Category: 1031 Exchange General

If you find yourself looking to sell a business use or investment property, a 1031 Exchange is a tax deferral strategy worth considering. 1031 Exchanges enable you to defer taxes such as capital gains, depreciation recapture, state, and net investment income tax. It is important to have all the facts in front of you in order to discern whether this investment strategy is right for you and your specific real estate transaction. Understanding key financial figures such as sales prices, property values, adjusted basis, and capital gains are crucial for ensuring a successful and tax-deferred transaction. This blog will break down the essential values and calculations to determine the benefit of a 1031 Exchange. 
What You Need to Know for a 1031 Exchange  
There are many values to consider when contemplating a 1031 Exchange. Whether you’re a seasoned investor or new to the world of 1031 Exchanges, knowing these figures associated with your real estate transaction will help you navigate the exchange process with confidence. Let’s break down the essentials. 
Key Financial Figures  
Accumulated Depreciation: Accumulated depreciation is the total amount of depreciation that has been recorded on a real estate property since it was placed in service. It represents the reduction in the property’s value over time due to wear and tear, obsolescence, or physical deterioration. Accumulated depreciation is subtracted from the property’s original cost to calculate its book value or net carrying value. For example, if a building was purchased for $1,000,000 and has accumulated depreciation of $200,000, its book value is $800,000. https://www.accruit.com/blog/what-are-1031-exchange-depreciation-option… depreciation is also used to determine the taxable gain or loss when the property is sold or exchanged.  
Adjusted Basis: The adjusted basis is the original cost of a property modified by certain factors like capital improvements, depreciation, and other adjustments. It reflects the current value of the asset for tax purposes and is used to calculate capital gains or losses when the asset is sold. Adjusted basis is calculated by taking the cost basis, adding the value of improvements or other additions, and subtracting the accumulated depreciation.  
Capital Gain: This represents the profit you make from selling your property and is calculated by subtracting your adjusted basis from the sale price. The capital gain is the amount of money that would be taxed if a 1031 Exchange were not utilized. A 1031 Exchange allows those taxes to be deferred by reinvesting in like-kind property.  
Capital Improvements: Capital improvements are additions or upgrades to property that enhance its value, extend usage, or adapt it for new use. Capital improvements could include building an extension, installing central air conditioning, or adding a new roof. These improvements are considered long-term investments and can be capitalized, meaning the cost is added to the property’s basis and depreciates over time.  
Original Purchase Price: The original purchase price is what was initially paid for the Relinquished Property. Original purchase price is also known as cost basis.  
Replacement Property Value: To fully defer taxes under a 1031 Exchange, the Replacement Property(ies) purchased must have a value equal to or greater than the sale price of the Relinquished Property. If the value of the Replacement Property(ies) is less than the sale price, the difference, known as “boot,” may be taxable.  
Sale Price of the Relinquished Property: This is the price at which you sell your current property, which serves as the foundation for the entire 1031 Exchange. The sale price, along with other factors, determines how much you’ll need to reinvest into a new property to defer taxes fully. If you don’t reinvest an amount equal to or greater than this amount, you might face a taxable event. 
Calculations to Determine Your Tax Deferral with a 1031 Exchange  
Make use of the following calculations to help you determine the financial implications of your 1031 Exchange. 
Adjusted Basis: 
Adjusted basis is an important figure that helps determine the gain or loss that may be deferred when exchanging like-kind properties. 
Formula: 
Original purchase price of Relinquished Property 
+ Capital Improvements 
+ Other additions in value 
– Depreciation 
= Adjusted Basis  
 
Capital Gains:  
This calculation gives you the profit from the sale of your property, which would typically be subject to capital gains tax. In a 1031 Exchange, the goal is to defer this tax. 
Formula: 
Today’s Gross Sales Price  
– Cost of Sale (including commissions, fees, etc.) 
– Adjusted Basis  
= Total Capital Gains 
 
Taxes Due: 
This calculation sums the total tax liability you would face if you chose not to utilize a 1031 Exchange. 
Formula: 
Depreciation Recapture (Accumulated Depreciation x 25%) 
+ Federal Capital Gain Rate (Capital Gains x 15% or 20%, depending on your tax bracket) 
+ State Tax (varies by state, up to 13.3%) 
+ https://www.accruit.com/blog/what-net-investment-income-tax”>Net Investment Income Tax SF/HE (Net Investment Income x 3.8%) 
= Total Tax Due 
 
By using these formulas, you can determine the potential savings to be gained in your 1031 Exchange. Testing formulas can help gauge if preliminary estimates of tax liability, additional equity, etc., make a 1031 Exchange a strategy worth pursuing for your investment goals.  
Simplify the Process with Accruit’s 1031 Exchange Calculator 
While understanding individual figures and calculations is important, the process of a 1031 Exchange can become complex. That’s where Accruit’s 1031 Exchange Calculator comes in.  
Our calculator is designed to take the guesswork out of determining the potential tax liability or tax deferral with a 1031 Exchange. By entering your property’s original price, improvements, selling expenses, sales price, and other key details, you can quickly estimate your tax liability and the benefit of exchanging versus just selling the property outright. Once you have determined your capital gains, you will also know the Replacement Property value required for full tax deferral. The simple 1031 Exchange calculator simplifies these calculations, making you better informed and able to make better decisions for your real estate transaction.  
Try Accruit’s https://www.accruit.com/capital-gains-calculator”>1031 Exchange Calculator and let us do the heavy lifting for you!
Curious about our other calculators? Check them out on our website under “Resources”. 
Navigating the complexities of a 1031 Exchange requires understanding the key calculations that influence your tax deferral. By determining your key financial values, you can make informed decisions that maximize your tax deferral benefits. Accruit’s 1031 Exchange Calculator takes the guesswork out of these calculations, providing you with accurate estimates for informed decision-making. If you’re looking to defer taxes by reinvesting in like-kind properties with a 1031 Exchange, our tools and expertise are here to simplify the process. 
 
