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Choices Extend Beyond the Neighborhood
Owners of investment and business property considering the sale and reinvestment of their real property have choices that are far greater than their own neighborhood. Section 1031 Exchanges require that the new or replacement property be "like-kind" but that definition has expanded to include diverse investments; here are three examples of replacement property opportunities:
Tenant-in-common (TIC) ownership provides an opportunity to own institutional property without the hassles of managing tenants. Total annualized returns range from 6% to more than 15% with the right property. Now you can collect your earnings from the management company and never again talk to a tenant!
An UP-REIT is an umbrella partnership real estate investment trust. Once again, exchange your current investment property and purchase an interest in an UP-REIT. REIT's regularly carve off one or more buildings from their diverse holdings for investment clients to acquire using 1031 funds. After a period of seasoning, the Up-REIT is folded back into the REIT.
Oil and Gas Leases; this should give you an idea of how broad the definition of "like-kind" is when it comes to real estate. Investors receive long leasehold interests to the percentage of royalties purchased. Generally these will be mineral rights for oil or gas properties. These have existing cash flow and documented stability and growth. Properties incur no monthly expense or liabilities related to additional development, making it easier to track their performance and yield. Thanks to an active auction market, liquidity is available. Also, these interests may be exchanged again later.
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Common Identification Issues
Meeting the identification deadline can be challenging. It's imperative that you submit your list of replacement property choices within 45 days of your sale and that they be acquired within 180 days, or the due date of your tax return. Here is a quick guide for your reference:
Must be within the United States, the 50 states or the District of Columbia.
Cannot be owned by a related party unless the related party is also doing an exchange.
Cannot occupy upon acquisition; personal use is limited to 14 calendar days or ten percent of the days actually rented, whichever is greater.
New property must be in the same name as the old property, the IRS is tracking the taxpayer identification number, which must be the same for both the old and the new property.
Must intend to maintain the "investment intent" from the Relinquished Property to the Replacement Property.
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Tel: 603-444-0020
Fax: 603-444-6611
web: www.Section1031.com
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| Greetings! It is our pleasure to bring you the Fall edition of our newsletter in a fresh NEW format. You will quickly spot the articles that bring you the most value without pouring through subjects that don't interest you. As always, all of our newsletters are available on our website for you to read at any time at www.section1031.com. |
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On the Home Front!
Christine has just returned from the 2007 annual conference of the Federation of Exchange Accommodators (FEA) which was held in Chicago. The FEA has recently petitioned the Federal Trade Commission (FTC) to provide federal regulation and standards for the industry in an effort to ensure consumer protections on a nationwide basis. We strongly support this effort and are anxious to have real accountability in our industry.
In September, George escaped for a couple of weeks to his new vacation home in St. Augustine, Florida. He found out how wet and muggy Florida can be in the fall and will reserve his next visit for the cold snowy days of New England in January.
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Take a Class this Fall
If you haven't already done so, it's time to call Christine and schedule a Section 1031 Class in your office or conference room. New Hampshire Real Estate Brokers and Salespersons can now take advantage of our one hour "Section 1031 Like-Kind Exchange" course to receive continuing education credit. Whether you are in real estate sales, lending, accounting or settlement activities, this course will help you understand the mechanics of a successful exchange. |
 Selling Your Home Office
This is an area that many people disregard only to be rudely awakened at tax time, well after their transaction is old and cold. Prior home office deductions including depreciation can return to create a tax obligation unless the business portion of the property is handled as a Section 1031 Exchange. Operating a home office inside your personal residence has very distinct tax advantages, however, upon the sale of the personal residence, the home office has to be accounted for as a mixed use property. It can be partly protected under Section 121(home residence exclusion of $250,000/ $500,000) and the business portion can also be protected if that portion is handled by a Qualified Intermediary. Most clients will use the proceeds to acquire the portion of their new residence that will be used for business purposes but it can be used to acquire other business or investment property. Don't let this sleeping giant upset your home sale!
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 Replacement Property Choices
The number one reason that Exchanges fail is due to the inability of the client to select good Replacement Property. Listing three properties within 45 days is the easy part, contracting for the purchase and satisfying the due diligence issues is a much bigger hurdle. In Exchanges, the best advice is to "know where you are going before you leave where you are."
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Case Study #15
1031&1033
Our client was under agreement to sell his commercial property when a fire broke out and destroyed one of the two buildings on the property.
After carefully renegotiating the agreement, he proceeded with a Section 1031 Exchange for the land and existing building and used Section 1033 for the casualty loss portion of his property. Under Section 1033, he will have twenty-four months to reinvest in similar investment property. Since it was a garage that was destroyed, he will simply use his insurance proceeds to rebuild a garage at his new location. |
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Case Study #16
TIC Option
We represented a client in a forward exchange that involved the sale of a commercial "strip-mall" property. It was highly appreciated and our client had just passed his 75th birthday and was looking for an option that would provide cash flow in a passive investment. After a period of due diligence, our client elected to acquire tenant-in-common interests in five different institutional properties across the country. This technique provided investment diversification and hands-off ownership. This client used Kulch Financial Services and we are pleased to attach a guest article below. For more information, you may call them at 1-800-251-0662. |
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Guest Article-The TIC Advantage
A 1031 exchange is usually executed as a three-way delayed exchange, referred to as a "Starker Exchange", in which an intermediary is used to facilitate the transaction. Preferably, before you sell your property, you need to consider what type of replacement property will work best for you, and whether or not you want to own a whole or partial interest in a property. Increasingly, investors are choosing to purchase a partial Tenant-in-common interest for several reasons.
It is often difficult to locate a property that has the right purchase price, debt ratio, and closing schedule to meet the requirements for 1031 tax-deferred exchanges in the short 45-day time frame AND arrange any financing that may be necessary. A Tenant-in-common ownership interest has a number of advantages, such as:
- Flexible size to match your needs
- Pre-arranged financing
- No management hassles
- Potential for increased after-tax cash flow
- Economies of sale
- Can be identified and closed in a timely manner
- Investment can often be diversified into more than one property
Although you are comfortable with real estate investments and have had good returns in the past, you may not like the daily headaches that can accompany real estate management. Are you ready to give up the hassles of dealing with tenants, maintaining facilities, paying property taxes, etc? Would you like to sell your property but are faced with onerous tax consequences on the sale? You'd rather enjoy the income from the property and let someone else manage it. With a TIC 1031 Exchange, you can do exactly that.
A TIC 1031 exchange allows you to exchange your management-intensive property for an institutional-quality property with the potential to generate steady income, tax benefits and appreciation. With a TIC 1031 exchange properties, you no longer have to feel burdened by your real estate. Through your management contract, a manager will be retained to manage the asset while you enjoy all the benefits of income property ownership and freedom from management duties.
Your income from the replacement property may be higher than what you were receiving from the original property. You can earn substantial cash flow that may be up to 60% sheltered by the depreciation of your new basis in your TIC purchase.
No capital gains taxes may be due until the replacement property is eventually sold. If you should pass while owning a property, your heirs will receive a stepped up basis and the capital gains tax will be completely avoided. | |
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