Category: 1031 Exchange General

As most people acquainted with 1031 exchange transactions know, a 1031 exchange can be used to defer capital gains taxes on the sale of virtually any “like-kind” real property interest. “Like-kind” real property is any property the taxpayer owns or intends to acquire for investment or productive use in a trade or business. Many times, the focus is on commercial, light industrial, office or residential properties, but a significant number of 1031 exchanges involve farm, ranch, and other agricultural properties.
Ag-Related 1031 Exchanges
In the past 40+ years in the transactional real estate and 1031 exchange arenas, we have witnessed Ag sector taxpayers increasingly use 1031 exchanges for a variety of reasons. The typical example is the sale of unproductive property or property not suited to an existing Ag operation and use of the exchange funds to acquire another more productive property or property that otherwise improves operational efficiencies.
Another expansion of opportunities afforded by a 1031 exchange is the sale of agricultural land or water rights, timber rights, oil and gas and mineral rights not necessary for farm or ranch operations and exchanges into other real property interests. Sometimes this type of transaction affords a farmer or rancher the opportunity to develop an in¬come stream not dependent on commodity prices or not subject to the vagaries of the agricultural economy.
Many agricultural landowners have sold perpetual easements or long-term leasehold interests (30+ years in duration) for the installation of wind power and solar power generation facilities on portions of their farms or ranches that are not integral to crop or livestock production. There are also increasing opportunities for farmers and ranchers to sell conservation easements to private conservation organizations or government entities such as the U.S. Department of Agriculture and use the cash proceeds to exchange into other real property interests.
We have also witnessed many situations in which the current generation of owners who have succeeded to multi-generational farms and ranches are faced with the reality that there is no next generation to work the land and livestock 24/7/365 days a year while facing fluctuations in the economy, disease, predators, drought, fires and other natural disasters. Fortunately for those folks, there are always buyers interested in agricultural land and the aging sellers can exchange out of a sale into other types of income-producing property. For the first time in their lives, those diverse income streams support the retirees independently of the agriculture markets.
Investors Targeting Agricultural Properties
On the other side of the equation, there are many investors who have begun to realize the benefits of investing in agri¬cultural property. Though the return on investment is not as high as certain types of commercial, office or residential rental property, pastureland, which is in short supply for livestock producers, provides a steady cash return and an upside in appreciation in value. Some Ag property buyers are developers who see another higher and best use for property that has historically been used in agribusiness.
Many agricultural investors are also investing in farmland which has heretofore been in dry land crop production or pastureland but has the capacity for increased production and profitability. Those producers can marshal underutilized water resources and, with enhanced irrigation systems and farming practices, convert dry land farms into other production such as row crops, vineyards, etc. The profitability of the land can also be changed with the introduction of organic crops which bring higher prices at the marketplace. With each of these modifications there is a corresponding appreciation in value of the land.
Don’t overlook the possibilities available to taxpayers in exchange transactions involving agricultural real estate. If you have any questions about these types of transactions, Accruit has a robust team which specializes in agribusiness real estate transactions, and we are happy to provide you with the expertise to successfully complete these types of exchange transactions.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Ownership in passive real estate investments is becoming increasingly popular for a variety of reasons including aging real estate investors, new opportunities in the market, and the appeal of investments without management responsibilities. Two of the most common forms of passive ownership in real estate are REITs and DSTs. In this article we will discuss each and how they intersect with a 1031 Exchange, if at all. 
What is a Real Estate Investment Trust (REIT)?
At its core, a Real Estate Investment Trust (REIT) is a company that owns and operates income-producing real estate or related assets. You can think of these as similar to a mutual fund that invests in real estate instead of stocks. These assets may include office buildings, shopping malls, multi-family housing, self-storage facilities, warehouses, and more. Some REITs provide financing to other companies that invest in these assets, in the form of mortgages or other loans. Most REITs trade on major stock exchanges, and thereby provide an investment opportunity, much like a mutual fund, to individuals who wish to benefit from investing in real estate without having to manage the day-to-day operations of real estate.
REITs are ongoing business entities, whose purpose is to make money for the investors by buying, managing, and selling real estate. When a REIT sells one asset, they have a fiduciary responsibility to the investors to replace that asset quickly to maximize the return on investment, and often do so using a 1031 Exchange at the REIT level.
However, because REITs trade on stock exchanges, investors don’t own an interest in property, but rather own a small share of the REIT much like shares of stock in any other publicly traded company. Given they do not have an ownership interest in the underlying real estate owned by these companies, under current Section 1031 rules, investors cannot sell or acquire shares in a REIT as part of a 1031 Exchange. Thus, if a REIT investor decides to sell their shares, they have created a taxable event, and may not use Section 1031 to defer the tax implications.
