1031 Exchange News & Updates:
Trending This Month
This section will keep you up to date on what's trending in our industry, as well as new developments in 1031 and related tax law.
- April 2018
Can I use Section 1031?
While the real estate market continues to heat up, so are the number of "flippers" turning over properties. Our 1031 CORP. Exchange Team is getting many calls lately about the applicability of Section 1031 when flipping houses. Flipping usually entails a property that is purchased, quickly renovated and sold for a significant profit. The properties are not usually held for more than a couple of months. As these properties are not held long-term and were acquired with the intention of turning them over quickly, they do not qualify for tax-deferral treatment under Section 1031. Any property held for sale (spec homes, building lots, model homes, flips, etc.) are ineligible and the profit will be taxed as ordinary income. While Section 1031 doesn't include a specific holding period, the property does have to be held for the productive use in a trade or business or for investment. More important than the length of time a property is held is the picture painted through your use of the property (how it is reported to your lender, to the insurance carrier, on your tax return, was it listed for lease or for sale, etc.). Learn More
- March 2018
Acquiring DSTs as Replacement Property
Delaware Statutory Trusts (DST) are a preferred investment vehicle for passive 1031 exchange investors. DSTs are a fractional ownership in an individual or portfolio of large commercial or residential properties. To learn more about DSTs, click here.
- February 2018
Trading Down in the 1031
While the rule to maximize your tax-deferral requires you to acquire replacement property of equal or greater value and equity, we are seeing an increase in the number of Exchangers who want to trade down and pay tax on that trade down. While the 1031 exchange may still make sense, you should discuss your situation with a tax advisor just to confirm the exchange will still provide tax benefits with a trade down.
- January 2018
Using 1031 Funds for Earnest Money Deposits
While it has always been allowed, more and more Exchangers are taking advantage of the ability to use their exchange proceeds to make earnest money deposits on the replacement property. This can be done as long as the property has been properly identified and the Exchanger’s rights (but not their obligations) in the Agreement of Sale with the Seller have been assigned to 1031 CORP. as the qualified intermediary. Our Exchangers simply need to contact 1031 CORP. to request the assignment and a disbursement authorization.
- December 2017
Last Minute Exchanges
Traditionally, many investors and business owners are trying to wrap up transactions at the end of the year so the last two months of the year are very busy. December was no exception and many of those exchanges were initiated with only a few days of notice. We attributed this to the uncertainty related to tax reform as taxpayers wanted to know what was in the bill, how it would affect real estate and if it made sense to close in 2017 or 2018. The bill was signed into law on December 22, 2017.
- November 2017
Exchanges of Franchise Agreements
As talk of tax reform heats up, it seems more likely than not that you will no longer be able to exchange personal property assets held for business use or investment. Some tangible capital assets will be eligible for immediate expensing but some assets that can currently be exchanged will not. One asset that will likely no longer be eligible for 1031 treatment and not qualify for immediate expensing is a franchise agreement. We have initiated more exchanges of franchise agreements this month than we have seen in the last few years combined. We are happy these Exchangers had good advisors who recognized the need to get the transaction in by the end of the year and cooperative parties willing to make it happen.
- October 2017
Creating Single-Member LLCs to Acquire Replacement Property
There are many reasons a real estate investor would like to own their property in an entity instead of their individual names. Many times, it is related to financing requirements and/or minimizing personal liability. While Section 1031 has a same taxpayer/owner requirement, the exception to this rule is a disregarded entity for tax purposes. The most commonly used disregarded entity is a single member limited liability company (LLC). This will work for 1031 purposes provided the underlying taxpayer is the same one that held title (owned) the old property. 1031 CORP. has seen a big increase in the number of Exchangers creating new single member LLCs to acquire title of their new property.
- September 2017
Structuring Reverse Exchanges
The continuing decrease of properties on the market for sale is driving the need to structure a reverse exchange. A reverse exchange allows you to preserve the ability to exchange when you have found the replacement property you wish to acquire but, for a variety of reasons, cannot give up ownership of your old property. A reverse exchange is more complicated and costs more than a typical exchange but it allows 1031 CORP. to acquire the replacement property from the seller and hold for up to 180 days. Once the relinquished property is conveyed to a buyer, title to the parked property is transferred to the Exchanger. 1031 CORP. can also park title to the relinquished property if that makes more sense. Learn more about reverse exchanges.
