permit and compensate K if the site is needed for a higher public purpose. The permit is in the nature of a leasehold that allows K to place a cell tower in a specific location on government land. Therefore, the <u><em><strong>permit is an interest in real property</strong></em></u> under paragraph (a)(5) of this section. (Note: highlighted portions added by the author)</p>

<p>Based upon the foregoing information, a strong argument can be made that any value attributable to permits that are part of a much larger land transaction as referenced above qualifies for 1031 tax deferral so long as the Exchanger uses the funds within the 1031 exchange timeline to acquire qualifying replacement property.</p>

<p>Depending on the type of grazing or other special use permits at play, some additional information may be required to fully assess the situation, which could include any of the following:</p>

<ul>
<li>Allotment names and identifying numbers</li>
<li>USFS Ranger District info for the allotments</li>
<li>BLM District Office info for the allotments</li>
<li>Name of Exchanger entity or entities that are the listed permittee(s)</li>
</ul>

<p>We are aware of fairly recent variations on the more common scenario outlined above where a conservation or environmental entity will pay a landowner/Federal permittee a sum of money to waive or assign some, or all, of their grazing permits or other special use permits, back to the Federal agencies that issued the permits. The apparent goal of the payor entity is to encourage the Federal permittees to cease grazing their livestock on public lands and return the public lands to a more “natural” state. This enticement may make sense if the permittee can use the proceeds from the transaction to acquire other grazing lands and defer the taxable event by using 1031 exchange.</p>

<p>A couple of factors that make this scenario unique to the more common one discussed above include the following:</p>

<ul>
<li>The Exchanger will not be selling commensurate base property or permitted livestock to effect the permit waivers or transfers in question.</li>
<li>The Exchanger will also not be conveying the permits to the Buyer as a new permittee. Rather the permits simply revert to the respective agencies.</li>
</ul>

<p>Whether this type of transaction has any merit from a conservation standpoint or complies with the various Federal laws allowing for livestock grazing on public lands is open for debate. However, it appears that the taxpayer/permittee in such a situation can probably parlay the monetary consideration they receive into a valid 1031 exchange.</p>

<p>Much has been written about the <a href="/blog/same-taxpayer-requirement-1031-tax-deferred-exchange" title="Same Taxpayer rule in a 1031 Exchange">Same Taxpayer rule</a> and about <a href="/blog/1031-drop-and-swap-out-partnership-or-llc" title="Drop and Swap in a 1031 Exchange">Drop and Swap</a> transactions. But what happens when one of the partners wishes to cash out upon sale and the other wishes to continue investing?</p>

<p><strong>The Situation</strong></p>

<p>Ross and Joey have been friends their entire lives. After college they decided to pool some cash and buy investment real estate. Rather than consulting an attorney or CPA, they bought books, attended seminars, and talked to friends about their plans. As a result, they went online and formed Unagi LLC, and a short time later acquired their first rental property – a duplex in Bethlehem, PA – for $310,000. During the thirty years that they owned the property, it has been well maintained, and has generated significant cash flow for the friends. Joey has decided that he no longer wants to own this property, he wants to enjoy the use of his share of the sale proceeds and retire to Southern California; however, Ross wants to continue investing in real estate. Their friend, Gunther, is a real estate agent, and has told them that they can sell the property for about $1,600,000.</p>

<p><strong>The Problem</strong></p>

<p>Ross recognizes that the sale of the property would result in capital gains tax on $1,290,000 ($1,600,000 minus $310,000), plus depreciation recapture tax on $310,000. Their tax on the gain would be about $258,000, plus an additional $85,000 in depreciation recapture tax, plus state taxes (3.07% tax rate of PA) of roughly $39,603, and net investment income tax of $49,020 at a rate of 3.8%. Their $1,290,000 profit would be reduced by at least $431,623 due to associated taxes. Ross isn’t willing to incur this taxable event.</p>