What is a Delaware Statutory Trust (DST)?
Delaware Statutory Trusts (DSTs) are legally recognized trusts, created under Delaware law, in which each investor owns a “beneficial interest” in the DST, the percentage interest is based upon the amount of the equity investment. Much like REITs, DSTs own and operate income-producing real estate or related assets. These assets may include office buildings, shopping malls, multi-family housing, self-storage facilities, warehouses, etc. Whereas REITs have the investment portfolio consisting of a number of individual properties, DSTs are often a single property. Like REITs, DSTs offer individual investors the opportunity to invest in these assets without the management headaches, additionally they offer accredited investors access to investment grade real estate that is generally more highly valued property than they could have acquired on their own. Different than REITs, the Internal Revenue Service has determined that investors in DSTs can hold undivided fractional interests in the real estate holdings of the DST rather than the company, so DST interests are considered “like-kind” property for 1031 exchange purposes.
Each DST is formed to acquire a unique real estate asset, or portfolio of assets. When the asset is later sold, the DST terminates, and distributes the profits directly to the beneficial owners. Those owners may choose to participate in a new 1031 Exchange, or not, depending on their unique needs, and should they not utilize a 1031 Exchange it would create a taxable event. The point is that DST investors are eligible for 1031 Exchange treatment upon sale, whereas REIT investors are not.
Section 1031 Exchange Rules
First, we must remember that Section 1031 exchange apply only to “real property held for productive use in a trade or business or for investment.” This phrase eliminates the prospect of structuring a 1031 Exchange for any non-real estate investment assets, as well as assets that were not held for business or investment use. REITs are structured as partnerships and prior to the Tax Cuts and Jobs Act, there was an explicit statement within the statue that eliminated the prospect of structuring a 1031 Exchange with shares in a partnership and, notes, stocks, bonds, certificates of trust, and other similar items, as well. With the 2021 revision, the word “real” was inserted before each instance of the word “property”, clearly limiting 1031 Exchanges to real estate.
Do REITs and DSTs Intersect with a 1031 Exchange?
An investor cannot directly invest into a REIT through a 1031 Exchange. However, by utilizing a 1031 Exchange an investor can invest directly into a DST as their Replacement Property. Should an investor’s end goal be to exit from their current investment real estate and ultimately invest into a REIT, they could utilize a 1031 Exchange to buy a DST and later use a 721 Exchange to accomplish such.
Conclusion
Whether an investor should invest in a REIT or DST, is a fact-specific inquiry. No single answer will be applicable to every investor. Thus, investors are encouraged to discuss their situations and their strategies with their financial planner, attorney, and accountant.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Ownership in passive real estate investments is becoming increasingly popular for a variety of reasons including aging real estate investors, new opportunities in the market, and the appeal of investments without management responsibilities. Two of the most common forms of passive ownership in real estate are REITs and DSTs. In this article we will discuss each and how they intersect with a 1031 Exchange, if at all. 
What is a Real Estate Investment Trust (REIT)?
At its core, a Real Estate Investment Trust (REIT) is a company that owns and operates income-producing real estate or related assets. You can think of these as similar to a mutual fund that invests in real estate instead of stocks. These assets may include office buildings, shopping malls, multi-family housing, self-storage facilities, warehouses, and more. Some REITs provide financing to other companies that invest in these assets, in the form of mortgages or other loans. Most REITs trade on major stock exchanges, and thereby provide an investment opportunity, much like a mutual fund, to individuals who wish to benefit from investing in real estate without having to manage the day-to-day operations of real estate.
REITs are ongoing business entities, whose purpose is to make money for the investors by buying, managing, and selling real estate. When a REIT sells one asset, they have a fiduciary responsibility to the investors to replace that asset quickly to maximize the return on investment, and often do so using a 1031 Exchange at the REIT level.
However, because REITs trade on stock exchanges, investors don’t own an interest in property, but rather own a small share of the REIT much like shares of stock in any other publicly traded company. Given they do not have an ownership interest in the underlying real estate owned by these companies, under current Section 1031 rules, investors cannot sell or acquire shares in a REIT as part of a 1031 Exchange. Thus, if a REIT investor decides to sell their shares, they have created a taxable event, and may not use Section 1031 to defer the tax implications.
What is a Delaware Statutory Trust (DST)?