- August 2017
Diversification: Buying Traditional Real Estate and a DST
With an increase in high dollar transactions, more investors are diversifying their property types when acquiring replacement property. While many are buying traditional real estate assets, they are using some of their funds to also acquire a Delaware Statutory Trust (DST). A DST allows you to acquire a fractional interest in a large commercial property or a portfolio of properties. DSTs are a passive investment which makes them attractive to many who don’t like the responsibilities that come with being a landlord. To learn more about DSTs, click here.
- July 2017
Using Improvement Exchanges
Exchangers are taking advantage of improvement exchanges to use exchange proceeds to make improvements on the replacement property. The improvements must be made before the Exchanger acquires the property so an improvement exchange allows 1031 CORP. to acquire the replacement property from the seller and make the improvements using exchange funds. On or before the end of the 180-Day Exchange Period, the replacement property is transferred to the Exchanger for an amount equal to the original purchase price, including closing costs, plus the value of the improvements paid for and completed. Improvement exchanges are more complicated, have additional expenses and only work with advanced planning. To learn more about improvement exchanges, click here.
- June 2017
Quick Closing on Replacement Property
The lack of properties listed for sale has more and more Exchangers lining up their replacement property before pulling the trigger on the sale of their relinquished property. This is leading to shorter exchange
periods – the time between the sale of the relinquished property and the purchase of the replacement property. Many Exchangers are acquiring their replacement property before the end of the 45-Day Exchange Period.
- May 2017
Having Sellers Finance your Replacement Property
With real estate property values continuing to rise, many owners are seeing significant gains on the sale of the property. Because not all sellers wish to complete a 1031 exchange and acquire another property, we are seeing an increase in the number of sellers providing financing to their buyers. Structuring the financing as an installment sale allows the seller to defer the gain over the life of the loan. Each year, he will pay taxes only on the payments received. Part of that payment is the return of his basis with no tax consequence, part is his gain which he will owe capital gain taxes and part will be the interest paid by the buyer.
- April 2017
Buying NNNs - A Passive Investment Option
A Triple Net Lease (NNN) property is a lease structure where the tenant is required to pay all operating expenses associated with the property, including taxes, insurance and maintenance. A NNN is a passive investment eliminating many of the headaches that come from being a landlord. Common NNN properties include Walgreens, Panera Bread, FedEx distribution centers and Dollar Generals.
- March 2017
Our Exchange Officers have recently seen an increase in the number of Exchangers considering whether or not to provide financing for their Buyer. While you can combine a 1031 exchange and an installment sale, the tax-deferral benefits are not as good as only doing a 1031 exchange. Learn More about installment sales and how you could make them work with a 1031 exchange.
- January/February 2017
Selling Multiple Relinquished Properties
1031 CORP. has seen an increase in 1031 exchange transactions involving the sale of multiple relinquished properties followed by the acquisition of multiple replacement properties. These Exchangers seem to prefer having multiple smaller rental properties and have been successful with this investment strategy.
- December 2016
Buying the Replacement Property in an LLC
While there is a same taxpayer requirement when completing a 1031 exchange, it is possible to acquire the replacement property in the name of an limited liability company (LLC) provided the LLC is a single member LLC and the sole member is the same taxpayer who sold the relinquished property. To be considered a pass-thru entity for tax purposes, the LLC must also elect to be treated as a disregarded entity. Some taxpayers like the liability protection of an LLC while some lenders are requiring it.
- November 2016
We are seeing an increase in the number of exchangers who wish to use their 1031 exchange funds to make improvements to the replacement property. While it takes more planning and there are additional costs, improvement exchanges could be a great strategy to accomplish your investment objectives.
Free and Clear
Recently, we have seen an increase in the number of clients exchanging properties they own free and clear of debt. Many of these property owners waited a long time before deciding to pull the trigger on their long-held property but with consumer confidence continuing to rise, historic low mortgage rates holding steady and increasing property values are motivating real estate investors. Some are choosing to buy replacement property with no debt and others are opting to leverage their equity and purchase more valuable property.