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.  

If you find yourself looking to sell a business use or investment property, a 1031 Exchange is a tax deferral strategy worth considering. 1031 Exchanges enable you to defer taxes such as capital gains, depreciation recapture, state, and net investment income tax. It is important to have all the facts in front of you in order to discern whether this investment strategy is right for you and your specific real estate transaction. Understanding key financial figures such as sales prices, property values, adjusted basis, and capital gains are crucial for ensuring a successful and tax-deferred transaction. This blog will break down the essential values and calculations to determine the benefit of a 1031 Exchange. 
What You Need to Know for a 1031 Exchange  
There are many values to consider when contemplating a 1031 Exchange. Whether you’re a seasoned investor or new to the world of 1031 Exchanges, knowing these figures associated with your real estate transaction will help you navigate the exchange process with confidence. Let’s break down the essentials. 
Key Financial Figures  
Accumulated Depreciation: Accumulated depreciation is the total amount of depreciation that has been recorded on a real estate property since it was placed in service. It represents the reduction in the property’s value over time due to wear and tear, obsolescence, or physical deterioration. Accumulated depreciation is subtracted from the property’s original cost to calculate its book value or net carrying value. For example, if a building was purchased for $1,000,000 and has accumulated depreciation of $200,000, its book value is $800,000. https://www.accruit.com/blog/what-are-1031-exchange-depreciation-option… depreciation is also used to determine the taxable gain or loss when the property is sold or exchanged.  
Adjusted Basis: The adjusted basis is the original cost of a property modified by certain factors like capital improvements, depreciation, and other adjustments. It reflects the current value of the asset for tax purposes and is used to calculate capital gains or losses when the asset is sold. Adjusted basis is calculated by taking the cost basis, adding the value of improvements or other additions, and subtracting the accumulated depreciation.  
Capital Gain: This represents the profit you make from selling your property and is calculated by subtracting your adjusted basis from the sale price. The capital gain is the amount of money that would be taxed if a 1031 Exchange were not utilized. A 1031 Exchange allows those taxes to be deferred by reinvesting in like-kind property.  
Capital Improvements: Capital improvements are additions or upgrades to property that enhance its value, extend usage, or adapt it for new use. Capital improvements could include building an extension, installing central air conditioning, or adding a new roof. These improvements are considered long-term investments and can be capitalized, meaning the cost is added to the property’s basis and depreciates over time.  
Original Purchase Price: The original purchase price is what was initially paid for the Relinquished Property. Original purchase price is also known as cost basis.  
Replacement Property Value: To fully defer taxes under a 1031 Exchange, the Replacement Property(ies) purchased must have a value equal to or greater than the sale price of the Relinquished Property. If the value of the Replacement Property(ies) is less than the sale price, the difference, known as “boot,” may be taxable.  
Sale Price of the Relinquished Property: This is the price at which you sell your current property, which serves as the foundation for the entire 1031 Exchange. The sale price, along with other factors, determines how much you’ll need to reinvest into a new property to defer taxes fully. If you don’t reinvest an amount equal to or greater than this amount, you might face a taxable event. 
Calculations to Determine Your Tax Deferral with a 1031 Exchange  
Make use of the following calculations to help you determine the financial implications of your 1031 Exchange. 
Adjusted Basis: 
Adjusted basis is an important figure that helps determine the gain or loss that may be deferred when exchanging like-kind properties. 
Formula: 
Original purchase price of Relinquished Property 
+ Capital Improvements 
+ Other additions in value 
– Depreciation 
= Adjusted Basis  
 
Capital Gains:  
This calculation gives you the profit from the sale of your property, which would typically be subject to capital gains tax. In a 1031 Exchange, the goal is to defer this tax. 
Formula: 
Today’s Gross Sales Price  
– Cost of Sale (including commissions, fees, etc.) 
– Adjusted Basis  
= Total Capital Gains 
 
Taxes Due: 
This calculation sums the total tax liability you would face if you chose not to utilize a 1031 Exchange. 
Formula: 
Depreciation Recapture (Accumulated Depreciation x 25%) 
+ Federal Capital Gain Rate (Capital Gains x 15% or 20%, depending on your tax bracket) 
+ State Tax (varies by state, up to 13.3%) 
+ https://www.accruit.com/blog/what-net-investment-income-tax”>Net Investment Income Tax SF/HE (Net Investment Income x 3.8%) 
= Total Tax Due 
 
