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Pay No Tax - Properly Structured Tax Free Gain or Partial Tax-Free Income - Reduce Tax Burden

FOR A FREE CONSULTATION CONTACT US or PHONE 800.333.0801

IRS Section §1031 Basics

"Real estate offers so many tax advantages it is unique in that it can be used to postpone capital gain taxes indefinitely."  www.wellingtonpublications.com/hpr/planning/section5.html "Real Estate"

When income taxes were first imposed in 1918, gain or loss recognition was required on all disposition of property. To allow USA citizens to maintain wealth an IRS provision for non-recognition of gain or loss on the exchange property was introduced in 1921, § 1031. Since inception, there have been five major amendments made to the Tax-Deferred Exchange as we know it today.  The real estate tax deferred exchange gained significant recognition and popularity in the early 1980’s following the case of Starker vs. United States, which created the 180 day Safe Harbor period following the sale of an asset to effectuate an exchange. This procedure is outlined under the Internal Revenue Code Section 1031, and involves a series of rules and regulations that must be met in order to take full advantage of this tax benefit.  Since the mid-1980’s billions of dollars of real estate have been successfully exchanged via this technique.

Getting Started:

Contact 1031FEC. Though 1031FEC and Kenneth Wheeler do not offer tax advice or legal advice, we can guide you in the right direction and facilitate the efforts of other professionals who will be working with you to complete the transaction. One needs to consult early with an accountant and other professional advisors. 1031FEC's goal is to assist, ease, & expedite the § 1031 property transfer process.

Definition of Real Property for 1031 Exchanges

December 2, 2020, added new §1.1031(a)-3 to the Treasury Regulations defining real property for purposes of §1031. The new section clarifies that property defined as real property under state law is real property for purposes of §1031.  Real property includes land and improvements to land, unsevered natural products of land, and water and air space superjacent to land. Classification of property for depreciation purposes does not impact the asset’s character as real property under §1031.

Improvements are further defined as inherently permanent structures, or structural components thereof.  Improvements include buildings, enclosed parking facilities as well as paved parking areas, in-ground swimming pools, stationary wharves and docks, permanent advertising displays, power generation and transmission facilities, permanently installed telecommunications cables, microwave transmission, cell, broadcast and electric transmission towers, oil and gas pipelines, offshore platforms, derricks, oil and gas storage tanks, grain storage bins and silos, among other listed structures. For assets not specifically listed, there are 5 factors to be considered in making a determination:

  1. The manner in which the asset is affixed to real property;
  2. Whether designed to be permanent or removable;
  3. Damage that removal would cause either to the asset or the real property;
  4. Circumstances suggesting that the asset is not intended to be indefinitely affixed;
  5. Time and expense required to move the asset.

Based upon the above analysis, bus shelters, which are easily removed and reinstalled elsewhere when routes change, do not qualify as inherently permanent structures, and would not qualify as real property under §1031.  Conversely, a large sculpture constructed within a building’s atrium, weighing five tons, which is permanently affixed to the building through specially designed structural supports, and which could not be removed without great cost and severe damage to both the sculpture and the building, would meet this test, and would qualify as real property.

Structural components  include distinct assets that are a constituent part of and are integrated into an inherently permanent structure, such as wall, partitions, doors, wiring, plumbing and HVAC systems, piping and other components. For items not specifically listed, the factors to be considered are:

  1. The manner, time and expense of installing and removing;
  2. Whether the component is designed to be moved;
  3. Damage that removal would cause to the component or the structure;
  4. Whether it was installed during construction of the inherently permanent structure.

Unsevered natural products of land include growing crops, plants, and timber; mines; wells and other natural deposits, such as water, ores and minerals. These items lose their real property designation once they are severed, extracted or removed.

Intangibles that are treated as real property under §1031 include fee ownership; co-ownership, leaseholds, options to acquire real property, easements, stock in a cooperative housing corporation, shares in a mutual ditch, reservoir, or irrigation company that is treated as real estate under state law, and land development rights. Licenses and permits in the nature of a leasehold, easement or similar right, that are solely for the use, enjoyment or occupation of the land or permanent structure are also deemed to be real property. Thus a land use permit for a cell tower on land would qualify as real property, but a business license to operate a casino in a building would not.

The Final Regulations confirm that intangibles that were previously excluded under IRC §1031(a)(2), repealed in the TCJA, continue to be excluded, regardless of classification under state law.  These non-qualifying assets include stock, bonds, notes, securities, debt instruments, partnership interests, certificates of trust or beneficial interest, and choses in action.

Incidental Personal Property is addressed in new Treasury Regulation §1.1031(k)-1(g)(7)(iii), which clarifies that use of exchange funds to acquire a small amount of personal property, incidental to the acquisition of real property, will not be deemed to be a violation of the safe harbor restrictions limiting the taxpayer’s rights to receive, pledge, borrow or obtain the benefits of the exchange funds prior to receipt of like-kind property or an exchange terminating event. However, for the exception to apply, 1) the personal property must typically be transferred together with the real property in standard commercial transactions, and 2) the aggregate fair market value of the personal property must not exceed 15% of the aggregate fair market value of the replacement real property. If multiple replacement properties are acquired, the 15% threshold is measured against the total value of all replacement properties.

Importantly, the incidental property is disregarded only for purposes of determining whether there has been an early distribution of funds; it is not disregarded for purposes of determining like-kind property. Gain (or “boot”) will still be recognized on the value of the incidental property acquired.

Checklist outline for a 1031 Exchange transaction requiring planning, expertise & support.