- AUGUST 2016
LLCs, Everywhere an LLC
In a 1031 exchange, there is a same taxpayer requirement that the relinquished property and the replacement property must have the same owner. One exception is a disregarded entity such as a single member limited liability company (LLC) when its sole member is the same taxpayer that sold the relinquished property. This month saw many Exchangers creating new LLCs to acquire the replacement property for a variety of different reasons. To learn more about using single member LLCs in a 1031, click here.
- JULY 2016
Delaware Statutory Trusts (DSTs) are all the Rage
A Delaware Statutory Trust (DST) is a fractional ownership in a large commercial or residential property or properties. We have seen an increasing number of exchangers buying into a DST as replacement property which often include a portfolio of properties and is considered a passive investment. Click for more information on DSTs.
- JUNE 2016
Sellers are taking advantage of the strong real estate market and packaging a number of relinquished properties to sell to one buyer. This strategy helps ensure they have the proceeds of multiple properties to roll into an often much more valuable replacement property. While packaging properties could take a little more planning time, the opportunity to diversify your assets is often worth the extra effort.
- MAY 2016
Knowledge = Power
As Pennsylvania real estate licensees work to satisfy their continuing education required hours by the end of the month, we have been busy presenting CE courses across the Commonwealth. Even those not looking for credit hours have scheduled in-house seminars on 1031 exchanges. This is in response to the increased number of 1031 exchange questions from their sellers and their desire to best serve the needs of their clients. If you are interested in setting up a seminar or CE course, please contact Margo McDonnell.
- APRIL 2016
Sorry, but No Notice
This month has seen a number of last minute exchanges with Exchangers setting up their exchanges within a day or two of the closing of the relinquished property. While 1031 CORP. can certainly make this work, we do prefer our clients have ample time to review their 1031 exchange documents in advance and we like to give the title/escrow officers sufficient notice.
- MARCH 2016
One Property Will Not Do!
We are seeing more transactions involving the acquisition of multiple replacement properties. Exchangers are taking advantage of low interest rates and leverage their exchange funds into two or three replacement properties. Way to put your deferral to work!
- FEBRUARY 2016
Triple Net Lease Properties
Triple Net Lease (NNN) Properties seem to be the hottest replacement property option around. A NNN property, such as a Walgreens, CVS or Panera Bread, are a great passive investment for an investor with more money to invest and prefers a more passive investment.
- JANUARY 2016
We continue to see a significant number of reverse exchanges. This trend has continued since 2014!
- DECEMBER 2015
Push to Get It Done
As usual, Exchangers are trying to wrap up their transactions before the end of the year even if they are initiating it this month.
- NOVEMBER 2015
Short Exchange Periods
With the real estate market continuing to favor sellers, we are seeing more and more Exchangers planning ahead and lining up their replacement property so they can acquire shortly after the sale of their relinquished property. Many are not getting anywhere near the end of the 45-Day Identification Period.
- OCTOBER 2015
Large Commercial Transactions
While many of the exchanges we handle involve the exchange of single family rental properties, we are seeing an increase in commercial transactions selling for over $5,000,000.
- SEPTEMBER 2015
Exchanges of Vacation Homes
Generally, a vacation home does not qualify for 1031 treatment unless it meets the requirements of Revenue Procedure 2008-16. This is the first time we have seen a number of these transactions and it shows the benefits of 1031 if you have patience and time to plan ahead. To qualify, you need to only use the property for 14 days in each of the two 12-month periods prior to the sale of the property. You also have to rent the property for at least 14 days during the same two 12-month periods.
- AUGUST 2015
There is a renewed interest in improvement exchanges especially in states where there are no additional realty transfer tax or stamps. While they are more expensive and require additional planning, improvement exchanges are a great way of maximizing your tax-deferral by using exchange funds to improve the replacement property before you acquire it.
- JULY 2015
Flips and Other Dealer Property
We lost track of the number of inquiries we received regarding properties being flipped. Unfortunately, Section 1031 specifically excludes property held for sale or treated as inventory, such as flips, dealer property, spec homes and building lots.