By using these formulas, you can determine the potential savings to be gained in your 1031 Exchange. Testing formulas can help gauge if preliminary estimates of tax liability, additional equity, etc., make a 1031 Exchange a strategy worth pursuing for your investment goals.  
Simplify the Process with Accruit’s 1031 Exchange Calculator 
While understanding individual figures and calculations is important, the process of a 1031 Exchange can become complex. That’s where Accruit’s 1031 Exchange Calculator comes in.  
Our calculator is designed to take the guesswork out of determining the potential tax liability or tax deferral with a 1031 Exchange. By entering your property’s original price, improvements, selling expenses, sales price, and other key details, you can quickly estimate your tax liability and the benefit of exchanging versus just selling the property outright. Once you have determined your capital gains, you will also know the Replacement Property value required for full tax deferral. The simple 1031 Exchange calculator simplifies these calculations, making you better informed and able to make better decisions for your real estate transaction.  
Try Accruit’s https://www.accruit.com/capital-gains-calculator”>1031 Exchange Calculator and let us do the heavy lifting for you!
Curious about our other calculators? Check them out on our website under “Resources”. 
Navigating the complexities of a 1031 Exchange requires understanding the key calculations that influence your tax deferral. By determining your key financial values, you can make informed decisions that maximize your tax deferral benefits. Accruit’s 1031 Exchange Calculator takes the guesswork out of these calculations, providing you with accurate estimates for informed decision-making. If you’re looking to defer taxes by reinvesting in like-kind properties with a 1031 Exchange, our tools and expertise are here to simplify the process. 
 
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.  

How 1031 Exchanges are Utilized in Real Estate Transactions Involving Foreign Investors 
The Seller of U.S. property to a foreign investor can utilize a 1031 Exchange in the exact same way they would if they were selling property to a domestic investor that is a citizen of the United States. As the Seller they must abide by the standard 1031 Exchange rules and regulations to complete a valid 1031 Exchange for tax deferral.  
But can a foreign investor use a 1031 Exchange when investing in U.S. Real Estate? The short answer is yes; foreign investors can use 1031 Exchanges for U.S. real estate investments. The longer answer includes added complexities that foreign investors must abide by to achieve tax deferral status.  
Some key considerations for foreign investors regarding 1031 Exchanges include: 

U.S. Property Requirement: Both the property being sold, and the Replacement Property must be in the continental United States, with some exceptions. Learn more about the designation between https://www.accruit.com/blog/1031-exchanges-involving-foreign-property”… and domestic property.

Tax Identification Number: Foreign investors must obtain a U.S. Tax Identification Number (TIN) to complete a 1031 Exchange. 

Withholding Requirements: Under FIRPTA, 15% of the gross sale price must be withheld for foreign Sellers of U.S. real estate. However, foreign investors can potentially avoid this withholding if their 1031 Exchange is properly structured. 

Compliance with 1031 Exchange Rules: Foreign investors must follow the same rules as domestic investors, including the 45-day identification period and the 180-day completion period. 

Foreign Investment in Real Property Tax Act (FIRPTA) 
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was enacted by Congress to impose tax on foreign investors selling real estate assets in the United States. FIRPTA mandates that anyone purchasing real estate assets from foreign individuals or entities must withhold a specified portion of the purchase price, which would ordinarily be paid to the foreign Seller. Buyers are required to withhold up to 15% of the gross sale price when purchasing from individual Sellers. This mandate ensures the foreign Seller pays the required capital gains taxes. Withholding can be avoided if a property becomes the purchaser’s personal residence and the sales price is no more than $300,000, if the 1031 Exchange is simultaneous i.e. The Seller and Buyer are exchanging properties with one another, or if the IRS has issued a withholding certificate to the foreign Seller. 
While foreign investors can utilize a 1031 Exchange it requires advance planning. For a foreign investor to achieve tax deferral with a 1031 Exchange they file a Form 8288-B and successfully obtain a withholding certificate prior to the sale of their property. It is strongly encouraged that foreign investors consult with a professional tax advisor to determine if FIRPTA applies, help them obtain a U.S. Taxpayer Identification Number (TIN), and apply for a withholding certificate. In a 1031 Exchange, the Buyer must be informed in writing that a withholding certificate has been requested.  
It is important to contact a reputable 1031 Exchange Qualified Intermediary, such as Accruit, well before the closing date to prepare all necessary exchange documentation, which must then be sent to the closing agent. Once the sale is finalized, the 45-day and 180-day identification deadlines commence. 
Why are Foreign Investors Investing in US Real Estate? 
Foreign Investors, and even countries, are drawn to investing in U.S. Real Estate for a multitude of reasons. Many of the reasons don’t differ from why U.S. citizens choose to invest in real estate. Reasons for foreign investment in U.S. real estate include: 

Stable Economic Environment: The U.S. economy is perceived as stable and resilient with strong legal protections for property rights, making it an attractive investment destination. 

Diversification: Investing in U.S. real estate allows foreign investors to diversify their portfolios, reducing risk by spreading investments across different geographic regions. 

High Returns: Historically, U.S. real estate markets, especially in major cities, have provided strong returns on investment through both rental income and property value appreciation. 

Political Stability: The political stability and transparency in the U.S. attract investors seeking safe and secure investment environments compared to their home countries. 

Investment Opportunities: The U.S. offers a wide range of real estate investment opportunities, from residential property to commercial real estate, catering to various investment strategies and goals. 

Legal and Tax Advantages: The U.S. provides certain legal and tax benefits for real estate investors, such as the ability to use 1031 Exchanges to defer capital gains taxes. 