  1. Choose your 1031 Qualified Intermediary (QI)
  2. Consult with your tax professionals
  3. Include Cooperation Clause language in your purchase and sale agreement
  4. QI prepares your exchange documents
  5. Start searching for Replacement Property
  6. Sign all documents QI prepares
  7. Sell your Relinquished Property
  8. Identify your Replacement Property
  9. Enter into contract on Replacement Property
  10. Contact QI once Replacement Property escrow is opened
  11. Close on Replacement Property
  12. QI transfers funds to complete your purchase

                                             Your exchange is complete

1031FEC April 2021 §1031 Tax Calculation Summary

What are the Basics of a 1031 Property Exchange?

A 1031 Exchange is a mechanism that allows one to defer capital gains taxes otherwise incurred at the sale of real estate. 

Basic Criteria:

1. Properties: Simplified, both the old property and the new property must be either land, commercial or rental property (in certain cases, vacation and even personal residential property also qualify). You can exchange property for other IRS recognized like-kind property. For example, office buildings could be sold and apartments purchased or an industrial complex sold and raw land purchased. The buying and selling transactions can be separate events involving different parties, just as they would in any arms-length sale and repurchase of property.

2. Money: You cannot touch the proceeds (money). By law, the proceeds from the sale of your current property must be held with a Safe Harbor "Qualified Intermediary or Qualified Escrow Holder" (sometimes also called an "Accommodator" or a "Facilitator"). You cannot place the proceeds in escrow until the second property is acquired, nor can you have a friend, employee, broker, your CPA or attorney hold the money for you.

3. Timing: From the date you close on the sale of your current property, you have 45 days to determine a list of up to three properties you want to own. Also, from the date of closing of the sale of your current property, you have *180 days to close on the purchase of one or all of the properties listed on your 45-day list.
Contact 1031 FEC for more details about this time limit.  *May be less than 180 days with tax date limits.

4. Reinvestment: To avoid taxable gain, you must reinvest in a property of equal or greater value.  To exchange for property of less value may cause prorated tax liability.

5. Title: The title-holder of the old, sold property must remain the title holder of the new property until after the exchange is completed.

For more information

1031FEC Documents are in PDF Format

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1031 Do's and Don'ts

Do advanced planning for the exchange. Visit with your accountant, attorney, broker, lender and Qualified Intermediary (Accommodator).

Do not miss your identification and exchange deadlines. Failure to identify within the 45 day identification period or failure to acquire replacement property within the 180 day exchange period will disqualify the entire exchange. Reputable Intermediaries will not act on back-dated or late identifications.

Do keep in mind these three basic rules to qualify for complete tax deferral:

  • Use all proceeds from the relinquished property for purchasing the replacement property.

  • Make sure the debt on the replacement property is equal to or greater than the debt on the relinquished property. (Exception: A reduction in debt can be offset with additional cash, however, a reduction in equity cannot be offset by increasing debt.

  •  Receive only like-kind replacement property.  The IRS tends to follow a state's property  classification.  Note: IRS Section 1245 real property (accelerated depreciation) can not be exchanged for IRS Section 1250 real property or land.  IRS Section 1245 property is like-kind to many other 1245 properties. (ask 1031FEC for assistance with like-kind rules)

Do not plan to sell and invest the proceeds in property you already own. Funds applied toward property already owned purchase goods and services, not like-kind property.

Do attempt to sell before you purchase. Occasionally Exchangers find the ideal replacement property before a buyer is found for the relinquished property. If this situation occurs, a reverse exchange (buying before selling) is the only option available. Although there is considerable legal precedent for reverse exchanges, Exchangers should be aware they are considered a more aggressive exchange variation because no clear IRS guidelines exist.

Do not dissolve partnerships or change the manner of holding title during the exchange. A change in the Exchanger's legal relationship with the property may jeopardize the exchange.

 

Boot

 

The term "boot" is not used in the Internal Revenue Code or the Regulations, but is commonly used in discussing the tax consequences of a Section 1031 tax-deferred exchange. Boot received is the money or the fair market value of "other property" received by the taxpayer in an exchange. Money includes all cash equivalents plus liabilities of the taxpayer assumed by the other party, or liabilities to which the property exchanged by the taxpayer is subject. "Other property" is property that is non-like-kind, such as personal property received in an exchange of real property, property used for personal purposes, or "non-qualified property." "Other property" also includes such things as a promissory note received from a buyer (Seller Financing).

 

Any Boot Received In Addition To Like Kind Replacement Property Will Be Taxable (to the extent of gain realized on the exchange). This is okay when a seller desires some cash or debt reduction and is willing to pay some taxes. Otherwise, boot should be avoided in order for a 1031 Exchange to be completely tax-free.

 

 Boot can result from a variety of factors. It is important for a taxpayer to understand what can result in boot if taxable income is to be avoided. The most common sources of boot include the following:

 

  • Cash boot taken from the exchange. This will usually be in the form of net cash received, or the difference between cash received from the sale of the exchange property and cash paid to acquire the replacement property or properties. Net cash received can result when a taxpayer is "trading down" in the exchange so that the replacement property does not cost as much as the exchange property sold for.

 

  • Debt reduction boot which occurs when a taxpayer’s debt on replacement property is less than the debt which was on the exchange property. As with cash boot, debt reduction boot can occur when a taxpayer is trading down in the exchange.

 

  • Sale proceeds being used to pay service costs at closing which are not closing expenses. If proceeds of sale are used to service non-transaction costs at closing, the result is the same as if the taxpayer received cash from the exchange, and then used the cash to pay these costs. Taxpayers are encouraged to bring cash to the closing of the sale of their property to pay for the following non-transaction costs:

 

· Rent proration.

 

· Utility escrow charges.

 

· Tenant damage deposits transferred to the buyer.

 

· Any other charges unrelated to the closing.

  

  • Excess borrowing to acquire replacement property. Borrowing more money than is necessary to close on replacement property will cause cash being held by an Intermediary to be excessive for the closing. Excess cash held by an Intermediary is distributed to the taxpayer, resulting in cash boot to the taxpayer. Taxpayers must use all cash being held by an Intermediary for replacement property. Additional financing must be no more than what is necessary, in addition to the cash, to close on the property.