<p><strong>The Solution</strong></p>

<p>Ross and Joey consult their tax and legal advisors, and structure a variation of the “drop and swap” strategy in that Joey will withdraw from the LLC under state laws. In exchange for his 50% interest in Unagi LLC, he will become a 50% tenant in common owner of the property, owning alongside Unagi LLC. Simultaneous with Joey’s withdrawal from the LLC, Ross’s sister Monica will become a 1% member of Unagi LLC, allowing its status as a tax partnership to remain intact because Unagi LLC continues to have multiple members, notwithstanding the change of members. At the end of the year, Unagi LLC’s CPA will issue appropriate documents so that Joey will recognize his fair share of the depreciation recapture and capital gains. The result to Joey should effectively be no different than it would have been if he stayed in the LLC and the property was simply sold without an exchange.</p>

<p>At the time of the sale of the Bethlehem duplex, Joey will receive his 50% share of the proceeds in a taxable event to him. Ross has consulted with additional tax and legal advisors, and Unagi LLC will enlist the aid of a Qualified Intermediary (“QI”) such as Accruit to help structure its portion of the transaction as a 1031 exchange, allowing him to defer the associated taxes. The QI will work with the other professionals involved in the transaction, preparing the necessary exchange documents, and holding Unagi’s share of the sale proceeds. Within 45 days after the sale, Unagi LLC will identify appropriate replacement properties. Learn more about the <a href="/blog/what-are-rules-identification-and-receipt-replacement-property-irc-§1031-tax-deferred-exchange" title="Rules of Identification for Replacement Property">Rules for Identification and Receipt of Replacement Property in a 1031 exchange</a>. Using the exchange proceeds held by the QI, Unagi will complete the acquisition of a new property, Replacement Property, worth at least $800,000, thereby exchanging equal or up, and maximizing the value of their 1031 exchange.</p>

<p><strong>The Result</strong></p>

<p>Joey was able to cash out of the original investment property, pay associated taxes, and retire to Southern California, where he is now pursuing an acting career. Ross and Monica, as the two members of Unagi LLC, continue to own investment property in the Bethlehem area. Ross deferred the taxes from the sale of the original investment property by utilizing a 1031 Exchange. Those taxes will remain deferred until Ross completes a real estate transaction, if ever, without the use of a 1031 Exchange.</p>

<p>As always, taxpayers are encouraged to discuss their plans with their tax and legal advisors before they embark on the path toward the sale of an investment or business use property, and to engage the services of a Qualified Intermediary the first closing that will be part of their exchange.</p>

<p>A 1031 exchange is a powerful tool that can help investors defer taxes when they sell one investment property and buy another. However, there are some common mistakes that investors make during the process that can cost them time and money. In this article, we will discuss some of the most common mistakes to avoid in a 1031 exchange.</p>

<p><strong>Mistake #1: Not understanding the 1031 Exchange timeline</strong></p>

<p>The IRS has specific rules and timelines that must be followed in a 1031 exchange. Investors have 45 days from the sale of their relinquished property to identify potential replacement properties and 180 days to complete the purchase of one or more of those identified replacement properties. Failure to meet these deadlines will result in the disqualification of the 1031 exchange, meaning that the investor will be responsible for paying taxes on any capital gains realized from the sale of the relinquished property.</p>

<p><strong>Mistake #2: Not using a 1031 Exchange Qualified Intermediary</strong></p>

<p>A Qualified Intermediary (QI) is a third-party facilitator that through a series of assignments acts as the party to complete the exchange with the Exchanger. By virtue of these assignments, title to the Relinquished Party passes through the QI to the Buyer, and title to the Replacement Property passes through the QI to the Exchanger. Title does not actually vest in the QI, saving a legal step, and in many states, additional transfer taxes. The QI ensures a valid 1031 exchange by properly structuring the exchange per IRC 1031, preparing all necessary exchange documents, and monitoring the exchange to ensure continued compliance throughout the process. Failure to use a QI can result in missteps causing the disqualification of the exchange and the loss of tax deferral benefits.</p>

