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- 1031 Exchanges
One of the Last Tax Shelters
A 1031 Tax Deferred Exchange is one of the last tax shelters allowed by the Internal Revenue Service. It is a transaction in which a taxpayer exchanges investment property for like-kind property and defers the payment of capital gain taxes. The IRS defines like-kind property as all real property held for the productive use of trade or business or for investment purposes. This basically means any real estate held for investment except your primary residence and second family home.
There are some important rules which must be followed to effectuate a valid exchange:
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The exchange must be opened before the close of escrow on the relinquished (sale) property.
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The taxpayer must identify the replacement (acquired) property within 45 days after the close of the relinquished (sale) property.
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The taxpayer must close the replacement property within 180 days from the close of the relinquished property or the tax return filing of the relinquished property, whichever comes first.
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The taxpayer must reinvest all net proceeds into the replacement property.
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The taxpayer must obtain a debt of equal or greater amount on the replacement property.
By following these rules, the taxpayer may shelter the capital gain taxes into the replacement property. This creates more buying power for the taxpayer than if the capital gain taxes were paid. Also, by deferring the payment of capital gain taxes, the taxpayer gets to invest the taxes interest free from the IRS.
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- Five Types of 1031 Exchanges
The Five Types of §1031 Tax Deferred Exchanges
1- Simultaneous –
When both relinquished and replacement properties close escrow the same day. *2- Delayed – After the relinquished has closed escrow, the replacement property must be identified within the first 45 days, and purchased within 180 days. *
3- Reverse – Allows the purchase of the replacement property before the selling of the relinquished property. The relinquished property must be identified within 45 days after escrow has closed on the purchase property, and must close escrow no later than 180 days. *
4- Build to Suit – Allows the taxpayer to construct improvements on the replacement property during the course of the exchange. *
5- Personal Property – An exchange involving personal property, (e.g. airplane for an airplane, boat for a boat or a restaurant business for a restaurant business), to be used for investment or the productive use in a trade or business. *
* Each type of exchange involves special rules and requirements promulgated from the IRS. An experience Intermediary should be employed to facilitate such transactions to assure proper handling and tax deferral by the IRS. Remember, all 1031 Tax-Deferred Exchanges must be set up prior to the close of Escrow. Please consult with your professional administrator at Exchange Resources to discuss the details of your exchange. We are always pleased to answer any questions you might have regarding your exchange, escrow holdback or foreclosure.
- To Sell or to 1031 Exchange?
Sale or 1031 Exchange?
Whether an investor owns a property all cash or with leverage, the benefits of tax deferral are significant. The tax dollar saved can be utilized to purchase additional property. The example below shows the significant advantage of exchanging for an investor who sells a $425,000 property that has been fully depreciated and that was debt-free. This assumes the client is subject to a combined federal and state tax bracket of 35%. The investor who executed a property §1031 Tax Deferred Exchange defers the payment of capital gain taxes as well as recapture of depreciation taxes3;
Sale 1031 Exchange
Net Equity (Minus Cost)
$400,000. $400,000.
Taxes (35%)
$150,000. None
Funds to Reinvest
$250,000. $400,000.
If the investor leverages his new property to 70% by putting 30% down, he could purchase properties totaling:
Acquisition Value
$833,000
By doing a §1031 Tax Deferred Exchange, the investor increased his portfolio by $467,000. More than if he sold and subsequently reinvested with after-tax dollars thus creating a better sale for your investor.
Please call me for specific information regarding your possible 1031 Tax Deferred Exchange or Holding Account.
- Reverse 1031 Exchange
R E V E R S E
§1031 Tax-Deferred Exchanges
The newly issued Revenue Procedure (REV. Proc.2000-37) provides a safe harbor for reverse exchanges entered into on or after September 15, 2000 provided the taxpayer does the following:
1. The safe harbor allows a taxpayer to treat the Exchange Accommodation Titleholder (EAT) as the beneficial owner of the property for federal income tax purposes. The parked property must be held under a Qualified Exchange Accommodation Agreement.
2. The EAT must hold legal title or similar ownership to the property being parked.
3. The taxpayer must have the intent to park with EAT either the relinquished or the replacement property as part of a 1031 tax deferred exchange.
4. No later than five (5) business days after the transfer of ownership of the property to the EAT, the taxpayer and EAT must enter into a written agreement indicating that this is an exchange and that the accommodating party will be treated as the owner of the property for tax purposes.
5. Within 45 days after the transfer of ownership of the replacement property to the EAT, the taxpayer must identify the property to be relinquished.
6. No later than 180 days after the transfer of ownership of the property (replacement or relinquished) to the EAT, the replacement property must be transferred to the taxpayer or the relinquished property to the ultimate to buyer
An EAT that satisfies the requirements of a Qualified Intermediary under the regulations, may also enter into an exchange agreement with the taxpayer to serve as the Qualified Intermediary in a simultaneous or deferred exchange. The taxpayer can guarantee some or all of the obligations of the EAT, including secured or unsecured debt incurred to acquire the replacement property. The taxpayer can also loan or advance funds to the EAT. The parked property can be leases by the EAT to the taxpayer or enter into a property management agreement with the taxpayer.
- 1031 Exchange and Primary Residence
Primary Residence
5 Year Hold Required to Exclude Gain Under IRC §121
As of October 22, 2004, there is new law regarding the sale of ones primary residence which was purchased as part of an IRC §1031 Exchange. Under this provision, a taxpayer who exchanges into a rental house that is later converted into their home, is not allowed to exclude gain under the principal residence exclusion rules of IRC §121 ($250,000 for singles and $500,000 for a married couple filing jointly) unless the sale occurs at least five years from the date of its acquisition.