 

  • Loan acquisition costs with respect to the replacement property which are serviced from exchange funds being brought to the closing. Loan acquisition costs include origination fees and other fees related to acquiring the loan. Taxpayers usually take the position that loan acquisition costs are being serviced from the proceeds of the loan. However, the IRS may take a position that these costs are being serviced from Exchange Funds. This position is usually the position of the financing institution also. There is no guidance in the form of Treasury Regulations on this issue at the present time which is helpful.

 

  • Non-like-kind property which is received from the exchange, in addition to like-kind property (real estate). Non-like-kind property could include the following:

 

  • Seller financing, promissory note.

 

  • Sprinkler equipment acquired with farm land.

 

  • Ditch stock in a mutual irrigation ditch company acquired with farm land (possible issue).

 

  • Big T Water acquired with farm land (possible issue).

 

Acquisition of ditch stock or Big T water is a possible issue with the IRS. Most taxpayers report their exchanges of farm land by taking the position that water on the farm land is indistinguishable from, and the same thing as real estate. The IRS has been known to have a different view.

 

Boot Offset Rules - Only the net boot received by a taxpayer is taxed. In determining the amount of net boot received by the taxpayer, certain offsets are allowed and others are not, as follows:

 

  • Cash boot paid (replacement property) always offsets cash boot received (exchange property).

 

  • Debt boot paid (replacement property) always offsets debt-reduction boot received (exchange property).

 

  • Cash boot paid always offsets debt -reduction boot received.

 

  • Debt boot paid never offsets cash boot received (net cash boot received is always taxable).

 

Exchange expenses (transaction and closing costs) paid (exchange property and replacement property closings) offset net cash boot received.

 

  

 Rules of Thumb Regarding Boot

 

Always trade "across" or up. Never trade down. Trading down always results in boot received, either cash, debt reduction or both. The boot received can be mitigated by exchange expenses paid.

 

Bring cash to the closing of the Exchange Property to cover charges which are not transaction costs (see above).

 

Do not receive property which is not like-kind.

 

Do not over-finance replacement property. Financing should be limited to the amount of money necessary to close on the replacement property in addition to exchange funds which will be brought to the replacement property closing.

 

Basis and Depreciation Consideration

 

The basic concept of a 1031 exchange is that the basis of your old property passes to your replacement new property. In other words, if you sold your old property for $100,000, and bought your replacement new property for the same, your basis on the replacement new property would be the same. It makes sense then that your depreciation schedule would be exactly the same. It is. In other words, one continues the depreciation calculations as if one continues to own the old property (the acquisition date, cost, previous depreciation taken, and remaining un-depreciated basis remain the same).

 

For additional depreciation a property purchase above the minimum replacement property purchase for complete tax deferral is required.

 

One may have an interest deduction for replacement property borrowed funds.

 

1031FEC recommends your experienced 1031 exchange and personal tax advisor to confirm your tax advantages.

IRS Section § 121 - Sale of Residence (Does not qualify for a 1031 Exchange)

You may qualify to exclude from your income all or part of any gain from the sale of your main home. Your main home is the one in which you live most of the time.

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

  • Owned the home for at least two years (the ownership test)
  • Lived in the home as your main home for at least two years (the use test)

Gain

If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

  • If you can exclude all of the gain, you do not need to report the sale on your tax return
  • If you have gain that cannot be excluded, it is taxable. Report it on Schedule D (Form 1040)
  • Consider business property as replacement with a 1031 exchange

Loss

You cannot deduct a loss from the sale of your main home.

Worksheets

Worksheets are included in IRS Publication 523, Selling Your Home, to help you figure the:

  • Adjusted basis of the home you sold
  • Gain (or loss) on the sale
  • Gain that you can exclude

Reporting the Sale

Do not report the sale of your main home on your tax return unless you have a gain and at least part of it is taxable. Report any taxable gain on IRS Schedule D (Form 1040).

More Than One Home

If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

Example One:

You own and live in a house in the city. You also own a beach house, which you use during the summer months. The house in the city is your main home; the beach house is not.

Example Two:

You own a house, but you live in another house that you rent. The rented house is your main home.

Business Use or Rental of Home

You may be able to exclude your gain from the sale of a home that you have used for business or to produce rental income. But you must meet the ownership and use tests.

Example:

On May 30, 1997, Amy bought a house. She moved in on that date and lived in it until May 31, 1999, when she moved out of the house and put it up for rent. The house was rented from June 1, 1999, to March 31, 2001. Amy moved back into the house on April 1, 2001, and lived there until she sold it on January 31, 2003. During the 5-year period ending on the date of the sale (February 1, 1998 - January 31, 2003), Amy owned and lived in the house for more than 2 years as shown in the table below.

Five Year Period Used as Home Used as Rental

2/1/98-5/31/99

16 months

 

6/1/99-3/31/01

 

22 months

4/1/01-1/31/03

22 months

               

 

38 months

22 months

Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed for renting the house.

Contact 1031 FEC for tax saving alternatives when selling a home with gain above exclusion allowed.

 

How 1031 FEC Consultants Assist, Ease, & Expedite the § 1031 Property Transfer Process

1)  Access to Premium Agriculture and Commercial Real Estate Property Provided by the  Highest Integrity National & Regional Companies.

 

2)   No Fee or small fee for clients. Most 1031 FEC services supported by national and regional premium real estate property providers.**

 

3Free Consultation to assist you with your  § 1031 real estate exchange property transfer and investment plan.

 

4)  Experienced reinvestment assistance resulting in  full value diversification for less risk.

 

5)  Assist to qualify, locate and match clients to § 1031 Managed Premium Replacement Properties for Tax Advantaged Exchanges or Direct Purchase of Commercial, Agriculture & Development Land (Land Banking), assisting Real Estate Property Owners, Sellers, Investors, their Qualified Intermediaries, Escrow Agents & Professional Advisors.