- JUNE 2015
Buying Replacement Property in a Single-Member LLC
There has been an increase in the number of exchangers who are opting to create a disregarded entity, such as a single-member limited liability company where the sole member is the same taxpayer who sold the relinquished property. This satisfies the same taxpayer requirement while also giving the exchanger additional protections.
- MAY 2015
Buying Multiple Properties
Clients have been diversifying and acquiring multiple replacement property. In most of the transactions, only one property was relinquished. Some exchanges involved the acquisition of several smaller properties while others leveraged their exchange funds to acquire larger replacement properties.
- APRIL 2015
Reverse exchanges continue to be a popular strategy to preserve the ability to defer gain when they want to acquire replacement property but have not yet secured a buyer for the relinquished property or they want to make improvements to the replacement property before giving up their relinquished property.
- MARCH 2015
No Debt on the Replacement Property
Exchangers are opting to put additional cash into the replacement property to avoid having debt. While exchangers who want to maximize their tax deferral have to acquire replacement property of equal or greater value and equity, some are choosing to trade down and pay the tax. Others are choosing to buy for equal or greater value and equity and add cash from their pocket which would offset any liability boot received when the relinquished property mortgage was paid in full.
- FEBRUARY 2015
Back to Back Closings / Short Exchange Periods
An unusually higher number of Exchangers are closing on the replacement property immediately after closing on the relinquished property. This is significantly lowering the average Exchange Period for our clients. This certainly works but it does takes a little more planning and coordination with all parties.
- JANUARY 2015
Exchangers are looking for replacement properties that need improvements and want to use their exchange funds to make those improvements. This typically requires our sister company, MEC Associates, LLC, to acquire the replacement property, make the improvements and convey the improved property to the Exchanger
on or before the end of the 180-Exchange Period. Don’t forget an improvement exchange takes quite a bit of advance planning to maximize its benefits.
- DECEMBER 2014
December was no different than other Decembers. Everyone wants to close by the end of the year. This was the norm for both selling relinquished properties as well as buying replacement properties. Crazy busy month for us but no complaining. We are always grateful for the business.
- NOVEMBER 2014
Consolidation of Properties
A number of clients are selling multiple properties to acquire one replacement property of equal or greater value. With the hot real estate market creating a seller’s market, Exchangers are able to sell multiple properties within a relatively short period of time and manage the closing dates to work within one exchange transaction.
- OCTOBER 2014
Everyone Wants a Trust
While there is the same taxpayer (owner) requirement when exchanging properties, title to the replacement property can usually be acquired by a disregarded entity, such as a revocable or “grantor” trust. Typically, the trust does not have a separate tax identification number and the Exchanger will report the property on their own tax return.
- SEPTEMBER 2014
1031 Exchange Seminars
While it does not pertain directly to transactions, more real estate teams and associations are requesting a 1031 exchange presentation in their office. Our Certified Exchange Specialists® are always happy to accommodate this request.
- AUGUST 2014
I’ll Take the Boot!
A surprising number of Exchangers initiating a new exchange this month have elected to exclude some cash from their exchange and pay tax on it. The taxable portion is called “boot.” In some of these exchanges, the Exchanger was still acquiring replacement property of equal or greater value but did not want to have to refinance after buying the replacement property to get cash.
- JULY 2014
Just One Identified Replacement Property
Exchangers are putting replacement property under contract early in the exchange process and only identifying that one property on their 45-Day Identification. They are not identifying any “back up” properties just in case their first choice falls thru for any reason.
- JUNE 2014
Seller Providing Financing on Replacement Property
More and more Exchangers are having the seller of the replacement property finance the acquisition instead of using a traditional lender. For the Seller, they can report the sale as an installment sale and receive some tax benefits. The Exchanger must be sure to reinvest all net equity into replacement property before financing.
- MAY 2014
Reverse exchanges seem to come in waves and it is high tide again. We are seeing a good increase in the number of reverse exchanges – a structure used when the Exchanger must take title to the replacement property before giving up title to the relinquished property.
