<p>Do you have clients who own investment property? Have you ever wondered how to incorporate 1031 tax-deferred exchange into your residential business? While generally, residential properties are not eligible for 1031 exchange, you may have clients who are buying or selling a property that qualifies.&nbsp;We will be providing a high level overview during this webinar on how the concepts of 1031 not only benefit your clients but also you as a broker.</p>
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<p>CE Credits available through Texas Real Estate Commission (TREC)<br />
Course Number: 39194<br />
1 hour CE Credit<br />
Instructor: Brendan Lewis</p>

<p>We are often asked to help a taxpayer understand the pros and cons of structuring a Section 1031 tax-deferred exchange. Sometimes during these conversations, the taxpayer indicates that they have little or no gain on the current property, and then jump to the conclusion that they have no need to structure a 1031 exchange.</p>

<p>Alas, they often have reached the conclusion in haste, without weighing all of the tax facts.</p>

<p>Assuming that this is the taxpayer’s first investment property, on which the taxpayer has little or no capital gain, the depreciation recapture taxes is often overlooked. Investment real estate is depreciated over its tax life (commercial investment property is depreciated over 39 years, and residential investment property over 27-½ years), and upon sale the depreciation is “recaptured” and taxed at 25% at the Federal level, plus state and local taxes. For example, Joe bought a residential investment property ten years ago for $100,000. During those ten years, he has taken approximately $3,636 in depreciation each year, for a total of $36,363 in depreciation. Upon sale, he will have to pay Federal depreciation recapture tax of $9,090. Even if Joe sells the property for $100,000 – no capital gains – he will have to pay this tax, plus potential state and local taxes.</p>

<p>Now assume that this is Joe’s third investment property, the result of two prior 1031 exchanges. Further assume that he bought his first property for $100,000 and sold it ten years later for $200,000. He then acquired Property 2 for $200,000 as part of a successful 1031 exchange, holding it for another ten years before selling it for $300,000. Joe is now selling Property 3, which he bought for $300,000 ten years ago, but he is selling it for the same $300,000. Notice that Joe has $200,000 in capital gains ($100,000 from each of the first two properties), plus the depreciation recapture on each of the three properties $36,363 in depreciation on each property, for a total of $109,089. Even though Joe has no capital gains on his current property, without a new 1031 exchange he will have to recognize $200,000 in capital gains from the first two properties, plus the recapture tax on over $109,000 in depreciation. Capital gains taxes on the $200,000 (20% Federal, plus state) and depreciation recapture taxes on the $109,089 (25% Federal, plus state and perhaps local) could easily exceed $100,000, depending on where Joe resides.</p>

<p>Another variation to consider is if Joe fell behind on his mortgage. To satisfy the lender, he provides a Deed in lieu of foreclosure. If his investment Property 1 has a current fair market value of $100,000, and debt of $30,000 he has backed himself into a new corner. He still has the depreciation recapture taxes previously discussed, but now he also has net debt relief of $30,000. This mortgage boot would be taxed similar to capital gains taxes, at the Federal, state, and local levels.</p>

<p>Remember, a properly structured 1031 exchange can fully shelter both the depreciation recapture and capital gains taxes, at the Federal level, and usually at the state and local level as well.</p>

<p>As always, taxpayers are encouraged to discuss their plans with their tax and legal advisors before they embark on the path towards sale of the investment property, and to engage the services of Accruit before closing on the sale of the relinquished property as well.</p>
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<p style="text-align:center"><a href="https://cta-redirect.hubspot.com/cta/redirect/6205670/959852e4-dc2a-419… alt="Questions about an exchange? Contact us." class="hs-cta-img" id="hs-cta-img-959852e4-dc2a-4190-b67f-4cc1ed13478a" src="https://no-cache.hubspot.com/cta/default/6205670/959852e4-dc2a-4190-b67…; style="border-width:0px;" /></a></p>

<p>On this episode of the <a href="https://mtlandsource.com/podcasts/what-are-you-going-do-all-money&quot; target="_blank">Ranch Investor Podcast</a>,&nbsp;Accruit Managing Director Max A. Hansen brings his 40+ years of experience as a 1031 exchange expert to the table in discussing how to use a 1031 exchange when buying or selling ranch or farm properties.</p>

<p>He talks with Colter DeVries of Clark &amp; Associates Land Brokers, LLC and Andy Rahn of Montana Land Source, LLC, two energetic entrepreneurs in the real estate industry, about creating an exit plan when selling agricultural property, deferring capital gains taxes through the use of 1031 exchange, as well as how to leverage a real estate portfolio so dollars can go as far as possible.</p>

<p>Click to listen in your browser or find the episode on your favorite podcast app.</p>
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<p>Do you have clients who own investment property? Have you ever wondered how to incorporate 1031 tax-deferred exchange into your residential business? While generally, residential properties are not eligible for 1031 exchange, you may have clients who are buying or selling a property that qualifies.&nbsp;We will be providing a high level overview during this webinar on how the concepts of 1031 not only benefit your clients but also you as a broker.</p>
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<p>&nbsp;</p>