Foreign Investments in U.S. Real Estate  
As of March 2023, U.S. property sales to foreign Buyers totaled $53 billion. Across the country, 79% of the counties have at least one foreign investor present.
As far as specific sectors within the real estate market, Industrial and Multifamily real estate account for the largest portion of foreign commercial real estate investment. From Quarter 2 in 2020 to 2022, industrial real estate investment had grown from 15% to 30% of all foreign capital invested. Multifamily properties are second to industrial property at just under 30% of all foreign investment. A growing sector of real estate in recent years is agricultural land. Foreign ownership and investment in U.S. agricultural land, which includes farmland, forest land, and pastures, has also seen a significant increase over the last few years. Since 2017, this sector has grown almost 50%. According to the latest AFIDA report from 2021, more than 40 million acres of U.S. agricultural land is owned by foreign investors and companies. This equates to just under 2%of all U.S. land and over 3% of all privately held agricultural land.  
While residential real estate remains a popular real estate sector of foreign investment, commercial property investment has grown in recent years. As of 2023, the leading countries in commercial property acquisitions include: 

Canada – $15.98 billion
Singapore – $10.85 billion 
Japan – $2.91 billion 

Regulations on Foreign Investment in U.S. Real Estate 
Various governmental entities and numerous laws are utilized to regulate foreign investment in U.S. real estate. While there has been increased foreign investment in commercial and residential properties over the past few years, agricultural land has seen a significant rise, which has heightened national security concerns including foreign control over food supply and proximity to sensitive U.S. military and government bases. Congress has several committees tasked with addressing these concerns.  
The Committee on Foreign Investment in the United States (CFIUS): 
The CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States, as well as specific real estate transactions by foreign entities, to determine their impact on U.S. national security. 
Members of CFIUS include: 

Department of the Treasury (chair) 
Department of Justice 
Department of Agriculture 
Department of Defense 
Department of State 
Department of Energy 

White House Offices that Observe and Participate in CFIUS Activities: 

Office of Management & Budget 
Council of Economic Advisors 
National Security Council 
National Economic Council 
Homeland Security Council 

Non-Voting, Ex-Officio Members: 

Director of National Intelligence 
Secretary of Labor 

These roles are defined by statute and regulation. 
CFIUS operates under Section 721 of the Defense Production Act of 1950, as amended, and follows Executive Orders and the Code of Federal Regulations. The latest amendment was the Foreign Investment Risk Review Modernization Act (FIRRMA) in August 2018. Pursuant to these provisions, CFIUS allows the President to suspend or block certain foreign transactions. There are specific rules for how investigations and self-reporting can lead to these actions or exemptions for some foreign entities. 
Agricultural Foreign Investment Disclosure Act (AFIDA) 
AFIDA provides the framework for the collection and dissemination of information on foreign transactions and ownership of agricultural land in the U.S. Since its enactment in 1978, the law and regulations have been administered by the USDA Farm Service Agency which requires foreign investors who acquire, transfer, or hold interest in U.S. agriculture land to report their holdings and transactions to the Secretary of Agriculture. FSA uses the info to compile and file an annual report with Congress and the data is also included in searchable spreadsheets on a county-by-county basis throughout the United States. 
Current Congressional Measures 
In addition to the long-standing CFIUS and AFIDA regulations, there are measures pending in Congress to improve the current system.   

The AFIDA Improvements Act of 2024 will use the results from the Government Accountability Office (GAO) study of the AFIDA process to codify the AFIDA requirements and provide more robust data reporting and review. 

The Promoting Agricultural Safeguards & Security Act of 2023 (PASS) prohibits persons who are acting on behalf of China, Russia, Iran, or North Korea from purchasing or investing in U.S. agricultural land and companies. The President may waive this prohibition on a case-by-case basis if the President determines that the waiver is vital to U.S. national security interests. The bill also places the Secretary of Agriculture on CFIUS and requires CFIUS to review certain transactions involving investments by foreign persons in the U.S. agricultural sector. The Bill also requires the Department of Agriculture to report to Congress on the risks that foreign purchases of U.S. businesses engaged in agriculture pose to the agricultural sector of the United States. 

The Farmland Act of 2023 (Foreign Agricultural Restrictions to Maintain Local Agriculture and National Defense) was introduced to amend AFIDA to strengthen the oversight and transparency of AFIDA. Notably, the Act amends AFIDA by imposing a requirement that any entity (including a Buyer, Seller, real estate agent, broker, and title company) involved in the purchase or transfer of agricultural land in the United States shall (1) conduct due diligence relating to the agriculture land being purchased or transferred; and (2) certify to the Secretary of Agriculture that, to the best of the knowledge and belief of the entity, the entity is in compliance with all applicable provisions of AFIDA. It also would allow for review of any purchase or lease of U.S. ag land by a foreign entity which exceeds $5,000,000 in value or more than 320 acres that has taken place in the past 3 years. 

The above measures regulated by legislation and executed by various committees help ensure our country remains diligent and aware of the potential risks that foreign investment in U.S. real estate could post on national security, as well as the US economy.   
Foreign investors will continue to find U.S. real estate as an attractive investment opportunity and 1031 Exchanges continue to provide qualifying foreign investors the same tax deferral opportunities as U.S. citizens.  
 
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. 

How 1031 Exchanges are Utilized in Real Estate Transactions Involving Foreign Investors 
The Seller of U.S. property to a foreign investor can utilize a 1031 Exchange in the exact same way they would if they were selling property to a domestic investor that is a citizen of the United States. As the Seller they must abide by the standard 1031 Exchange rules and regulations to complete a valid 1031 Exchange for tax deferral.  
But can a foreign investor use a 1031 Exchange when investing in U.S. Real Estate? The short answer is yes; foreign investors can use 1031 Exchanges for U.S. real estate investments. The longer answer includes added complexities that foreign investors must abide by to achieve tax deferral status.  
Some key considerations for foreign investors regarding 1031 Exchanges include: 

U.S. Property Requirement: Both the property being sold, and the Replacement Property must be in the continental United States, with some exceptions. Learn more about the designation between https://www.accruit.com/blog/1031-exchanges-involving-foreign-property”… and domestic property.