The Conference Agreement on H.R. 4520 includes the following provision to amend §121(d):
Sec. 840. Recognition of gain from the sale of a principal residence acquired in a like-kind exchange within 5 years of sale.
(10) PROPERTY ACQUIRED IN LIKE-KIND EXCHANGE.
If a taxpayer acquired property in an exchange to which section 1031 applied, subsection (a) shall not apply to the sale or exchange of such property if it occurs during the 5-year period beginning with the date of the acquisition of such property.
Example: A taxpayer purchased a rental house two years ago and then moved into it as their principal residence. Under the new law, they will have to wait three years before selling the property and excluding gain under IRC §121. The taxpayer still must meet the two out of five year occupancy test.
To qualify as a like kind Tax Deferred Exchange, the property must have been purchased with intent to hold for investment purposes or productive use in a trade of business, and not for personal use purposes.
- Foreclosures - FAQs
When Can I Start a Foreclosure?
Unless the Note or Deed of Trust state differently, the lender may start the foreclosure process as soon as a payment is missed. However, practically it is prudent and courteous to wait at least a week before beginning the process.
How Long Does a Foreclosure Take in California?
A foreclosure will take, at the very least, about four months from start to finish. California law requires that the following time table be met:
Step 1:
Notice of Default is recorded
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Three (3) months pass
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Step 2:
Notice of Trustee’s Sale is recorded
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21 days pass
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Step 3:
Sale Date
This process cannot be shortened. However, the lender can choose to lengthen the process. For example, the lender may want to postpone the sale date so that the borrower can obtain additional financing.
Who Pays the Foreclosure Costs and Expenses?
Typically, the Note and Deed of Trust require that the borrower pay the costs and expenses incurred during the foreclosure process. During the foreclosure process, the lender who initiates the foreclosure process will be invoiced for costs and expenses incurred. If the borrower desires to bring current their account or pay-off the debt entirely, he or she must pay all costs and expenses. Should the property go to sale, the costs and expenses will be paid by the buyer at the auction.
What Rights does the Borrower Have During the Foreclosure Process?
The borrower can pay any delinquent amounts to bring the loan current or may payoff the loan if a balloon payment is due. The borrower may refinance or even sell the property.
What Happens at the Sale?
The auction usually occurs at the entrance of the courthouse or city or county building in the county where the property is located. The starting bid is the amount the borrower owes the lender. If no one bids for the property, the lender will become the owner of the interest being auctioned. If the property is desirable and is being auctioned at a good price, third-party buyers may show up to bid for the property. The lender may choose to bid for the property as well. Whoever ends up purchasing the property it is essential to remember that, generally speaking, while most junior liens will be "wiped out", the senior
- Judicial v. Non-Judicial Foreclosures
NON-JUDICIAL FORECLOSURES
California and many other states use deeds of trust to secure real property. The non-judicial foreclosure process is used when a deed of trust contains a power of sale. The power of sale enables the trustee, a third party chosen by the lender, to initiate the foreclosure process without having to go to court. The trustee will guide both the lender and the borrower through the foreclosure process, assuring that the appropriate legal and contractual requirements are satisfied.
JUDICIAL FORECLOSURES
If the property being foreclosed on is located in a state where mortgages rather than deeds of trust are utilized as security interests then the foreclosure must be "judicial". This simply means that the foreclosure process involves local courts rather than a third-party trustee. Each state has its own rules and regulations that must be carefully followed otherwise the courts may set aside the foreclosure process.
Sometimes, even if the property is secured by a deed of trust containing a power of sale, the lender may decide to proceed with a judicial foreclosure. The types of properties that generally fall into this category are income producing properties such as apartment complexes, hospitals, office buildings and agricultural lands.
BOTH PROCESSES SIMULTANEOUSLY
It is possible to commence both judicial and non-judicial foreclosure processes on the same property for the same default. This allows the lender to have both options open and choose the solution that best suits his or her needs.
- Taxes
- TIC (Tenant-in-common) Investments
Tenant-in-Common Investments
Tenant-in-Common references a way of taking title to real estate in which each owner possesses an undivided, fractional interest in an entire property. TIC buildings have become increasingly popular choices for replacement properties for 1031 exchanges. TIC owners shares in the net income, appreciation, and tax shelters of the entire property according to their percentages of ownership.
TIC owners receive separate property deeds and title insurance for their interests in the property investment. This gives each TIC investor the same rights of ownership that a single owner would enjoy. TIC offerings are prepackaged with management and financing in place; they often simplify the 1031 exchange process for investors looking for passive real estate investments.
TIC investments promote simplicity by decreasing the burdens of active management. Owners of real income property who are ready to relinquish the daily obligations of being a landlord and are looking for an investment which provides cash flow opportunities are ideal candidates for TIC investments.
If you are interested in receiving more information on Tenant-in-Common investing, or if you would like to schedule an appointment to discuss your specific situation, please call me as soon as possible. - Church Activities
HOUSE CHURCH
House church every Wednesday at 7.00 pm at
510 W. Altadena Drive
Altadena, CA 91001
ALL ARE WELCOME.
Please join us as we glorify our Lord Jesus and encourage each other in the the Word of God.
God bless you.
- St David's Church
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660 W. Huntington Drive • Arcadia, CA 91007
(626) 375-3620 • (626) 445-6660