- APRIL 2014
Making Minor Improvements to the Replacement Property Before Purchasing
Improvement exchanges are complicated and significantly increase your transaction expenses. In recent months, we have seen a number of Exchangers work with the seller of the replacement property to increase the contract sale price of the property and the seller makes the desired improvements. In a few situations, with the Exchanger's authorization, 1031 CORP. loaned the Seller the funds to make the improvements (after signing a note and mortgage which would be paid off at closing). The Seller's tax liability does not increase because the basis of the property is also increased and the Exchanger has the opportunity to use exchange funds to make the desired improvements. While this is not the solution for everyone, you never know until you ask!
- MARCH 2014
Inquiries Regarding the Conversion of 1031 replacement Property into a Primary Residence
The number of calls and emails with questions regarding the transition from investment property to primary residence was up significantly in recent weeks. Learn more about the things to keep in mind when making the conversion.
- FEBRUARY 2014
Inquiries for Later this Year
Investors and business owners seems to be planning ahead and are inquiring about 1031 exchanges for transactions that will not happen until the third or fourth quarter of 2014. This is very different from what we have seen in recent years when we received inquiries quickly followed by a request to initiate the 1031 exchange.
- JANUARY 2014
Multiple Replacement Properties
Exchangers are levering their buying power and acquiring multiple replacement properties to comlete their 1031 exchange. The increased buying power is a direct result of the Exchanger's ability to defer their gain and keep all equity invested in replacement property. 1031 exchanges provide the opportunity to grow an investment portfolio with pre-tax dollars.
- DECEMBER 2013
Personal Property Exchanges
This month, we have seen an increase in the number of inquiries involving the exchange of personal property assets, such as airplanes and equipment. Years of bonus depreciation is making a 1031 exchange almost a necessity.
- NOVEMBER 2013
Last Minute Exchanges
This month, we have seen a significant increase in the number of last minutes closings. We have been opening new 1031 exchanges just a few days before the closing of the relinquished property. We anticipate this trend to continue thru the end of the year.
- SEPTEMBER 2013
Relinquished Properties Selling Quickly
This past month, we have had a number of clients pleasantly surprised by how swiftly they found a buyer for a recently listed property. Many of those quickly selling properties are in resort areas.
- AUGUST 2013
Resort Area Homes
After years of only occasionally seeing a transaction involving a resort area home, we have clients buying and selling them all over the place again. Many are taking advantage of the opportunity to trade up. Of course, vacation homes usually do not qualify but you could certainly use the home as a rental for two years and safely convert into your dream vacation home. Learn how.
- JULY 2013
Triple Net Lease Properties (NNN)
- JUNE 2013
June has seen a significant increase in the number of exchange transactions involving commercial transactions over $5M. Multi-housing and retail centers top the list with golf course properties and mobile home parks rounding it out.
- MAY 2013
Yes, we said nothing. There is no one thing that is trending this month. We are, however, seeing a significantly greater number of investors and business owners initiating a 1031 exchange.
- APRIL 2013
Installment Sales and 1031 Exchanges
We are seeing a number of Exchangers offering to provide financing to their buyers. While it means they may not be able to defer all of their gain through their 1031 exchange, they feel the ability to get a set rate of return on the note makes it a worthwhile strategy. Learn more about how 1031 exchanges can successfully work with an installment sale.
- MARCH 2013
Last Minute Exchanges
This has been a trend for quite a while but March has a seen a significant increase in the number of people initiating their 1031 exchange just a day or two before the closing of their relinquished property. We have had a few even call us from the closing table! Ideally, you should initiate your 1031 exchange as soon as your relinquished property is under Agreement with a Buyer. This allows us to provide your closing agent with ample notice and give you time to review your Exchange Agreement before signing.
- FEBRUARY 2013
We did not have anyone exchanging conservation easements for a several years and we’ve recently handled a few of them with a few more in the works. It seems as the economy is improving, states are freeing up funds for these conservation easements and the preservation of their open space. So what is a conservation easement? It is a perpetual easement that runs with the property deed and requires you to relinquish your rights to develop a piece of property, usually open space. Property owners are compensated for this easement and it is usually all taxable so a 1031 exchange can be very advantageous.