Tax Identification Number: Foreign investors must obtain a U.S. Tax Identification Number (TIN) to complete a 1031 Exchange. 

Withholding Requirements: Under FIRPTA, 15% of the gross sale price must be withheld for foreign Sellers of U.S. real estate. However, foreign investors can potentially avoid this withholding if their 1031 Exchange is properly structured. 

Compliance with 1031 Exchange Rules: Foreign investors must follow the same rules as domestic investors, including the 45-day identification period and the 180-day completion period. 

Foreign Investment in Real Property Tax Act (FIRPTA) 
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was enacted by Congress to impose tax on foreign investors selling real estate assets in the United States. FIRPTA mandates that anyone purchasing real estate assets from foreign individuals or entities must withhold a specified portion of the purchase price, which would ordinarily be paid to the foreign Seller. Buyers are required to withhold up to 15% of the gross sale price when purchasing from individual Sellers. This mandate ensures the foreign Seller pays the required capital gains taxes. Withholding can be avoided if a property becomes the purchaser’s personal residence and the sales price is no more than $300,000, if the 1031 Exchange is simultaneous i.e. The Seller and Buyer are exchanging properties with one another, or if the IRS has issued a withholding certificate to the foreign Seller. 
While foreign investors can utilize a 1031 Exchange it requires advance planning. For a foreign investor to achieve tax deferral with a 1031 Exchange they file a Form 8288-B and successfully obtain a withholding certificate prior to the sale of their property. It is strongly encouraged that foreign investors consult with a professional tax advisor to determine if FIRPTA applies, help them obtain a U.S. Taxpayer Identification Number (TIN), and apply for a withholding certificate. In a 1031 Exchange, the Buyer must be informed in writing that a withholding certificate has been requested.  
It is important to contact a reputable 1031 Exchange Qualified Intermediary, such as Accruit, well before the closing date to prepare all necessary exchange documentation, which must then be sent to the closing agent. Once the sale is finalized, the 45-day and 180-day identification deadlines commence. 
Why are Foreign Investors Investing in US Real Estate? 
Foreign Investors, and even countries, are drawn to investing in U.S. Real Estate for a multitude of reasons. Many of the reasons don’t differ from why U.S. citizens choose to invest in real estate. Reasons for foreign investment in U.S. real estate include: 

Stable Economic Environment: The U.S. economy is perceived as stable and resilient with strong legal protections for property rights, making it an attractive investment destination. 

Diversification: Investing in U.S. real estate allows foreign investors to diversify their portfolios, reducing risk by spreading investments across different geographic regions. 

High Returns: Historically, U.S. real estate markets, especially in major cities, have provided strong returns on investment through both rental income and property value appreciation. 

Political Stability: The political stability and transparency in the U.S. attract investors seeking safe and secure investment environments compared to their home countries. 

Investment Opportunities: The U.S. offers a wide range of real estate investment opportunities, from residential property to commercial real estate, catering to various investment strategies and goals. 

Legal and Tax Advantages: The U.S. provides certain legal and tax benefits for real estate investors, such as the ability to use 1031 Exchanges to defer capital gains taxes. 

Foreign Investments in U.S. Real Estate  
As of March 2023, U.S. property sales to foreign Buyers totaled $53 billion. Across the country, 79% of the counties have at least one foreign investor present.
As far as specific sectors within the real estate market, Industrial and Multifamily real estate account for the largest portion of foreign commercial real estate investment. From Quarter 2 in 2020 to 2022, industrial real estate investment had grown from 15% to 30% of all foreign capital invested. Multifamily properties are second to industrial property at just under 30% of all foreign investment. A growing sector of real estate in recent years is agricultural land. Foreign ownership and investment in U.S. agricultural land, which includes farmland, forest land, and pastures, has also seen a significant increase over the last few years. Since 2017, this sector has grown almost 50%. According to the latest AFIDA report from 2021, more than 40 million acres of U.S. agricultural land is owned by foreign investors and companies. This equates to just under 2%of all U.S. land and over 3% of all privately held agricultural land.  
While residential real estate remains a popular real estate sector of foreign investment, commercial property investment has grown in recent years. As of 2023, the leading countries in commercial property acquisitions include: 

Canada – $15.98 billion
Singapore – $10.85 billion 
Japan – $2.91 billion 

Regulations on Foreign Investment in U.S. Real Estate 
Various governmental entities and numerous laws are utilized to regulate foreign investment in U.S. real estate. While there has been increased foreign investment in commercial and residential properties over the past few years, agricultural land has seen a significant rise, which has heightened national security concerns including foreign control over food supply and proximity to sensitive U.S. military and government bases. Congress has several committees tasked with addressing these concerns.  
The Committee on Foreign Investment in the United States (CFIUS): 
The CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States, as well as specific real estate transactions by foreign entities, to determine their impact on U.S. national security. 
Members of CFIUS include: 

Department of the Treasury (chair) 
Department of Justice 
Department of Agriculture 
Department of Defense 
Department of State 
Department of Energy 

White House Offices that Observe and Participate in CFIUS Activities: 

Office of Management & Budget 
Council of Economic Advisors 
National Security Council 
National Economic Council 
Homeland Security Council 

Non-Voting, Ex-Officio Members: 