Delaware Statutory Trusts (DSTs) are legally recognized trusts, created under Delaware law, in which each investor owns a “beneficial interest” in the DST, the percentage interest is based upon the amount of the equity investment. Much like REITs, DSTs own and operate income-producing real estate or related assets. These assets may include office buildings, shopping malls, multi-family housing, self-storage facilities, warehouses, etc. Whereas REITs have the investment portfolio consisting of a number of individual properties, DSTs are often a single property. Like REITs, DSTs offer individual investors the opportunity to invest in these assets without the management headaches, additionally they offer accredited investors access to investment grade real estate that is generally more highly valued property than they could have acquired on their own. Different than REITs, the Internal Revenue Service has determined that investors in DSTs can hold undivided fractional interests in the real estate holdings of the DST rather than the company, so DST interests are considered “like-kind” property for 1031 exchange purposes.
Each DST is formed to acquire a unique real estate asset, or portfolio of assets. When the asset is later sold, the DST terminates, and distributes the profits directly to the beneficial owners. Those owners may choose to participate in a new 1031 Exchange, or not, depending on their unique needs, and should they not utilize a 1031 Exchange it would create a taxable event. The point is that DST investors are eligible for 1031 Exchange treatment upon sale, whereas REIT investors are not.
Section 1031 Exchange Rules
First, we must remember that Section 1031 exchange apply only to “real property held for productive use in a trade or business or for investment.” This phrase eliminates the prospect of structuring a 1031 Exchange for any non-real estate investment assets, as well as assets that were not held for business or investment use. REITs are structured as partnerships and prior to the Tax Cuts and Jobs Act, there was an explicit statement within the statue that eliminated the prospect of structuring a 1031 Exchange with shares in a partnership and, notes, stocks, bonds, certificates of trust, and other similar items, as well. With the 2021 revision, the word “real” was inserted before each instance of the word “property”, clearly limiting 1031 Exchanges to real estate.
Do REITs and DSTs Intersect with a 1031 Exchange?
An investor cannot directly invest into a REIT through a 1031 Exchange. However, by utilizing a 1031 Exchange an investor can invest directly into a DST as their Replacement Property. Should an investor’s end goal be to exit from their current investment real estate and ultimately invest into a REIT, they could utilize a 1031 Exchange to buy a DST and later use a 721 Exchange to accomplish such.
Conclusion
Whether an investor should invest in a REIT or DST, is a fact-specific inquiry. No single answer will be applicable to every investor. Thus, investors are encouraged to discuss their situations and their strategies with their financial planner, attorney, and accountant.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Ownership in passive real estate investments is becoming increasingly popular for a variety of reasons including aging real estate investors, new opportunities in the market, and the appeal of investments without management responsibilities. Two of the most common forms of passive ownership in real estate are REITs and DSTs. In this article we will discuss each and how they intersect with a 1031 Exchange, if at all. 
What is a Real Estate Investment Trust (REIT)?
At its core, a Real Estate Investment Trust (REIT) is a company that owns and operates income-producing real estate or related assets. You can think of these as similar to a mutual fund that invests in real estate instead of stocks. These assets may include office buildings, shopping malls, multi-family housing, self-storage facilities, warehouses, and more. Some REITs provide financing to other companies that invest in these assets, in the form of mortgages or other loans. Most REITs trade on major stock exchanges, and thereby provide an investment opportunity, much like a mutual fund, to individuals who wish to benefit from investing in real estate without having to manage the day-to-day operations of real estate.
REITs are ongoing business entities, whose purpose is to make money for the investors by buying, managing, and selling real estate. When a REIT sells one asset, they have a fiduciary responsibility to the investors to replace that asset quickly to maximize the return on investment, and often do so using a 1031 Exchange at the REIT level.
However, because REITs trade on stock exchanges, investors don’t own an interest in property, but rather own a small share of the REIT much like shares of stock in any other publicly traded company. Given they do not have an ownership interest in the underlying real estate owned by these companies, under current Section 1031 rules, investors cannot sell or acquire shares in a REIT as part of a 1031 Exchange. Thus, if a REIT investor decides to sell their shares, they have created a taxable event, and may not use Section 1031 to defer the tax implications.
What is a Delaware Statutory Trust (DST)?
Delaware Statutory Trusts (DSTs) are legally recognized trusts, created under Delaware law, in which each investor owns a “beneficial interest” in the DST, the percentage interest is based upon the amount of the equity investment. Much like REITs, DSTs own and operate income-producing real estate or related assets. These assets may include office buildings, shopping malls, multi-family housing, self-storage facilities, warehouses, etc. Whereas REITs have the investment portfolio consisting of a number of individual properties, DSTs are often a single property. Like REITs, DSTs offer individual investors the opportunity to invest in these assets without the management headaches, additionally they offer accredited investors access to investment grade real estate that is generally more highly valued property than they could have acquired on their own. Different than REITs, the Internal Revenue Service has determined that investors in DSTs can hold undivided fractional interests in the real estate holdings of the DST rather than the company, so DST interests are considered “like-kind” property for 1031 exchange purposes.