 

6)  Ease the § 1031 procedure burden and stress.  Maintain peace of mind with 1031 FEC experience guiding clients through each step and groups of documents to help assure IRS compliance and qualification. Reduce property transfer stress.

 

7)  Expedite the § 1031 process by monitoring each necessary phase and encouraging completion of documentation by all parties resulting in a timely transfer of ownership.

 

8)  Best § 1031 Property Management teams available with proven experience, integrity and success results in property income and appreciation without the stress.

 

9)  Tax, Estate and Legacy Planning assistance by matching the right income property to minimize, and in some cases, defer income tax permanently with 1031 FEC Consultation and Advisory Services.  Personalized investment strategies assist to produce a greater after tax return.  Tax savings and deferment can be thousands of dollars and $ millions for some property owners.

 

10)  Tax Planning assistance by performing a Property Cost Segregation Study (PCSS).  Tax reduction, savings and deferment could lower and save current tax dollars due now and in the future for many property owners.

 

11)  Retirement Planning assistance with plans that place usually taxed income to IRS approved retirement funds allowing deductions to $100,000 and tax savings up to $40,000 annually.  Roth IRA alternatives considered to allow no taxation.

 

Year End Exchanges

 

The ability to terminate the exchange by prematurely filing the tax return for the tax year in which the transfer of the relinquished property occurs. In other words, if you have a year-end exchange – for instance, if you sold your property in October, but won’t be purchasing the replacement property in the exchange until February – don’t file your taxes until you’ve completed the purchase of the replacement property, and have completed the exchange!  If you file your taxes for the year in which you sold your property before you purchase the new property within the exchange, the exchange will be automatically terminated and you will not defer the capital gains.  You will owe all the taxes on your sale.  If you are in a year-end exchange situation and you will not complete the exchange before your accountant files your taxes (aka April 15th), then FILE FOR AN EXTENSION.

 

We Assist You to Find Premium 1031 Exchange Properties within Your 45 days

from Closing to Identify Replacement Property

§ 1031 Premium TIC Exchange - What is a Tenants-In-Common Investment?

IRS (Internal Revenue Service) IRC (Internal Revenue Code) § 1031 TIC and § 721 TIC real property exchanges and stock exchanges remain popular for tax-deferral.  Generally two to eight owners of single property allow owners to purchase larger more secure leased real estate.

Tenant in Common is a form of holding title to real property.  It allows the owner/owners to own an undivided fractional interest in the entire property.  In addition, it has become the preferred investment vehicle for real property investors who wish to defer capital gains via a § 1031 exchange and own real property without the management headaches.

The following factors have increased the popularity of Tenant-in-Common (TIC) investments:

  • Today's modern investor demands an investment portfolio that includes real estate diversification, appreciation and income without the hassle of active property management

  • The IRS complied to allow the public investor access to passive real estate investment in March, 2002 by clarifying TIC guidelines in Revenue Procedure 2002-22

  • The investment property marketplace is over 4 trillion dollars

  • In some states, 90% of all investment properties listed and sold over 3 million dollars were involved in a § 1031 Tax-Deferred Exchange

  • Most non-institutional investors (individuals) are not familiar with the strict provisions of the IRC §1031  

  • Owner age shift: 170,000 reach the age of 65 daily

Conventional Direct Ownership

Property Exchange

 1031 FEC Tenant-in-Common

Premium Property Exchange

Lower returns on less desirable properties

Higher returns on institutional-quality properties

Difficult to comply with § 1031 45 day ID rules; exchanger must find properties

Easy to comply with § 1031 45 day ID rules; 1031 FEC assists to choose properties

Difficult to match § 1031 exchange debt and equity

Easy to match § 1031 exchange debt and equity

Investor must negotiate and arrange loan

Prearranged financing

Expensive and time-consuming property management

Professional proven property management in place.  You receive a monthly or quarterly income check.

Cash flow, depreciation, and appreciation potential

Cash flow, depreciation, and appreciation potential

Ability to use the § 1031 exchange again

Ability to use the § 1031 exchange again

Ability to refinance and distribute proceeds “tax free”

Ability to refinance and distribute proceeds “tax free”

In a 1031FEC Premium Tenants-in-Common (TIC) investment you are a co-owner of an entire property. You title as an owner in an undivided interest in the property along with other investors. For example, as a TIC investor in a multi-tenant office, you share in the ownership of the entire property, not a specific office space. Likewise, if you invest in an apartment complex, you share in the ownership of the entire property, not a specific unit.

IRS § Section 1032 advantages exchange of stock for property with no gain or loss recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation.  No gain or loss shall be recognized by a corporation with respect to any lapse or acquisition of an option, or with respect to a securities futures contract (as defined in section 1234B), to buy or sell its stock (including treasury stock).  For basis of property acquired by a corporation in certain exchanges for its stock, see your tax advisor, your Qualified Intermediary and 1031FEC.

IRS §721 ("721 Exchange") or upREIT allows a Taxpayer to exchange rental or investment real estate ultimately for shares in a Real Estate Investment Trust (REIT). This is called a §721 exchange, also known as an upREIT or §1031 / 721 exchange.  Your 1031FEC Consultant can advise in detail for your personal portfolio.

What is an UPREIT?

An Umbrella Partnership Real Estate Investment Trust or UPREIT implements the use of both The Internal Revenue Code Section §1031 and §721.  In an UPREIT structure, the investor executes a 1031 exchange TIC into one property in which he/she will co-own for about 12-18 months.  At that time the investor will implement a § 721 exchange in which he/she will contribute a property to a partnership. At this point the investor receives interest in the partnership called operating partnership units (OP units). § 721 exchanges are often used by real estate investment trusts (REITs), which typically own all or substantially all of their assets through a subsidiary partnership with the REIT acting as general partner.