Director of National Intelligence 
Secretary of Labor 

These roles are defined by statute and regulation. 
CFIUS operates under Section 721 of the Defense Production Act of 1950, as amended, and follows Executive Orders and the Code of Federal Regulations. The latest amendment was the Foreign Investment Risk Review Modernization Act (FIRRMA) in August 2018. Pursuant to these provisions, CFIUS allows the President to suspend or block certain foreign transactions. There are specific rules for how investigations and self-reporting can lead to these actions or exemptions for some foreign entities. 
Agricultural Foreign Investment Disclosure Act (AFIDA) 
AFIDA provides the framework for the collection and dissemination of information on foreign transactions and ownership of agricultural land in the U.S. Since its enactment in 1978, the law and regulations have been administered by the USDA Farm Service Agency which requires foreign investors who acquire, transfer, or hold interest in U.S. agriculture land to report their holdings and transactions to the Secretary of Agriculture. FSA uses the info to compile and file an annual report with Congress and the data is also included in searchable spreadsheets on a county-by-county basis throughout the United States. 
Current Congressional Measures 
In addition to the long-standing CFIUS and AFIDA regulations, there are measures pending in Congress to improve the current system.   

The AFIDA Improvements Act of 2024 will use the results from the Government Accountability Office (GAO) study of the AFIDA process to codify the AFIDA requirements and provide more robust data reporting and review. 

The Promoting Agricultural Safeguards & Security Act of 2023 (PASS) prohibits persons who are acting on behalf of China, Russia, Iran, or North Korea from purchasing or investing in U.S. agricultural land and companies. The President may waive this prohibition on a case-by-case basis if the President determines that the waiver is vital to U.S. national security interests. The bill also places the Secretary of Agriculture on CFIUS and requires CFIUS to review certain transactions involving investments by foreign persons in the U.S. agricultural sector. The Bill also requires the Department of Agriculture to report to Congress on the risks that foreign purchases of U.S. businesses engaged in agriculture pose to the agricultural sector of the United States. 

The Farmland Act of 2023 (Foreign Agricultural Restrictions to Maintain Local Agriculture and National Defense) was introduced to amend AFIDA to strengthen the oversight and transparency of AFIDA. Notably, the Act amends AFIDA by imposing a requirement that any entity (including a Buyer, Seller, real estate agent, broker, and title company) involved in the purchase or transfer of agricultural land in the United States shall (1) conduct due diligence relating to the agriculture land being purchased or transferred; and (2) certify to the Secretary of Agriculture that, to the best of the knowledge and belief of the entity, the entity is in compliance with all applicable provisions of AFIDA. It also would allow for review of any purchase or lease of U.S. ag land by a foreign entity which exceeds $5,000,000 in value or more than 320 acres that has taken place in the past 3 years. 

The above measures regulated by legislation and executed by various committees help ensure our country remains diligent and aware of the potential risks that foreign investment in U.S. real estate could post on national security, as well as the US economy.   
Foreign investors will continue to find U.S. real estate as an attractive investment opportunity and 1031 Exchanges continue to provide qualifying foreign investors the same tax deferral opportunities as U.S. citizens.  
 
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. 

How 1031 Exchanges are Utilized in Real Estate Transactions Involving Foreign Investors 
The Seller of U.S. property to a foreign investor can utilize a 1031 Exchange in the exact same way they would if they were selling property to a domestic investor that is a citizen of the United States. As the Seller they must abide by the standard 1031 Exchange rules and regulations to complete a valid 1031 Exchange for tax deferral.  
But can a foreign investor use a 1031 Exchange when investing in U.S. Real Estate? The short answer is yes; foreign investors can use 1031 Exchanges for U.S. real estate investments. The longer answer includes added complexities that foreign investors must abide by to achieve tax deferral status.  
Some key considerations for foreign investors regarding 1031 Exchanges include: 

U.S. Property Requirement: Both the property being sold, and the Replacement Property must be in the continental United States, with some exceptions. Learn more about the designation between https://www.accruit.com/blog/1031-exchanges-involving-foreign-property”… and domestic property.

Tax Identification Number: Foreign investors must obtain a U.S. Tax Identification Number (TIN) to complete a 1031 Exchange. 

Withholding Requirements: Under FIRPTA, 15% of the gross sale price must be withheld for foreign Sellers of U.S. real estate. However, foreign investors can potentially avoid this withholding if their 1031 Exchange is properly structured. 

Compliance with 1031 Exchange Rules: Foreign investors must follow the same rules as domestic investors, including the 45-day identification period and the 180-day completion period. 

Foreign Investment in Real Property Tax Act (FIRPTA) 
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was enacted by Congress to impose tax on foreign investors selling real estate assets in the United States. FIRPTA mandates that anyone purchasing real estate assets from foreign individuals or entities must withhold a specified portion of the purchase price, which would ordinarily be paid to the foreign Seller. Buyers are required to withhold up to 15% of the gross sale price when purchasing from individual Sellers. This mandate ensures the foreign Seller pays the required capital gains taxes. Withholding can be avoided if a property becomes the purchaser’s personal residence and the sales price is no more than $300,000, if the 1031 Exchange is simultaneous i.e. The Seller and Buyer are exchanging properties with one another, or if the IRS has issued a withholding certificate to the foreign Seller. 
While foreign investors can utilize a 1031 Exchange it requires advance planning. For a foreign investor to achieve tax deferral with a 1031 Exchange they file a Form 8288-B and successfully obtain a withholding certificate prior to the sale of their property. It is strongly encouraged that foreign investors consult with a professional tax advisor to determine if FIRPTA applies, help them obtain a U.S. Taxpayer Identification Number (TIN), and apply for a withholding certificate. In a 1031 Exchange, the Buyer must be informed in writing that a withholding certificate has been requested.  
It is important to contact a reputable 1031 Exchange Qualified Intermediary, such as Accruit, well before the closing date to prepare all necessary exchange documentation, which must then be sent to the closing agent. Once the sale is finalized, the 45-day and 180-day identification deadlines commence. 
Why are Foreign Investors Investing in US Real Estate? 
Foreign Investors, and even countries, are drawn to investing in U.S. Real Estate for a multitude of reasons. Many of the reasons don’t differ from why U.S. citizens choose to invest in real estate. Reasons for foreign investment in U.S. real estate include: 

Stable Economic Environment: The U.S. economy is perceived as stable and resilient with strong legal protections for property rights, making it an attractive investment destination. 