Each DST is formed to acquire a unique real estate asset, or portfolio of assets. When the asset is later sold, the DST terminates, and distributes the profits directly to the beneficial owners. Those owners may choose to participate in a new 1031 Exchange, or not, depending on their unique needs, and should they not utilize a 1031 Exchange it would create a taxable event. The point is that DST investors are eligible for 1031 Exchange treatment upon sale, whereas REIT investors are not.
Section 1031 Exchange Rules
First, we must remember that Section 1031 exchange apply only to “real property held for productive use in a trade or business or for investment.” This phrase eliminates the prospect of structuring a 1031 Exchange for any non-real estate investment assets, as well as assets that were not held for business or investment use. REITs are structured as partnerships and prior to the Tax Cuts and Jobs Act, there was an explicit statement within the statue that eliminated the prospect of structuring a 1031 Exchange with shares in a partnership and, notes, stocks, bonds, certificates of trust, and other similar items, as well. With the 2021 revision, the word “real” was inserted before each instance of the word “property”, clearly limiting 1031 Exchanges to real estate.
Do REITs and DSTs Intersect with a 1031 Exchange?
An investor cannot directly invest into a REIT through a 1031 Exchange. However, by utilizing a 1031 Exchange an investor can invest directly into a DST as their Replacement Property. Should an investor’s end goal be to exit from their current investment real estate and ultimately invest into a REIT, they could utilize a 1031 Exchange to buy a DST and later use a 721 Exchange to accomplish such.
Conclusion
Whether an investor should invest in a REIT or DST, is a fact-specific inquiry. No single answer will be applicable to every investor. Thus, investors are encouraged to discuss their situations and their strategies with their financial planner, attorney, and accountant.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Generally, 1031 Exchanges cannot be utilized to acquire real property that will be remodeled or otherwise improved or developed and resold, because the “qualified use” requirement contained in Code Section 1031 requires that the taxpayer have a bona fide intent at the time of acquisition to hold the property for productive use in a trade or business or for investment.
Flip Properties
That being said, there have been situations involving 1031 Exchanges by taxpayers with dealer/developer histories but varying fact patterns similar to the scenario described above where taxpayers have claimed the 1031 deferral and the IRS and courts have looked at the facts of each specific case in determining eligibility for 1031 deferral.
In determining if a property is being acquired and held by the taxpayer for purposes of resale to the taxpayer’s customers in the ordinary course of the taxpayer’s business,it is incumbent to devine the bona fide intent of the taxpayer at the time of acquisition and during the ownership period to determine whether the 1031 Exchange is valid.
Arguably, if the taxpayer has a bona fide intent at the time of acquisition to hold the property per the 1031 Exchange regulations and an unsolicited buyer comes along a couple weeks later and offers them twice what they paid for the property and the taxpayer sells, the taxpayer has met the qualified use requirement. What better investment is there? Another example is where the taxpayer gets a new job in a different area and the taxpayer cannot manage the property he or she recently acquired. One more example is a when a property is bought and the taxpayer makes every effort to rent it, but it does not get rented and has a buyer who is willing to acquire the property for another purpose.
From a practical standpoint, the taxpayer and their CPA must deal with the Form 8824 that is filed for that transaction involving a 1031 exchange. The form asks when the taxpayer acquired the real property described in the relinquished property contract and qualifying as “relinquished property” and when they sold it. A short holding period raises a red flag despite the taxpayer’s bona fide intent. The taxpayer may win the ensuing argument, but could spend more than the taxes on attorney and CPA fees. The taxpayer should always follow the guidance of their qualified CPA or other tax advisor in regard to the tax reporting.
Criteria in distinguishing 1031 Exchange Property from “Dealer” Property
As stated above, various criteria are often evaluated by those in the 1031 Exchange industry in determining whether property qualifies for Section 1031 treatment as opposed to being “dealer/developer” property. The criteria include the following:

What is the initial purpose for which the property was purchased?
What was the purpose for which the property was later held?
What is the extent to which the taxpayer made improvements if any such as subdivision, roads/streets construction, utilities and other infrastructure build-outs, actual residential construction, etc.?
What is the taxpayer’s frequency, number, and consistency of property sales?
What is the size and type of transactions involved?
What is the taxpayer’s regular business?
