Prove your intent The first thing the IRS examines in a 1031 exchange is your intent. The intent with which you purchase a property and use it plays a significant role in determining whether or not you will qualify for a 1031 exchange. Properties utilized for personal use don't qualify for a 1031 exchange. Only those properties that are held for use in trade, business, or investment purposes are eligible for a 1031 exchange. What does the 'Safe Harbor Rule' say? In 2008, the IRS included the safe harbor rule to the initial tax code. The rule states that so long as the investor adheres to 1031 exchange guidelines, the IRS will not question whether a dwelling unit as property held for productive use in a trade or business or investment purposes. Fulfilling the following requirements, you can determine whether or not your vacation property qualifies for a 1031 exchange. (a) The investor must own the dwelling unit for at least 24 months before opting for a 1031 exchange. This time frame is known as the 'qualifying use period.' (b) During the qualifying use period, in each of the two 12-month duration - (i) The investor must rent out the dwelling unit to another person for 14 days or more at a fair monthly rental, and (ii) The investor must not use the dwelling unit for personal use for more than 14 days or 10 percent of the number of days during the 12 months when the property was rented. Is your vacation home eligible for a 1031 exchange? The IRS had included the safe harbor rule to provide guidance. However, it isn't the only criteria used in a 1031 exchange. Tax rules are the interpretation of case law that may vary from situation to situation. The following factors will tell you whether or not your vacation home qualifies for a 1031 exchange -
When doing a 1031 exchange on a vacation home, it's required to prove investment intent. The safe harbor rule explains the 1031 exchange eligibility of vacation homes. However, other factors may also impact qualification. Therefore, whether you sell or purchase a vacation home using a 1031 exchange, you must prove that the property is held for use in business, trade, or for investment purposes. Your intent is what matters the most and which can qualify your vacation home for a 1031 exchange.
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What is TIC or Tenancy-in-common?
A TIC investment offers ownership in a real estate where two or more investors share an undivided, fractional interest in the asset. The shares of each investor in a TIC are not required to be equal, and ownership interests can also be inherited. Under a TIC arrangement, each co-owner receives a single deed at the time of closing for their undivided percentage of interest in the entire property. A TIC investor exercises the same rights and benefits as any sole owner of a property without the burden of managing the property. A TIC investment can either be privately arranged by investors or could be a syndicated TIC arrangement where a uniform set of rules apply to all investors. Most of the syndicated TICs are viewed as securities under federal security law. Why should I do a TIC 1031 Exchange?
What you need to know? Revenue Procedure 2000-37 has the guidelines for this type of investment. Any investment not conforming to these guidelines will be taxed normally, which means a big 'No' to the possibility of a 1031 exchange. This kind of investment must be vigilantly scrutinized for potential financial risks. You may require the assistance of your advisor or a 1031 expert. These investments are illiquid, and investors can't interfere in the management of the investment. Is a TIC 1031 Exchange investment beneficial for me? Of course, it is. If you are selling your investment property and don't want to have management responsibilities on your new property, there is no reason why you shouldn't invest in TICs. Post your investment in a TIC property; you will start receiving your share of income on a regular basis. How can I do a TIC 1031 exchange? For that, we need a few information like your basis, equity, etc. You can give us a call at 888-993-2835 and speak to one of our 1031 exchange experts. They will assist you with everything related to investment. One of the most common concerns that investors come up with is: 'can I exchange my primary residence using a 1031 exchange?' Maybe not everyone, but certainly some can. But can you? If you ask IRS, you'll get a direct No. However, as it happens under the Internal Revenue Code, there are exceptions. Let's consider a situation: what if after some time you choose to convert your primary residence into a rental property? Here's the answer. If you turn your primary home into a rental property (i.e., you rent it to tenants who get the possession, and you no longer use the property as your primary residence), you may be able to do a 1031 exchange on that property. Although the IRS doesn’t clearly state how long you must hold the property for rental purposes, the majority of tax professionals believe that one to two years should be enough, given you can show the property is used for investment purposes. The IRS has clear views on the following two points:
Certainly, you may not be able to do a 1031 exchange on your primary residence. However, if you convert your primary residence into a rental property and hold onto it for some time, you are good to go for a 1031 exchange. Therefore, while rules (those established by the IRS) can't be broken, bringing the exceptions into light can transform your investment portfolio. Discuss your 1031 exchange questions, concerns, and requirements here, call us at 888-993-2835. The term Like-kind properties are not specifically defined in the tax code. IRC Section 1031 doesn't restrict "like-kind" property to certain types of real estate. Any real property that is held for productive use in a trade or business or for investment is known as "like-kind" property. The term refers to the Character or nature of the property, rather than its quality or grade. Real estate properties are mostly considered as "like-kind" regardless of whether the property is improved or not improved. The 1031 exchange allows the investor to exchange real properties with like-kind real property. Which properties are not considered as ‘like-kind’? A Primary or Secondary Residence: The taxpayer or exchanger’s primary or secondary residence is not considered as like-kind and does not qualify for a 1031 exchange. It should be noted that primary residences do qualify for the tax exclusion, with certain limitations, but under IRC Section 121 – not Section 1031. Property that are held "primarily for resale" or "dealer property" are prohibited from tax deferral under IRC Section 1031. Qualifying Real Property The real estate properties which are exchanged are extremely broad. Any real estate property held for productive use in a trade or business or for investment- regardless of the fact it is improved or not is considered "like-kind." Improvement in real estate allude to the quality or grade, not the character or nature of the real property. Properties that are viewed as like-kind are:
Besides tax deferral, a vital component of a 1031 exchange is identifying and buying the right replacement property. 1031 Property list that qualifies for a 1031 exchange includes apartments, land office, retail, residential rentals, hotels, self-storage, senior care facilities, restaurants, medical, industrial daycare and educational, retail, and other investment properties and businesses. For instance, you can now sell land and procure an office building, sell a four-plex and acquire land for development, or sell a warehouse and purchase a single-tenant retail property; all of them are considered “like-kind” 1031 exchange properties. 1031 Property List With the financial recession of 2007-2008, the number of exchanges drastically reduced and most TIC sponsors either shut down their business or turned to some other projects. With the boom of 1031 exchanges in recent years, the demand for security, diversification, and passive income has inspired real estate companies to provide replacement property to 1031 exchangers. Instead of using the pre-crash TIC form of ownership, sponsors have selected the Delaware Statutory Trust (DST) structure, which offers similar benefits to TICs. DST replacement property has various benefits to consider, but only accredited investors (high net worth or annual income) have access to DSTs. Several exchangers sell management-intensive properties or land in hopes of secure monthly income without the hassles of maintenance, tenant turnover, day to day responsibilities, or upkeep. You can invest your 1031 exchange proceeds in 3 ways to achieve passivity in real estate ownership: properties with a Tenants-in-Common (TIC) properties, Net Lease (NNN), and properties in a Delaware Statutory Trust (DST). 1031xchange.com has been helping exchangers looking for passive income for more than 15 years and has access to what we can proudly say is the more comprehensive selection of 1031 exchange properties. What is a 1031 Exchange? A 1031 tax-deferred exchange enables investors to reinvest the profits from the trade of investment property in one or more replacement properties without getting immediate federal (and most state) capital gains taxes on the appreciated value. When the process of sale and purchase meet the 1031 exchange standards, taxes are deferred until the newly procured property is sold. This deferral policy can be replicated through any number of exchanges until the tax liability crosses into the individual’s estate upon death. If you go for a 1031 Exchange in Alabama, you should be aware of the basics. IRC Section 1031 enables an accurately structured exchange allowing any investor to trade property and reinvest the profits in a brand-new property and to put off all capital gain taxes. IRC Section 1031 (a)(1) states: “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.” Individual tax situations can differ and can be quite complex. It is advisable to seek guidance from a tax professional in a specific situation. If you are searching for a 1031 property list, call 1031xchange at 1-888-993-2835 or drop an email: [email protected] Buying a real estate property at a discounted price can make any investor happy. That's why the number of investors looking for 1031 exchange property for sale has increased. As properties put on sale are likely to cost less than premium properties, more and more 1031 investors look for such properties that can be purchased at a discounted price.