<p><strong>Mistake #3: Not properly identifying replacement property</strong></p>

<p>Investors must follow strict identification rules when selecting replacement properties in a 1031 exchange. They must identify potential replacement properties within 45 days of the sale of their relinquished property, and they must follow one of three identification rules: the Three-Property Rule, the 200% Rule, or the 95% Rule. (These rules are discussed in more detail here: [insert blog link]) Failure to properly identify replacement properties can result in the disqualification of the exchange.</p>

<p><strong>Mistake #4: Mixing personal and business propert</strong>y</p>

<p>A 1031 exchange is only applicable to investment or business property. It cannot be used for personal property, such as a primary residence. Mixing personal and business property can result in the disqualification of the exchange, unless great care is exercised in structuring the exchange.</p>

<p><strong>Mistake #5: Not consulting with a tax professional</strong></p>

<p>The rules and regulations surrounding a 1031 exchange can be complex and confusing. It is important to consult with a tax professional who is familiar with the intricacies of the process to ensure that all requirements are met and mistakes are avoided. Failure to consult with a tax professional can result in costly errors and the loss of tax deferral benefits.</p>

<p>In conclusion, a 1031 exchange can be an effective way to defer taxes on investment properties. However, it is important to understand the rules and requirements of the process in order to avoid common mistakes that will result in the disqualification of the exchange. By working with a Qualified Intermediary and consulting with a tax professional, investors can ensure a successful 1031 exchange and maximize their tax deferral benefits.</p>

<p>DENVER, Co. - (May, 4, 2023) - On April 19, 2023, Accruit announced a successful acquisition by <a href="https://inspirafinancial.com/&quot; title="Inspira Financial">Inspira Financial</a>, a leading provider of health, wealth, retirement, and benefits solutions. In this strategic move, Accruit is excited to bring real estate 1031 exchange service solutions to over 5 million Inspira Financial clients holding over $55 billion in assets under custody.</p>

<p>After an extensive process and in-depth evaluation of numerous companies, Accruit found the right match in Inspira Financial. For over 20 years, Inspira Financial has provided access to and custody solutions for <a href="https://www.mtrustcompany.com/custody-services/alternative-asset-valuat…; title="Millennium Trust Alternative Asset Investments">alternative asset investments</a>, including real estate, making the company and its existing clients a great fit for Accruit’s real estate 1031 exchange services.</p>

<p>“As we looked at how to best serve our current clients and grow our business, finding a company with strategic, like-minded values and service, which we found in Inspira Financial, was the right move,” said Brent Abrahm, CEO and Founder of Accruit. “This acquisition isn’t about slowing down, it’s about accelerating our growth and opportunities, and extending our reach to over 5 million potential clients.”</p>

<p>As a 1031 exchange Qualified Intermediary and a technology solution provider, Accruit holds a unique position in the marketplace, making it an attractive extension of the solutions Inspira Financial currently offers clients. Accruit’s patented 1031 exchange workflow technology, Exchange Manager ProSM, streamlines the 1031 exchange process through embedded controls, automated notifications, custom exchange agreement and document creation, and digital execution via electronic signatures, making it simple and efficient.</p>

<p>“Being part of Inspira Financial allows Accruit to exponentially expand our footprint and provide exceptional service to more people looking to maximize their financial wellbeing,” said Steven Holtkamp, Managing Director, and CFO of Accruit.</p>

<p><strong>About Accruit Holdings</strong><br />
Accruit Holdings boasts over 20 years in the 1031 exchange industry. Through our leading independent, national Qualified Intermediary, we provide 1031 exchange services across the U.S. and specialize in all types of exchanges from forward, reverse, and build-to-suit/improvement, to specialty "non-safe harbor" reverse exchanges. We revolutionize the industry through our patented 1031 exchange workflow software by offering both SaaS and back-office solutions to the real estate marketplace.</p>