What is the extent to which advertising, promotion, or other active efforts were made to recruit buyers for the sale of the property?
Was the property marketed with brokers?
What is the reason and purpose for which the property was held at the time of sale?

Some cases that involved a determination of the validity of a 1031 Exchange on a property that was acquired for resale include: Redwood Empire Sav. & Loan Ass’n v. Comm’r, 628 F.2d 516, 517 (9th Cir. 1980); Pool v. Comm’r, 251 F.2d 233, 237 (9th Cir. 1957); Evans v. IRS, T.C. Memo. 2016-7 (January 2016); Paullus v. Commissioner, 72 T.C.M. 636 (1996).
AAdditional Tax Planning Options for Developers: Section 1227 Unrelated to a 1031 Exchange: Developers and their advisors may gain some comfort from Section 1227 of the Code which allows some taxpayers to sell up to five lots and pay long term capital gains tax on the proceeds. However, there are strict standards which must be met in order to obtain that benefit such as holding the properties for 5 years.
Summary
Sometimes it is hard to determine if a developer or a flipper is eligible for 1031 treatment. There is no explicit rule, rather it is a “facts and circumstances” test as to the property in question. A developer or flipper could have a long history of acquiring property and selling it in a short time-period, but a specific property property they own may have long been held as an investment or income producing property. Obviously the taxpayer’s intent at the time the property was acquired and the ability to substantiate that intent is key. Hopefully, the answers to the bullet points above can help a taxpayer or advisor determine whether tax deferral through Section 1031 is viable in connection with a particular piece of property.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Generally, 1031 Exchanges cannot be utilized to acquire real property that will be remodeled or otherwise improved or developed and resold, because the “qualified use” requirement contained in Code Section 1031 requires that the taxpayer have a bona fide intent at the time of acquisition to hold the property for productive use in a trade or business or for investment.
Flip Properties
That being said, there have been situations involving 1031 Exchanges by taxpayers with dealer/developer histories but varying fact patterns similar to the scenario described above where taxpayers have claimed the 1031 deferral and the IRS and courts have looked at the facts of each specific case in determining eligibility for 1031 deferral.
In determining if a property is being acquired and held by the taxpayer for purposes of resale to the taxpayer’s customers in the ordinary course of the taxpayer’s business,it is incumbent to devine the bona fide intent of the taxpayer at the time of acquisition and during the ownership period to determine whether the 1031 Exchange is valid.
Arguably, if the taxpayer has a bona fide intent at the time of acquisition to hold the property per the 1031 Exchange regulations and an unsolicited buyer comes along a couple weeks later and offers them twice what they paid for the property and the taxpayer sells, the taxpayer has met the qualified use requirement. What better investment is there? Another example is where the taxpayer gets a new job in a different area and the taxpayer cannot manage the property he or she recently acquired. One more example is a when a property is bought and the taxpayer makes every effort to rent it, but it does not get rented and has a buyer who is willing to acquire the property for another purpose.
From a practical standpoint, the taxpayer and their CPA must deal with the Form 8824 that is filed for that transaction involving a 1031 exchange. The form asks when the taxpayer acquired the real property described in the relinquished property contract and qualifying as “relinquished property” and when they sold it. A short holding period raises a red flag despite the taxpayer’s bona fide intent. The taxpayer may win the ensuing argument, but could spend more than the taxes on attorney and CPA fees. The taxpayer should always follow the guidance of their qualified CPA or other tax advisor in regard to the tax reporting.
Criteria in distinguishing 1031 Exchange Property from “Dealer” Property
As stated above, various criteria are often evaluated by those in the 1031 Exchange industry in determining whether property qualifies for Section 1031 treatment as opposed to being “dealer/developer” property. The criteria include the following:

What is the initial purpose for which the property was purchased?
What was the purpose for which the property was later held?
What is the extent to which the taxpayer made improvements if any such as subdivision, roads/streets construction, utilities and other infrastructure build-outs, actual residential construction, etc.?
What is the taxpayer’s frequency, number, and consistency of property sales?
What is the size and type of transactions involved?
What is the taxpayer’s regular business?
What is the extent to which advertising, promotion, or other active efforts were made to recruit buyers for the sale of the property?
Was the property marketed with brokers?
What is the reason and purpose for which the property was held at the time of sale?

Some cases that involved a determination of the validity of a 1031 Exchange on a property that was acquired for resale include: Redwood Empire Sav. & Loan Ass’n v. Comm’r, 628 F.2d 516, 517 (9th Cir. 1980); Pool v. Comm’r, 251 F.2d 233, 237 (9th Cir. 1957); Evans v. IRS, T.C. Memo. 2016-7 (January 2016); Paullus v. Commissioner, 72 T.C.M. 636 (1996).