In a
§721 exchange or UPREIT structure, rather than taking possession of another property, the investors receive OP units that carry the economic benefits of the REIT’s entire portfolio, including any capital appreciation and distributions of operating income.  OP units can be converted later into shares of the associated REIT, and may only be taxable when such a conversion or liquidation takes place.

IRS §1031 and §721 TIC exchange investments are structured to defer capital gains and recapture of depreciation taxes in accordance with 1031 exchange requirements.

Reduce risk by identifying 1031FEC Premium TIC replacement property for your 1031 Exchange.  Identify multiple TIC Properties. Or, acquire interest in multiple TIC Properties.  One may directly acquire TIC or most properties without an exchange.

45 days is a very short time to locate a qualified property. Using the 3-Property Rule, one can identify a 1031FEC Premium TIC Property as one of your properties. If the other choices fail to close, the entire proceeds can easily be applied to the TIC property.

If you do replace with one whole property and have proceeds left, you can put these remaining proceeds into the TIC property identified.

Failure to close under 1031 time limit is the #1 reason clients reveal as to why many sellers pay capital gain taxes!

This is an open investment program. This means that the properties are already purchased and the investment program structure is in place, eliminating the risk of time and uncertainty in identifying a replacement property.  Simplicity and speed are achieved due to the efforts of an experienced real estate principal.  Negotiation process is complete.  Surveys, Rent rolls, etc. are already completed and available for your review.  Non-recourse Financing is in place.   After your review of all due diligence used to acquire the property, and upon your approval, you are ready to close! Closings can be complete in days, not months.

 The TIC structure has various features that make it attractive to the real estate buyer:

Access to Preferred High Grade Properties from Reputable National Real Estate Companies - The typical investment in whole commercial building begins at $1 million, but through premium TIC ownership, the average person is able to enjoy ownership in an institutional-type property with a minimum investment. Besides reliable income and growth potential, these high quality properties are able to attract tenants with greater financial strength and stability than possible for the individual landlord.

Combined Real Estate Experience - As an alternative to sole ownership of real estate, a 1031 buyer can take ownership in a large preferred commercial property along with other unrelated buyers, not as limited partners, but as individual owners. Each of the TIC owners brings their previous real estate knowledge to the group. Thus, each decision of the TIC ownership will be backed by many years of real estate experience.

Lessee Management with up to 25 Years Experience in Real Estate - Most of the day-to-day property operations are handled by a Master Lessee. The lessee managers control or has involvement in more than $350 million in real estate assets and have extensive experience in real estate. Thus, situations that arise in day-to-day operations will be addressed quickly and efficiently, and the Premium Property TIC owner will enjoy the freedom from property management.

Simple Mailbox Management - The Premium TIC property owner avoids the time and frustration of dealing with multiple tenants. You no longer deal with "toilets, tenants and trash," and simply receive your monthly lease payment from your mailbox. Enjoy other interests, travel and time with family.

Exact Dollar Matching - In a Premium TIC property, you may be permitted to purchase any amount above the minimum. For example, if you have $152,479 of equity from the sale of a previous property you can purchase $152,479 of equity in a TIC property.

Low Minimums - Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC owners in any one property. Most TIC owners number 15-25 per property. Minimum purchase requirements are structured to meet this limitation and can range as low as $50,000 equity.

Non-recourse Financing - The mortgages on most of the Premium TIC properties offered are non-recourse. The TIC debt structure generally allows for the debt financing to assumed. Assumption usually occurs without the need for qualification or loan assumption fees.

Diversification - Due to the low minimums in Premium TIC properties, the buyer can decrease risk by diversifying into different properties in various different marketplaces.

Speed and Simplicity - Speed and simplicity are achieved due to the efforts of 1031 FEC Consultants, Associates and experienced real estate professionals. The negotiation process is complete, and survey, rent rolls, etc. are already completed and available for your review. After your review of all the due diligence used to acquire your property, and upon your approval, you are ready to close. The closing can be completed in days, not months.

No Closing Costs - Some property investments include closing costs.  Be sure of all costs in a purchase or exchange.  Absent seller default or other items outside the control of 1031FEC, closings are generally within the agreed upon time frame. 1031 FEC does not charge the TIC owners closing costs.  Non-FEC1031 triple-net Master Lease transactions generally result in client closing expenses.  1031 Qualified Intermediary fees are paid by the buyer/exchanger.

Deeded Interest - The Premium TIC owners buy the property and receive a deeded interest. You can transfer this interest by gift, sale, inheritance, assignment, etc. Such transfer does not need to coincide with the transfer of all TIC interests in the property. If requested to do so by the TIC owner, 1031FEC will assist in the marketing of any TIC interest.

No Special Allocations - All the Premium TIC owners receive lease payments, sale proceeds and the depreciation tax benefits in proportion to their percentage ownership in the property.

Impasse Resolution Procedure - On a decision requiring unanimous vote, such as a sale decision, a 75% vote by the TIC owners may be sufficient to initiate the impasse resolution procedure. This procedure allows the TIC owners with 75% or more of the property to make an offer to buyout the dissenting owner with 25% or less of the property. The dissenting TIC owners can either: (1) accept this offer, (2) buy out the 75% TIC owners at the same price per percentage ownership, or (3) change their dissenting vote to a consenting vote.

Financial and Estate Planning - 1031FEC assists with your family financial and estate planning in mind that can result in wealth building using risk tolerance and diversification considerations and passing of wealth to heirs with minimum or no tax.

As a leader in locating and providing qualified managed premium §1031 Tenants-in-Common (TIC) replacement properties, 1031FEC can offer owners advantages for success. 1031FEC can assist finding the proper 1031 property for your business requirements that can defer capital gains tax and recapture of depreciation taxes1031FEC Consultants advise you and your CPA to assist proper IRS documentation and procedure.  Reduce stress of management or income collection with 1031FEC TIC and other qualified income properties.