Diversification: Investing in U.S. real estate allows foreign investors to diversify their portfolios, reducing risk by spreading investments across different geographic regions. 

High Returns: Historically, U.S. real estate markets, especially in major cities, have provided strong returns on investment through both rental income and property value appreciation. 

Political Stability: The political stability and transparency in the U.S. attract investors seeking safe and secure investment environments compared to their home countries. 

Investment Opportunities: The U.S. offers a wide range of real estate investment opportunities, from residential property to commercial real estate, catering to various investment strategies and goals. 

Legal and Tax Advantages: The U.S. provides certain legal and tax benefits for real estate investors, such as the ability to use 1031 Exchanges to defer capital gains taxes. 

Foreign Investments in U.S. Real Estate  
As of March 2023, U.S. property sales to foreign Buyers totaled $53 billion. Across the country, 79% of the counties have at least one foreign investor present.
As far as specific sectors within the real estate market, Industrial and Multifamily real estate account for the largest portion of foreign commercial real estate investment. From Quarter 2 in 2020 to 2022, industrial real estate investment had grown from 15% to 30% of all foreign capital invested. Multifamily properties are second to industrial property at just under 30% of all foreign investment. A growing sector of real estate in recent years is agricultural land. Foreign ownership and investment in U.S. agricultural land, which includes farmland, forest land, and pastures, has also seen a significant increase over the last few years. Since 2017, this sector has grown almost 50%. According to the latest AFIDA report from 2021, more than 40 million acres of U.S. agricultural land is owned by foreign investors and companies. This equates to just under 2%of all U.S. land and over 3% of all privately held agricultural land.  
While residential real estate remains a popular real estate sector of foreign investment, commercial property investment has grown in recent years. As of 2023, the leading countries in commercial property acquisitions include: 

Canada – $15.98 billion
Singapore – $10.85 billion 
Japan – $2.91 billion 

Regulations on Foreign Investment in U.S. Real Estate 
Various governmental entities and numerous laws are utilized to regulate foreign investment in U.S. real estate. While there has been increased foreign investment in commercial and residential properties over the past few years, agricultural land has seen a significant rise, which has heightened national security concerns including foreign control over food supply and proximity to sensitive U.S. military and government bases. Congress has several committees tasked with addressing these concerns.  
The Committee on Foreign Investment in the United States (CFIUS): 
The CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States, as well as specific real estate transactions by foreign entities, to determine their impact on U.S. national security. 
Members of CFIUS include: 

Department of the Treasury (chair) 
Department of Justice 
Department of Agriculture 
Department of Defense 
Department of State 
Department of Energy 

White House Offices that Observe and Participate in CFIUS Activities: 

Office of Management & Budget 
Council of Economic Advisors 
National Security Council 
National Economic Council 
Homeland Security Council 

Non-Voting, Ex-Officio Members: 

Director of National Intelligence 
Secretary of Labor 

These roles are defined by statute and regulation. 
CFIUS operates under Section 721 of the Defense Production Act of 1950, as amended, and follows Executive Orders and the Code of Federal Regulations. The latest amendment was the Foreign Investment Risk Review Modernization Act (FIRRMA) in August 2018. Pursuant to these provisions, CFIUS allows the President to suspend or block certain foreign transactions. There are specific rules for how investigations and self-reporting can lead to these actions or exemptions for some foreign entities. 
Agricultural Foreign Investment Disclosure Act (AFIDA) 
AFIDA provides the framework for the collection and dissemination of information on foreign transactions and ownership of agricultural land in the U.S. Since its enactment in 1978, the law and regulations have been administered by the USDA Farm Service Agency which requires foreign investors who acquire, transfer, or hold interest in U.S. agriculture land to report their holdings and transactions to the Secretary of Agriculture. FSA uses the info to compile and file an annual report with Congress and the data is also included in searchable spreadsheets on a county-by-county basis throughout the United States. 
Current Congressional Measures 
In addition to the long-standing CFIUS and AFIDA regulations, there are measures pending in Congress to improve the current system.   

The AFIDA Improvements Act of 2024 will use the results from the Government Accountability Office (GAO) study of the AFIDA process to codify the AFIDA requirements and provide more robust data reporting and review. 

The Promoting Agricultural Safeguards & Security Act of 2023 (PASS) prohibits persons who are acting on behalf of China, Russia, Iran, or North Korea from purchasing or investing in U.S. agricultural land and companies. The President may waive this prohibition on a case-by-case basis if the President determines that the waiver is vital to U.S. national security interests. The bill also places the Secretary of Agriculture on CFIUS and requires CFIUS to review certain transactions involving investments by foreign persons in the U.S. agricultural sector. The Bill also requires the Department of Agriculture to report to Congress on the risks that foreign purchases of U.S. businesses engaged in agriculture pose to the agricultural sector of the United States. 