AAdditional Tax Planning Options for Developers: Section 1227 Unrelated to a 1031 Exchange: Developers and their advisors may gain some comfort from Section 1227 of the Code which allows some taxpayers to sell up to five lots and pay long term capital gains tax on the proceeds. However, there are strict standards which must be met in order to obtain that benefit such as holding the properties for 5 years.
Summary
Sometimes it is hard to determine if a developer or a flipper is eligible for 1031 treatment. There is no explicit rule, rather it is a “facts and circumstances” test as to the property in question. A developer or flipper could have a long history of acquiring property and selling it in a short time-period, but a specific property property they own may have long been held as an investment or income producing property. Obviously the taxpayer’s intent at the time the property was acquired and the ability to substantiate that intent is key. Hopefully, the answers to the bullet points above can help a taxpayer or advisor determine whether tax deferral through Section 1031 is viable in connection with a particular piece of property.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Generally, 1031 Exchanges cannot be utilized to acquire real property that will be remodeled or otherwise improved or developed and resold, because the “qualified use” requirement contained in Code Section 1031 requires that the taxpayer have a bona fide intent at the time of acquisition to hold the property for productive use in a trade or business or for investment.
Flip Properties
That being said, there have been situations involving 1031 Exchanges by taxpayers with dealer/developer histories but varying fact patterns similar to the scenario described above where taxpayers have claimed the 1031 deferral and the IRS and courts have looked at the facts of each specific case in determining eligibility for 1031 deferral.
In determining if a property is being acquired and held by the taxpayer for purposes of resale to the taxpayer’s customers in the ordinary course of the taxpayer’s business,it is incumbent to devine the bona fide intent of the taxpayer at the time of acquisition and during the ownership period to determine whether the 1031 Exchange is valid.
Arguably, if the taxpayer has a bona fide intent at the time of acquisition to hold the property per the 1031 Exchange regulations and an unsolicited buyer comes along a couple weeks later and offers them twice what they paid for the property and the taxpayer sells, the taxpayer has met the qualified use requirement. What better investment is there? Another example is where the taxpayer gets a new job in a different area and the taxpayer cannot manage the property he or she recently acquired. One more example is a when a property is bought and the taxpayer makes every effort to rent it, but it does not get rented and has a buyer who is willing to acquire the property for another purpose.
From a practical standpoint, the taxpayer and their CPA must deal with the Form 8824 that is filed for that transaction involving a 1031 exchange. The form asks when the taxpayer acquired the real property described in the relinquished property contract and qualifying as “relinquished property” and when they sold it. A short holding period raises a red flag despite the taxpayer’s bona fide intent. The taxpayer may win the ensuing argument, but could spend more than the taxes on attorney and CPA fees. The taxpayer should always follow the guidance of their qualified CPA or other tax advisor in regard to the tax reporting.
Criteria in distinguishing 1031 Exchange Property from “Dealer” Property
As stated above, various criteria are often evaluated by those in the 1031 Exchange industry in determining whether property qualifies for Section 1031 treatment as opposed to being “dealer/developer” property. The criteria include the following:

What is the initial purpose for which the property was purchased?
What was the purpose for which the property was later held?
What is the extent to which the taxpayer made improvements if any such as subdivision, roads/streets construction, utilities and other infrastructure build-outs, actual residential construction, etc.?
What is the taxpayer’s frequency, number, and consistency of property sales?
What is the size and type of transactions involved?
What is the taxpayer’s regular business?
What is the extent to which advertising, promotion, or other active efforts were made to recruit buyers for the sale of the property?
Was the property marketed with brokers?
What is the reason and purpose for which the property was held at the time of sale?

Some cases that involved a determination of the validity of a 1031 Exchange on a property that was acquired for resale include: Redwood Empire Sav. & Loan Ass’n v. Comm’r, 628 F.2d 516, 517 (9th Cir. 1980); Pool v. Comm’r, 251 F.2d 233, 237 (9th Cir. 1957); Evans v. IRS, T.C. Memo. 2016-7 (January 2016); Paullus v. Commissioner, 72 T.C.M. 636 (1996).
AAdditional Tax Planning Options for Developers: Section 1227 Unrelated to a 1031 Exchange: Developers and their advisors may gain some comfort from Section 1227 of the Code which allows some taxpayers to sell up to five lots and pay long term capital gains tax on the proceeds. However, there are strict standards which must be met in order to obtain that benefit such as holding the properties for 5 years.