Our 1031FEC Premium TIC Program provides real estate buyers with the monthly rental income advantage of a triple-net lease with scheduled increases plus single-tenant property with the appreciation advantages of a multi-tenant property. By owning TIC interests in premium multi-tenant commercial properties across a wide geographical area, real estate buyers can enjoy the diversification that is not possible if you were to buy just one single location property.

The
1031FEC Managed Premium TIC Plan is well-suited for the 1031 Real Estate Exchange Property buyer seeking monthly income that increases annually, unlimited appreciation potential, and flexible and easy closings. Current and future 1031 exchange property owners and direct purchasers now have access to the advantages of a long-term, triple-net lease without the disadvantages.

No Fee to 1031 FEC 1031 Exchanger Client.  Fee paid by 1031 real estate property provider.

 

 

FEC1031 Exchange Checklist

 A 1031 Like Kind Exchange transaction requires planning, expertise and support. Follows is a checklist outlining key steps in an exchange.

How to do a 1031 Exchange - Outline

  1. Choose your 1031 Qualified Intermediary (QI)   

2. Consult with your tax professionals 

3. Include Cooperation Clause language in your purchase and sale agreement  

4. QI prepares your exchange documents                    

5. Start search for Replacement Property     

6. Sign all documents QI prepares    

7.Sell your Relinquished Property

       8. Identify your Replacement Property   

       9. Enter into contract on Replacement Property

9.    10. Contact QI once Replacement Property escrow is opened    

11.  11. Close on Replacement Property

       12. QI transfers funds to complete your purchase         

   Your exchange is complete

How to do a 1031 Exchange – Key Steps

1.      Choose your 1031 Qualified Intermediary – QI as exchange accommodator will prepare the documentation for the 1031 Exchange, and most importantly, safeguard your exchange funds.

2.      Consult with one’s tax professionals – Most Qis are excellent resources and will provide a great deal of information about like kind exchanges, however we cannot provide legal or tax advice. Engage your legal, tax, and/or financial advisors to review your specific circumstances. Although this is not mandatory for your 1031 Exchange, QIs recommend that investors should always seek advice from their advisors.

3.      Include Cooperation Clause language in one’s purchase and sale agreement – Instruct one’s real estate agent or attorney to include a 1031 Exchange Cooperation Clause in the contract / purchase and sale agreement.

4.      Qualified Intermediary prepares one’s exchange documents – After the contract is signed, contact your QI  executive directly, QI will prepare 1031 documents that need to be signed prior to closing.

5.      Start searching for Replacement Property – Remember that once one closes on the Relinquished Property, the clock starts ticking and you only have 45 days to identify your new Replacement Property. 45 days comes very quickly, so start looking at your options now.

6.      Sign all documents QI prepares – Sign all documents QI prepares PRIOR to the transfer of your Relinquished Property and determine sale proceeds to be placed into your Exchange.

7.      Sell your Relinquished Property – complete the transfer of your Relinquished Property.

8.      Identify your Replacement Property – By midnight of your 45-day deadline, complete the Identification form and deliver it via fax, email, mail to IPX1031.

9.      Enter into contract on Replacement Property adding the Cooperation Clause language.

10.   Contact QI once Replacement Property escrow is opened. QI will prepare all necessary documents for one to sign and to review with the tax/legal advisors.

11.   Close on Replacement Property

12.   QI transfers funds to complete your purchase – once your transaction closes, QI will transfer your exchange funds.

Your exchange is complete. Report the 1031 Exchange on IRS Form 8824 for the tax year your 1031 Exchange began.

 

 

Overview of the Reverse 1031 Exchange

Follows is a very brief and concise overview of Reverse 1031 Exchanges.  

1031 Exchange transactions, especially Reverse 1031 Exchanges, are complex tax-deferred tax strategies.  You should always seek competent legal, financial and tax counsel before entering into any Forward or Reverse 1031 Exchange transaction.  1031FEC can assist.

Reverse 1031 Exchanges

There are many reasons why you might find yourself in a position where you must acquire or would prefer to acquire your like-kind replacement property first before you sell your current relinquished property in your 1031 Exchange. 

You might unexpectedly find an investment opportunity that you must act on before you even have time to consider selling or listing your current relinquished property.  The sale or disposition of your relinquished property may unexpectedly collapse and you do not want to lose your acquisition that is closing soon.  Or, you may prefer to buy first to eliminate the pressure of having to identify your like-kind replacement property within the 45 calendar day identification deadline in a regular Forward 1031 Exchange. 

What ever your reason for deciding to purchase your replacement property first, the Reverse 1031 Exchange allows you to acquire your like-kind replacement property first and then subsequently list and sell your relinquished property within the prescribed 1031 Exchange deadlines.  It can be a great strategic tool when needed or preferred.

Revenue Procedure 2000-37

The Internal Revenue Service issued Revenue Procedure 2000-37 on September 15, 2000, which provides guidance on how to properly structure a Reverse 1031 Exchange transaction by using a parking arrangement in conjunction with a simultaneous 1031 Exchange.

Simultaneous 1031 Exchange

The actual 1031 Exchange portion of your Reverse 1031 Exchange transaction is a simultaneous or concurrent 1031 Exchange either at the beginning or end of your Reverse 1031 Exchange transaction.  You will enter into a 1031 Exchange Agreement with a Qualified Intermediary for the administration of your 1031 Exchange.

Parking Arrangement

You will enter into another agreement called the Qualified Exchange Accommodation Agreement ("QEAA") that will structure the parking arrangement for your Reverse 1031 Exchange.  The QEAA is signed by you and a 1031 Intermediary as your Exchange Accommodation Titleholder ("EAT").  The Exchange Accommodation Titleholder ("EAT") is the entity that will acquire and hold or "park" legal title to either your relinquished property or your like-kind replacement property during your Reverse 1031 Exchange transaction.