<p>CE Credits available through Texas Real Estate Commission (TREC)<br />
Course Number: 39194<br />
1 hour CE Credit<br />
Instructor: Brendan Lewis</p>

<p>That is the question.</p>

<p>We probably answer at least one phone call or email every day regarding how members of a partnership, limited liability company or other form of partnership who want to sell a property and go their separate ways may do so and still use a <a href="https://www.accruit.com/property-owners/1031-exchange-explained&quot; title="Start an Exchange with Accruit"><acronym>1031 exchange</acronym></a>. Typically, we find out about the issue when the closing of the sale of the property owned by the partnership is looming on the near horizon. In this situation, the distribution out of the partnership to the partners of pro-rata tenancy in common interests is not advisable.</p>

<p>The issue is largely due to the fact that there is no clear test of what is an acceptable “drop and swap” 1031 exchange holding period. When partners consider a drop from their partnership <acronym>interest</acronym> into a tenancy in common interest in the relinquished property and then swap or exchange out of the property, there is a danger if the “drop” takes place shortly before the closing, the IRS could disallow the exchanges into replacement properties. The IRS has reasoned that the tenancy in common interests in the relinquished property were not “held” long enough as investment or business use property, which is an <a href="https://www.accruit.com/blog/1031-exchange-holding-period-requirements&…; target="_blank">essential requirement for the exchange</a>.</p>

<p>The conventional wisdom— and in most cases, the safest approach—is to have the partnership proceed to closing of the old property and have Accruit, as the Qualified Intermediary, receive the exchange value per the 1031 Tax Deferred Exchange agreement. After the closing of the relinquished property, the partners will identify replacement properties which may be different types, i.e. multi-family residential, commercial/warehouse or any other property that is investment or business use property. Accruit will then acquire the various replacement properties on behalf of the partnership/taxpayer. The partners then agree to a special allocation within the partnership to track the profits and losses for the properties and allocate them to the rearranged partner groups during the subsequent holding period. After the partnership has held the properties in that arrangement for at least a couple of years, it will then distribute the property to the partners as tenants in common or to the new partner groups as new partnerships.</p>

<p>Keep in mind, there are still some adventurous souls who engage in drop and swap transactions involving short holding periods after the redemption of the partnership interests in return for the tenancy in common interests that are exchanged. They have relied on a long line of taxpayer-friendly federal cases such as <a href="https://law.resource.org/pub/us/case/reporter/F2/753/753.F2d.1490.84-70…; target="_blank">Magneson v. Commissioner, 753 F.2d 1490</a> (9th Cir. 1985). Practitioners have repeatedly asked the IRS to soften its position regarding the requisite holding period and the step transaction doctrine, but the IRS has refused to do so. This continued attitude toward drop and swap situations does not provide much comfort to taxpayers or their professionals.</p>

<p>The California Franchise Tax Board (FTB) is an example of a state agency that has taken an even more aggressive position on the drop and swap issue by disallowing them and those decisions have generally been upheld. However, the FTB recently lost on appeal when the taxpayer-appellant’s attorneys successfully argued that not only did the timing of the TIC transfers not matter, but the FTB’s assertion that these pre-exchange transfers “lacked substance” was without merit. Take a look at the case entitled <a href="https://ota.ca.gov/wp-content/uploads/sites/54/2020/03/18011715_Mitchel…; target="_blank">In the Matter of the Appeal of Sharon Mitchell</a> (OTA Case No. 18011715) (January 18, 2020). Admittedly, when looking at these transactions either through the lens of Federal or state law and none of the partners are cashing out but doing exchanges, albeit into different property , the continuity of investment argument should be persuasive.</p>

<p>The answer to the opening question, unfortunately, is there is no clear test for the period of qualified use prior to a sale and exchange. It’s always important for anyone stuck in a partnership and contemplating an exchange with partners of diverging interests to talk to their tax advisors as soon as possible to avoid the pitfalls outlined above.</p>
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<p>There's no question that 2020 has been a crazy year. This year's Federation of Exchange Accommodators (FEA) Conference theme is "Standing Strong in the Winds of Change" and it could not be more appropriate. The conference this year is all virtual, but we anticipate the content to be just as informative as it has been in years past. This is where all of the people in our industry get together and learn from the best among us. Gathering digitally from September 22-25, 2020, we are looking forward to seeing old friends and colleagues and being steeped in learning.</p>

<p>Over four days,&nbsp;6 classes on 1031 exchanges including potential changes &amp; the pending election will be shared among our peers.&nbsp;</p>

<p>Accruit is honored to have been tapped for the third year in a row to teach the Reverse Exchange Bootcamp. Martin S. Edwards (past FEA President)&nbsp;and Jordan Born (current FEA Board member and member of the government affairs and ethics committees) will be teaching this course.&nbsp;</p>

<p>The FEA is such an integral part of our business, which is why Accruit remains a very active member, and can boast that&nbsp;five of our employees hold or have held some type of leadership within the organization, from board member to President. They represent our industry in Washington to ensure that 1031 exchange is protected so that we can continue to serve our clients.</p>

<p>We look forward to learning a lot and bringing that knowledge back to better serve our clients.</p>

<p>Never stop learning.</p>