- JANUARY 2013
Yes, we sound like a broken record but there has been a significant increase in reverse exchanges this month. In the past, we knew it meant there was a renewed sense of confidence that they could sell their relinquished property within the next 180 days. While investors are still feeling that confidence, they are most concerned about locking in that replacement property they want. We've always said "Reverse exchanges make the impossible, possible" and more and more investors are utilizing this structure to accomplish their investment objectives.
- DECEMBER 2012
A Push to Get the Exchange Done
While there is traditionally a push to close on properties before the end of the year, we are hearing a significant increase in the “I want to close before the 31st” statements from our clients. There are just as many “the Seller needs to close by the 31st.” Obviously, the new 3.8% Medicare Tax and the prospect of higher capital gains are motivated people to complete their transactions now and avoid a larger tax bill.
- November 2012
Last Minute Exchanges
In the past, Exchangers have set up their exchanges months in advance but things have changed. Taxpayers are waiting until the last minute until they feel certain that the transaction will go through. While some of this these taxpayers are determining if it is better to simply sell and pay the tax now before rates go up or effect a 1031 exchange while most of the delays are the result of the tougher mortgage underwriting standards while. Don’t forget 1031 CORP. can initiate your exchange even if you are at the closing table.
- October 2012
Closing on or Near the 180th Day
This month we have seen a surprising twist. After seeing the length of time Exchangers take to complete their 1031 exchange decrease to an average of just 43 days, we have seen a good number of exchanges go the full 180-days. These are typically larger transactions and no doubt there is a lot of nail biting as we get closer but so far, our clients and their advisors have been able to make them work.
- September 2012
This month has seen an increase in the number of taxpayers setting up and inquiring about improvement exchanges, which allows 1031 CORP. to park legal title of the replacement property and make improvements within the 180-Day Exchange Period. They require additional planning and are more expensive than a delayed exchange but provide the opportunity to use exchange proceeds to improve a replacement property so its value is equal or greater to that of the relinquished property. Learn more.
- August 2012
Relinquished Properties Free & Clear of Debt
We are seeing an increase in the number of taxpayers exchanging property they have owned for many years and is owned free and clear of debt. It seems many have toyed with the idea of selling but were on the fence for quite a while. For many, the excellent opportunities on the purchase side was a big motivation. Additionally, the concern that property values are again starting to rise make now the right time to make their move.
- July 2012
After virtually none in 2011, we have seen an increase in equipment exchanges in the last few months. We suspect this is related to expiration of the 100% bonus depreciation that was available in 2010 and 2011. Cranes, heavy lifts, printing presses are just a few examples of what we have recently facilitated.
- June 2012
No Mortgage on Replacement Property
We are seeing a higher than usual amount of Exchangers choosing to put in additional funds rather than place a mortgage on the replacement property. Some are even choosing to trade down and pay tax on the difference
- May 2012
Exchanging Property with No Gain
Investors are exchanging properties with little or no gain, maybe even selling at a loss, to avoid costly depreciation recapture. The exchange is allowing them to capitalize on the buying opportunities and acquire a better investment.
- April 2012
Short Exchange Periods
Exchangers are lining up their replacement property and are ready to acquire it immediately after conveying the old property to a Buyer. The average exchange is now completed within 43 days (down from average of 93 days just two years ago).
- March 2012
Multiple Replacement Properties
Investors seem to be maximizing the opportunities available with the current real estate market couple with still historically low interest rates and leveraging their exchange funds into multiple replacement properties.
- February 2012
Oil and Gas!
We have had a rash of calls inquiring about royalties and bonus payments. When it comes to Marcellus Shale, the answer depends on the terms of your agreement with the gas company. Click for more information on Oil & Gas Royalties. Note you can always acquire oil and gas royalties as replacement property.
- January 2012
Reverse 1031 Exchanges
A sharp increase in reverse 1031 exchange transactions, a trend we mentioned January 2011. The pace has increased significantly since then and it indicates continued confidence in the real estate market. A reverse 1031 exchange is a mirror of a delayed exchange and allows one to defer gain when they must acquired the replacement property before being able to convey the relinquished property to a buyer.