Summary
Sometimes it is hard to determine if a developer or a flipper is eligible for 1031 treatment. There is no explicit rule, rather it is a “facts and circumstances” test as to the property in question. A developer or flipper could have a long history of acquiring property and selling it in a short time-period, but a specific property property they own may have long been held as an investment or income producing property. Obviously the taxpayer’s intent at the time the property was acquired and the ability to substantiate that intent is key. Hopefully, the answers to the bullet points above can help a taxpayer or advisor determine whether tax deferral through Section 1031 is viable in connection with a particular piece of property.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

October is now in full force with cooler temperatures, fall colors, pumpkins, and scary haunted houses. However, being scared is not necessary for those investors hesitant about initiating a 1031 Exchange prior to year-end because they fear that they won’t find new property to successfully complete their tax deferred exchange. The good news is that there might be a back-up option in-store, referred to as 1031 tax straddling, which provides tax deferral reassurance to most taxpayers selling investment property at the end of the year.
If a taxpayer successfully completes a 1031 Exchange, the main benefit is tax deferral of Federal Capital Gains, Depreciation Recapture, State, and Net Investment Income Tax (if applicable). However, if a taxpayer is not able to purchase new property to successfully complete the 1031 Exchange, the above taxes associated with the sale of their investment property will be due. With “tax straddling” the taxpayer may still receive a one-year tax deferral of the Capital Gains tax, thanks to IRS Installment Sale rules (§453/Publication 537). Assuming a bona fide intent to exchange, tax straddling provides an additional option to taxpayers who choose to sell their Relinquished Property near year-end to take advantage of the significant tax-deferral Capital Gain benefits of 1031 Exchanges. The one-year deferral benefits of Section 453 is a bit of a silver lining should they be unable to complete a successful 1031 Exchange.
Tax Straddling for a failed 1031 Exchange In a 1031 Exchange, taxpayers have 45 days from the sale of the old property, the Relinquished Property, to identify potential Replacement Property and then a total of 180 days, to purchase the identified property(ies). Once a 1031 Exchange is initiated, if Replacement Property is not identified within 45 days, or purchased within 180 days to complete the exchange, the earliest the Qualified Intermediary can return the taxpayer’s funds is on the 46th day (the day after the identification time period has ended) or, if Replacement Property was identified, the 181st day, the day after the 1031 Exchange time period is complete.
Taxpayers who enter into a 1031 Exchange that ultimately fails due to either failure to identify Replacement Property within the 45-day period or failure to acquire Replacement Property within the 180-day, exchange will have their funds to be returned back from the Qualified Intermediary in 2024 creating a taxable event. The default reporting in such cases is deferring payment of Capital Gains tax from their Relinquished Property sale until 2025 – the due date of their 2024 tax return. Combining §1031 with §453 permits the returned exchange funds received back from the Qualified Intermediary at end of the failed exchange to be treated as a payment in the year of actual receipt, rather than in the year the property was sold.
The IRS does not penalize investors for attempting to complete a 1031 Exchange. Tax straddling just provides an additional option to taxpayers selling investment property at the end of the year.
For more information, this article provides a more detailed explanation of Installment Sales in relation to a 1031 Exchange.
Taxpayers should consult with their tax advisors since tax straddling per Installment Sales Rules does not apply to all sales, and any gain attributed to debt relief will still have to be recognized in the year of sale. Be sure to consult with your tax advisor to determine if you can take advantage of these valuable tax-deferral methods.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

October is now in full force with cooler temperatures, fall colors, pumpkins, and scary haunted houses. However, being scared is not necessary for those investors hesitant about initiating a 1031 Exchange prior to year-end because they fear that they won’t find new property to successfully complete their tax deferred exchange. The good news is that there might be a back-up option in-store, referred to as 1031 tax straddling, which provides tax deferral reassurance to most taxpayers selling investment property at the end of the year.
If a taxpayer successfully completes a 1031 Exchange, the main benefit is tax deferral of Federal Capital Gains, Depreciation Recapture, State, and Net Investment Income Tax (if applicable). However, if a taxpayer is not able to purchase new property to successfully complete the 1031 Exchange, the above taxes associated with the sale of their investment property will be due. With “tax straddling” the taxpayer may still receive a one-year tax deferral of the Capital Gains tax, thanks to IRS Installment Sale rules (§453/Publication 537). Assuming a bona fide intent to exchange, tax straddling provides an additional option to taxpayers who choose to sell their Relinquished Property near year-end to take advantage of the significant tax-deferral Capital Gain benefits of 1031 Exchanges. The one-year deferral benefits of Section 453 is a bit of a silver lining should they be unable to complete a successful 1031 Exchange.