Reverse 1031 Exchange Structures

The challenge in structuring your Reverse 1031 Exchange is deciding which of your investment properties will be acquired and held or "parked" by the 1031 Intermediary as your Exchange Accommodation Titleholder ("EAT").  The structure selected by you will depend on whether there is financing involved and which investment property your lender will allow the 1031 Intermediary to hold or park legal title to.

The two structures are commonly referred to as Exchange Last and Exchange First because the simultaneous 1031 Exchange occurs either at the beginning (Exchange First) or at the end (Exchange Last) of your Reverse 1031 Exchange transaction.

Exchange Last Structure

The Exchange Last Reverse 1031 Exchange structure is the preferred strategy because it will provide you with the most flexibility in terms of structuring and financing your Reverse 1031 Exchange transaction.  It also provides you with more advanced structuring capabilities. 

Your like-kind replacement property is acquired and held or "parked" by the Exchange Accommodation Titleholder ("EAT") and a simultaneous or concurrent 1031 Exchange is completed later at the close of your relinquished property sale transaction (i.e. the simultaneous 1031 Exchange occurs at the back-end of your Reverse 1031 Exchange).

The primary obstacle with this structure will be your lender.  Lenders are concerned about the Exchange Accommodation Titleholder holding or parking title to the like-kind replacement property that will be used as collateral for the loan.  We recommend scheduling a conference call between you, your lender and the 1031 Intermediary as early as possible to determine whether this Reverse 1031 Exchange structure is viable.  You may need to shop around for lenders who are willing to work with you.  We can certainly assist you with this.

Exchange First Structure

A Reverse 1031 Exchange structure should keep your lender happy, but will eliminate your flexibility in terms of structuring and financing the acquisition of your like-kind replacement property and any advanced 1031 Exchange planning capabilities.

Your like-kind replacement property will be acquired directly by you, your lender will lend directly to you on the acquisition of your like-kind replacement property, and simultaneously you will transfer title of your relinquished property directly to the 1031 Intermediary as your Exchange Accommodation Titleholder (i.e. the simultaneous 1031 Exchange occurs at the front-end of your Reverse 1031 Exchange).

The difficultly with this structure is that you must temporarily advance (i.e. reinvest) the total amount of your equity that is currently trapped in your relinquished property into your like-kind replacement property up front before your relinquished property sale actually closes.  This kind of cash liquidity is usually not available. 

Separate Special Purpose Entity

The 1031 Intermediary will set-up a separate special purpose entity in the form of a separate single member limited liability company that will be used exclusively for your Reverse 1031 Exchange transaction.  The 1031 Intermediary should never hold title to multiple clients' real or personal property in the same special purpose entity.  The sole purpose of this entity is to acquire and hold or "park" legal title to your Reverse 1031 Exchange property. 

Reverse 1031 Exchange Deadlines

Deadlines for your Reverse 1031 Exchange are essentially the same as in a forward 1031 Exchange transaction.  You have 45 calendar days to identify what you are going sell as your relinquished property, and you have an additional 135 calendar days — for a total of 180 calendar days — to complete the sale of your identify relinquished property and close out your Reverse 1031 Exchange. 

Reverse 1031 Exchange Fees and Costs

Reverse 1031 Exchanges are more complicated and costly, so you need to review the amount of depreciation recapture and capital gain income tax liabilities being deferred to ensure that the cost of the Reverse 1031 Exchange transaction is justified.  We at 1031 FEC would be happy to assist you.

 

See Qualified Managed and Other Premium Investments   Featured Real Estate Investment Properties & state locations with minimum investment equity are at Investments.

Does your property qualify for this tax break?  For a no fee confidential consultation and for more details contact 1031 FEC.  We also can find if you qualify for a retirement tax deduction up to $100,000 for you and up to $100,000 for your spouse. We recommend your tax advisor or CPA be invited to consult and confirm details.

Other 1031FEC Exchange Advantages

  • Relieves the burden of active real estate ownership or "headache" properties (mailbox management by owners with owner controls).

  • An experienced 1031FEC exchange advisor to consult and assist you to choose the best preferred exchange investment for your portfolio with financial planning, estate planning, diversification and risk tolerance considerations.

  • Exchange a non-cash flow or low cash flow producing property for a premium higher cash flow producing property.  Increase and earn more income.

  • Access to ownership of income property in preferred, high grade quality corporate buildings, shopping centers, multi-residential and other triple net lease property in advantaged locations.

  • Experienced proven and successful management plus the possibility of the advantage of the combined real estate experience of several owners.

  • Diversify your real estate and investment portfolio by geography, property and investment type.  Exchange one property for two or more for a lower risk property portfolio.

  • Relocate property when owner retires, changes location for work or health reasons.

  • Facilitate estate planning.  Heirs receive property at the new 'stepped up' basis.  Multiple beneficiary solution transfers individual or multiple properties by a will or Trust.

  • Consolidate many properties into less parcels for a single or more manageable parcels.

  • Gain leverage for a larger or a more valuable property

  • Access to cash with a partial exchange.

  • Low minimum property investments and possible dollar matching exchanges.

  • Exchange slower appreciating property for preferred property with increasing income and appreciation.

  • Relieves the burden of future potential loss of value of temporarily inflated agriculture land or other inflated property values.  Maintain wealth with higher quality income property.

  • Avoid tax penalties and taxation burden with 1031FEC consultants to assist and guide you through the §1031 process to help assure IRS compliance, procedure and documentation.

  • Non-recourse financing.

  • Retirement Plan deductions possible.