<p><strong>About Inspira Financial</strong><br />
Inspira Financial solves important business challenges through innovative financial wellness solutions that help people plan, save and invest. With clients holding more than $55 billion in assets under custody, we are committed to using our decades of expertise and strong partnership with the financial community to empower employers, advisors and institutions to help people achieve short-term and long-term financial security. Learn more about <a href="https://inspirafinancial.com/&quot; title="Inspira Financial">Inspira Financial.</a></p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p><em>Updated 1/17/2024.</em></p>

<p>The 1031 Exchange has been a popular tax strategy for real estate investors for over a century, but its history and evolution are often overlooked. By understanding how this tax strategy has developed and changed over time, investors can make more informed decisions about their investments and take advantage of the benefits associated with a 1031 Exchange.</p>

<p>Originally established as part of the Revenue Act of 1921, 1031 Exchanges were designed to encourage investment and growth in the real estate market. The basic idea behind the exchanges was simple; by allowing investors to exchange one property for another without incurring capital gains, or other related taxes, the government could incentivize investors to keep their money in real estate and continue investing in new properties.</p>

<p>Over the years, the rules and regulations governing 1031 Exchanges have changed in response to new economic and political realities. For example, in 1979, the 9th US Circuit Court of Appeals approved “delayed exchanges” in the Starker case, which allowed investors to sell their property before acquiring a replacement property, therefore eliminated the requirement for a simultaneous exchange. The case involved not only the first non-simultaneously structured exchange but provided for a five-year time frame for Starker to receive his replacement property. In direct response to the open-ended period, in 1984, Congress codified the 45 and 180-day restrictions presented in Starker {Sec. 1031(a)(3)}, and prohibited exchanges of partnership interests {Sec. 1031(a)(2)(D)}. These narrower time frames provided a nexus between the sale and purchase.</p>

<p>In 1991, Section 1031 Regulations were issued, outlining four “Safe Harbors” including: how the exchange funds could be held so that the Taxpayer was not in constructive receipt; allowing funds to be put into a Trust or Escrow; the use of a Qualified Intermediary which took the place of the buyer in connection with the Taxpayers intent to exchange and; allowing the Taxpayer to earn interest on their funds, which previously was not allowed because that would be considered in “constructive receipt” of the funds.</p>

<p>In 1997, the Taxpayer Relief Act introduced a provision stating that domestic property and foreign property are not considered like-kind. This means that real estate investors could no longer exchange their domestic properties for foreign ones or vice versa using a 1031 exchange. However, the act did not change the rules around like-kind exchanges for properties within the United States. This clarification helped to ensure that investors could continue to use 1031 exchanges as a powerful tax strategy for domestic real estate investments. It also remained possible to exchange one foreign property for another foreign property.</p>

<p>In 2005, the IRS issued Revenue Procedure 2005-14, which provided guidance for combining Section 121 and Section 1031, which has implications for (a) rental property converted to primary residence, and (b) primary residence converted to rental property.</p>

<p>In 2008, the IRS issued Revenue Procedure 2008-16 which provided addition guidance and restrictions on vacation/second homes. The restrictions included the requirement that the Relinquished Property be held for investment for at least 24 months immediately preceding the exchange, and within each of the 12-months the property must have been rented out at fair market value for at least 14 days, and the owners personal use could not exceed 14 days or 10% of the total time the property was rented out. The same restrictions were put place for the Replacement Property.</p>

<p>More recently, the Tax Cuts and Jobs Act of 2017 made significant changes to the 1031 Exchange process, eliminating the ability to use 1031 Exchanges for personal property and limiting its use to real estate investments. The act also introduced new restrictions on the types of properties that could be exchanged, including stricter requirements for vacation homes and other non-primary residences.</p>

<p>Despite these changes, the core idea behind the 1031 exchange process remains the same, to incentivize real estate investment and promote growth in the real estate market. Whether you're a seasoned investor or just getting started in the world of real estate, understanding the history and evolution of 1031 Exchanges is essential to making informed decisions about your investments and maximizing the benefits of this powerful tax strategy.</p>