Tax Straddling for a failed 1031 Exchange In a 1031 Exchange, taxpayers have 45 days from the sale of the old property, the Relinquished Property, to identify potential Replacement Property and then a total of 180 days, to purchase the identified property(ies). Once a 1031 Exchange is initiated, if Replacement Property is not identified within 45 days, or purchased within 180 days to complete the exchange, the earliest the Qualified Intermediary can return the taxpayer’s funds is on the 46th day (the day after the identification time period has ended) or, if Replacement Property was identified, the 181st day, the day after the 1031 Exchange time period is complete.
Taxpayers who enter into a 1031 Exchange that ultimately fails due to either failure to identify Replacement Property within the 45-day period or failure to acquire Replacement Property within the 180-day, exchange will have their funds to be returned back from the Qualified Intermediary in 2024 creating a taxable event. The default reporting in such cases is deferring payment of Capital Gains tax from their Relinquished Property sale until 2025 – the due date of their 2024 tax return. Combining §1031 with §453 permits the returned exchange funds received back from the Qualified Intermediary at end of the failed exchange to be treated as a payment in the year of actual receipt, rather than in the year the property was sold.
The IRS does not penalize investors for attempting to complete a 1031 Exchange. Tax straddling just provides an additional option to taxpayers selling investment property at the end of the year.
For more information, this article provides a more detailed explanation of Installment Sales in relation to a 1031 Exchange.
Taxpayers should consult with their tax advisors since tax straddling per Installment Sales Rules does not apply to all sales, and any gain attributed to debt relief will still have to be recognized in the year of sale. Be sure to consult with your tax advisor to determine if you can take advantage of these valuable tax-deferral methods.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

October is now in full force with cooler temperatures, fall colors, pumpkins, and scary haunted houses. However, being scared is not necessary for those investors hesitant about initiating a 1031 Exchange prior to year-end because they fear that they won’t find new property to successfully complete their tax deferred exchange. The good news is that there might be a back-up option in-store, referred to as 1031 tax straddling, which provides tax deferral reassurance to most taxpayers selling investment property at the end of the year.
If a taxpayer successfully completes a 1031 Exchange, the main benefit is tax deferral of Federal Capital Gains, Depreciation Recapture, State, and Net Investment Income Tax (if applicable). However, if a taxpayer is not able to purchase new property to successfully complete the 1031 Exchange, the above taxes associated with the sale of their investment property will be due. With “tax straddling” the taxpayer may still receive a one-year tax deferral of the Capital Gains tax, thanks to IRS Installment Sale rules (§453/Publication 537). Assuming a bona fide intent to exchange, tax straddling provides an additional option to taxpayers who choose to sell their Relinquished Property near year-end to take advantage of the significant tax-deferral Capital Gain benefits of 1031 Exchanges. The one-year deferral benefits of Section 453 is a bit of a silver lining should they be unable to complete a successful 1031 Exchange.
Tax Straddling for a failed 1031 Exchange In a 1031 Exchange, taxpayers have 45 days from the sale of the old property, the Relinquished Property, to identify potential Replacement Property and then a total of 180 days, to purchase the identified property(ies). Once a 1031 Exchange is initiated, if Replacement Property is not identified within 45 days, or purchased within 180 days to complete the exchange, the earliest the Qualified Intermediary can return the taxpayer’s funds is on the 46th day (the day after the identification time period has ended) or, if Replacement Property was identified, the 181st day, the day after the 1031 Exchange time period is complete.
Taxpayers who enter into a 1031 Exchange that ultimately fails due to either failure to identify Replacement Property within the 45-day period or failure to acquire Replacement Property within the 180-day, exchange will have their funds to be returned back from the Qualified Intermediary in 2024 creating a taxable event. The default reporting in such cases is deferring payment of Capital Gains tax from their Relinquished Property sale until 2025 – the due date of their 2024 tax return. Combining §1031 with §453 permits the returned exchange funds received back from the Qualified Intermediary at end of the failed exchange to be treated as a payment in the year of actual receipt, rather than in the year the property was sold.
The IRS does not penalize investors for attempting to complete a 1031 Exchange. Tax straddling just provides an additional option to taxpayers selling investment property at the end of the year.
For more information, this article provides a more detailed explanation of Installment Sales in relation to a 1031 Exchange.
Taxpayers should consult with their tax advisors since tax straddling per Installment Sales Rules does not apply to all sales, and any gain attributed to debt relief will still have to be recognized in the year of sale. Be sure to consult with your tax advisor to determine if you can take advantage of these valuable tax-deferral methods.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.