FIRPTA Withholding Rules

Foreign Investment in Real Property Tax Act of 1980

UNDERSTANDING THE REQUIREMENTS AND THE EXCEPTIONS

Congress enacted the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) to impose a tax on foreign persons when they sell a U.S. real property interest. A “foreign person” includes a non-resident alien, foreign partnerships, trusts, estates and corporations which have not elected to be treated as a domestic corporation under IRC §897(i). For U.S. property dispositions subject to FIRPTA, the transferee (purchaser) is required to withhold and remit to the IRS 15% of the gross sales price to ensure that any taxable gain realized by the seller is actually paid. The withholding rate is computed differently for other foreign entities, such as foreign corporations and trusts, which are required to withhold 35% of the capital gain realized on the sale. The withholding tax rate on a partner’s share of income is 39.6% for non-corporate partners and 35% for corporate partners. For more information on FIRPTA, visit: www.irs.gov and download IRS Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities.

Who is a Non-Resident Alien?

A non-U.S. citizen who does not pass the green card test or the substantial presence test is considered a “non-resident alien.” If a non-citizen currently has a green card or has had a green card in the past calendar year, they would pass the green card test and be classified as a resident alien. If the individual has resided in the U.S. for more than 31 days in the current year and has resided in the U.S. for more than 183 days over a three-year period, including the current year, they would pass the substantial presence test and be classified as a resident alien. For more on the definition of a non-resident alien, see Topic 851, Resident and Non-Resident Aliens.

Three Exceptions to FIRPTA

  1. Property to become buyer’s personal residence. Section 1445 (b)(5) provides an exemption for property acquired by a transferee that will be used as the transferee’s personal residence. To qualify for the exemption, a closing officer will generally require the transferee to sign an affidavit stating that the amount realized (generally sales price) is not more than $300,000, and that the transferee or a member of their family intend to use the property as a personal residence for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer

  2. Seller declaration of non-recognition of gain or loss. The second exception to the FIRPTA withholding requirements is the simultaneous 1031 exchange. The transferee is not required to withhold if “[t]he transferor gives written notice that no recognition of any gain or loss on the transfer is required because of a non-recognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty.” Such notice is called a “Declaration and Notice to Complete an Exchange” (1031 Declaration and Notice). A transferee can rely on a 1031 Declaration and Notice only if: (1) the foreign person completes a simultaneous exchange (i.e., the same day); and (2) the foreign person receives no cash or mortgage boot.

    Further, if the property was seller’s principal residence, where the sale of property exceeds $300,000, a foreign seller’s notice of non-recognition of gain based on Section 121 may not be relied upon and an IRS withholding certificate is required even though the exclusion may reduce or even eliminate the amount to be withheld under Section 1445

    3. The third exception is for transactions in which the IRS has issued a withholding certificate (Withholding Certificate) to the foreign seller. The amount which must be withheld by a buyer can be reduced or eliminated pursuant to the Withholding Certificate. The transferee, the transferee’s agent or the transferor may request a Withholding Certificate. The IRS will generally grant or deny an application for a Withholding Certificate within 90 days after its receipt of a completed IRS Form 8288-B application.

Impact on Simultaneous Exchanges

Under the foregoing rules, a buyer of U.S. property from a foreign person can rely on a 1031 Declaration and Notice only if the foreign person exchanges U.S. property for other U.S. property in a swap in which the foreign person receives no cash or mortgage boot. Since many exchanges can involve payment of some cash or debt reduction, the utility of a 1031 Withholding Certificate is substantially reduced.

Impact on Delayed Exchanges

To the extent that the 1031 exchange is not simultaneous, or if any cash or mortgage boot will be received by a foreign person with respect to the disposition of U.S. property, the buyer can only rely on a Withholding Certificate issued by the IRS to a foreign person. As a result, foreign persons desiring to engage in a delayed 1031 exchange should consult with a tax advisor and apply for an International Tax Identification Number (ITIN) and a 1031 Withholding Certificate well in advance of the anticipated disposition of U.S. property holdings. For more information, see ITIN Guidance for Foreign Property Buyers/Sellers.

Steps Involved in Complying with FIRPTA in an Exchange

  1. First, consult with your tax advisor and analyze if FIRPTA applies to you and your transaction and determine if you are considered a “Foreign Person” who is selling a U.S. real property interest.
  2. Next, explore if any exceptions to the FIRPTA withholding apply to your situation. For a more detailed explanation of these terms and exceptions, review IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities and IRS Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests.
  3. If you are a Foreign Person, then you must obtain a U.S. Taxpayer Identification Number (TIN) from the IRS as follows:
  4. The next step is to apply for a Withholding Certificate from the IRS.
  5. Notify the buyer of your relinquished property that you have applied for a Withholding Certificate.
  6. Prior to closing on the sale of a relinquished property, contact a qualified intermediary to have the necessary exchange documentation prepared and forwarded to the closing officer so the transaction can be closed as a 1031 exchange.
  7. The exchange begins when the relinquished property closes. The buyer must file IRS Forms 8288 and 8288-A to report and pay the amount withheld to the IRS by the 20th day after the date of the relinquished property closing.

PFAS and environmentally potential hazards:

What is PFAS?

Per- and polyfluoroalkyl substances (PFAS) are comprised of synthetic organic molecule “chains,” most notably perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), among others. PFAS are now common in industrial and post-industrial societies around the world and have been found in air, soil, and water.

Capital Gains Tax Brackets

Disclaimer: The above brief descriptions are not to be construed as legal or tax advice and is qualified in its entirety by the actual closing documents. In case of any discrepancy, the actual closing documents will control.1031FEC recommends investors considering an IRS IRC §1031 tax-deferred exchange transaction  or an IRS IRC §721 exchange include and consult their accountant and/or attorney.

1031 Exchange 101          1031 Strategy        1031 Tax Alert October 22, 2004           IRS Publication 544

DST Entity                   IRS Section 1031               Oil & Gas Royalties               1033 Exchange 101  

  Using Exchanges to Postpone Capital Gains Taxes   1031 Developments-Easements & Other     453M

Duties of an Executor and Trustee

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