1031 Exchange Explained - Section 1031 of IRC or a 1031 exchange or a tax-deferred exchange of property is an arrangement that allows investors to defer capital gains tax on exchanging an investment property for another like-kind property. Properties involved in 1031 exchanges must be held for use in trade, business or for investment purposes. For example, an investment property can be exchanged for another using a 1031 exchange. Only personal properties don't qualify for a 1031 exchange. One of the 1031 exchange rules requires investors to involve a Qualified Intermediary in their respective 1031 exchanges. Similarly, there are many other rules that a pursuant of 1031 exchange must adhere to. 1031 Exchange Property Rules - A 1031 exchange investor can identify any number of replacement properties using any of the following rules -
The south-eastern state of US, Alabama, is known for innumerable reasons. Famous sights like Rosa Park's Museum and the church of Martin Luther King Jr. have always been a centre of attraction for anyone landing on the Alabama soil for the first time. The capital city Montgomery itself is popular among the natives as well as the outsiders for its beautiful landscape. However, the state of Alabama isn't only known for its architectural excellence and profound history, it is also considered as one of the best markets for real estate investors, especially for 1031 investors. To understand what 1031 exchange Alabama market has for investors, we reached out to Scott Davis, an experienced 1031 investor presently active in Alabama. You were born in Santa Ana, why you moved to Alabama? What made you change your mind? Frankly, it was Alabama's beautiful landscape that dragged me here. I used to visit my maternal uncle in Montgomery during school vacations. He would offer me a drive in his Fiat every weekend, and we would visit all the famous spots that Alabama is known for. I found all of them intriguing. That was the time when I had decided I would move to this Orange County city had I given any opportunity. I was 16 then. What I didn't know was that it would take me another 14 years to reach here. Your investment was thriving in Santa Ana yet you chose to do a 1031 exchange and shifted your base to Montgomery? Any specific reasons? I had a couple of investment properties in California that were generating considerable revenues. However, the maintenance expense was too high. I had to spend a significant part of my profit in maintaining both properties. Initially, it wasn't a big deal as the profit was good even after deduction. However, the operating expenses associated with both properties had begun to soar gradually and the profit was diminishing at the same pace. When the pressure finally began to pile on, my financial advisor and an old friend, Joshua, suggested me to sell out both properties and reinvest the proceeds in some other income-producing assets. He had introduced me to Section 1031 of IRC or what you call a to connect 1031 exchange, and how it could provide relief from property management. That was enough for me to take the final call. I had to sell my properties, I had to come to Alabama. Being a 1031 investor, how did you find Alabama different from a bigger state like California? 1031 exchange Alabama market has much to offer to investors of all stature. Popular states like California or Texas are known for high-quality institutional-grade properties that have high prices as well. Small investors may not find a place in these states. This is a harsh reality. However, Alabama is different. Not only the giants of the real estate market but even the small investors get a lot of buying options in Alabama. Things like low-income tax rate, strong single-family rental housing market, a massive flow of students and job seekers, low crime rate, and beautiful landscape make Alabama a perfect place for real estate investors as well as for tenants. You may find some of these qualities in bigger states but not all. What would be your biggest advice to someone who is looking to do a 1031 exchange in Alabama? If you want to do it, it's the right time. The best thing about the Alabama real estate market is that it's booming every day. Property's value is skyrocketing year by year. If there is any right time to invest in real estate in Alabama, it's today. But before you do it, don't forget to have a word with your financial advisor or a 1031 expert. I would like to say this only. Planning a 1031 Exchange Investment isn't that easy. It requires a proper understanding of the subject and the best possible assistance from someone who has some experience in this field. We'll try to help you with both in this blog. But before that, let's check out what a 1031 exchange offers?
What does Section 1031 Offer? Section 1031 of IRC or a 1031 exchange is a tax-deferred exchange of properties. It allows investors to defer capital gains tax on exchanging an investment property for another like-kind property. As per the rules, properties involved in a 1031 exchange must be held for use in trade, business or for investment purposes. In other words, you can't exchange an investment property for a primary residence, the replacement property must also be an investment property. Not to mention, 1031 exchange allows tax-deferment, it isn't tax-free. 1031 Exchange Rules-
There is a big misconception that in 1031 exchange Investment an investor can identify only one replacement property. However, it's not true. The IRS allows 1031 investors to identify one or more replacement properties as long as a few requirements are fulfilled.
As you can see, Section 1031 has quite strict rules when it comes to deadlines and identification of the property. Though 180 days may look enough, they aren't sometimes. Therefore, it's important that you talk to a 1031 advisor first and then plan your exchange. To speak to a 1031 advisor, you can call 888-993-2835 or email us at [email protected] |
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October 2019
Commercial Real Estate |