The Farmland Act of 2023 (Foreign Agricultural Restrictions to Maintain Local Agriculture and National Defense) was introduced to amend AFIDA to strengthen the oversight and transparency of AFIDA. Notably, the Act amends AFIDA by imposing a requirement that any entity (including a Buyer, Seller, real estate agent, broker, and title company) involved in the purchase or transfer of agricultural land in the United States shall (1) conduct due diligence relating to the agriculture land being purchased or transferred; and (2) certify to the Secretary of Agriculture that, to the best of the knowledge and belief of the entity, the entity is in compliance with all applicable provisions of AFIDA. It also would allow for review of any purchase or lease of U.S. ag land by a foreign entity which exceeds $5,000,000 in value or more than 320 acres that has taken place in the past 3 years. 

The above measures regulated by legislation and executed by various committees help ensure our country remains diligent and aware of the potential risks that foreign investment in U.S. real estate could post on national security, as well as the US economy.   
Foreign investors will continue to find U.S. real estate as an attractive investment opportunity and 1031 Exchanges continue to provide qualifying foreign investors the same tax deferral opportunities as U.S. citizens.  
 
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. 

What are Transferrable Development Rights? 
“Development Rights” are defined as the unused rights to develop a property within the limits set by state or local laws. With states and municipalities increasingly imposing restrictions on new construction, the value of development rights has skyrocketed. Since 1916, more than 140 state and local governments have introduced regulations allowing unused development rights to be transferred to different parcels. Property owners can consult with a local land use professional to determine whether they can benefit from such a program. These rights can then be used to construct improvements, such as buildings with more floor space or height, or to build at higher density than would otherwise be allowed. Consequently, an owner with unused development rights can achieve significant financial gain by selling these Transferable Development Rights (TDRs) to another parcel owner looking to further develop their property.  
The use of TDRs is a planning and preservation tool that is often used to protect agricultural, historic, or environmental resources while accommodating the needs of development. TDRs are the creation of state and local laws around the country that permit the owners of “preservation area” land to carve out the development rights of their property and sell them for use in a “receiving area”, usually nearby. Generally, developers purchase “development credits” and apply them to areas designated for growth at higher densities than would otherwise have been permitted. Once the property owner has sold their development rights, their land will be permanently restricted from further development. 
The Internal Revenue Service addressed the issue of Development Rights in 2008 with the release of PLR 200805012. Simply stated, the question asked in that private letter ruling was whether Development Rights are like-kind for the purposes of IRC Section 1031 to a fee interest in Replacement Property. The IRS noted that state law defined an “interest in real property” to include: 
 “title in fee, a leasehold interest, a beneficial interest, an encumbrance, development rights, air space and air rights, or any other interest with the right to use or occupancy of real property or the right to receive rents, profits, or other income derived from real property.”  
The IRS also noted the Treas. Reg. §1.1031(a)-1(b) provides that “like-kind” refers to the nature or character of the property and not to its grade or quality. Thus, real property in one asset class may be exchanged for real property in another asset class under §1031. The IRS concluded that the Development Rights to be acquired in this 1031 Exchange were like-kind to the fee interest being relinquished in the exchange. 
The IRS addressed a similar issue a year later with the release of PLR 200901020. The specific question to be resolved in this PLR was whether residential density development rights are like-kind to other interests in real estate. As with the earlier PLR, the IRS pointed out that Development Rights constitute interests in real estate under state law. The Exchanger was to dispose of development rights within a 1031 Exchange, and then acquire a fee interest in real estate, an additional leasehold interest in real estate with 30 years or more remaining, and certain land use rights. After a detailed historical analysis of Development Rights and easements in 1031 Exchanges, the IRS concluded that the Development Rights to be transferred by the Exchanger are of like-kind to the fee interest in real estate, a leasehold interest in real estate with 30 years or more remaining, and the land use rights.
In December 2020, the IRS issued the long anticipated Final Regulations for real property transactions under Section 1031. The Regulations provided many examples of what constitutes real property as well as a framework for analyzing items that were not listed. Relevant to this discussion, Treas. Reg. §1.1031(a)-3(a)(5)(i) specifically identified “land development rights” as real property for the purposes of 1031 Exchanges. Additionally, property that is real property under state or local law will also be treated as real property for purposes of Section 1031 under Treas. Reg. §1.1031(a)-3(a)(6). 
Based on this guidance from the IRS, Exchangers may sell or purchase Transferable Development Rights within a properly structured 1031 Exchange. 
To further understand Transferable Development Rights and the utilization of 1031 Exchanges involving TDRs, let’s walk through a hypothetical scenario involving two property owners and how they both can utilize TDRs. 
Utilization of 1031 Exchange with Transferrable Development Rights 
What does the owner of a three-story brownstone in New York have in common with the owner of a 100-acre farm in New Jersey? They each own something that they’re unaware of: Transferable Development Rights. 
Our New York City brownstone is owned by a widow who lives comfortably, though with little money left over each month. She has considered selling her home and moving but is reluctant to do so given the sentimental value of the home and high interest rates. She recently consulted with one of her trusted advisors who suggested that she consider TDRs. Her home is approximately 3,000 square feet on a lot that would allow for a home of up to 6,000 square feet. Because her home is in a ‘special purpose district’, she could sell those unused 3,000 square feet to a developer of a ‘designated receiving zone’, and still retain full ownership of her home and land. While the values of TDRs vary widely across the state, for purposes of this illustration we will assume an incredibly modest $200 per square foot (NYC TDRs ranged from $51 to $223 per square foot in 2013.) Thus, multiplying $200 by 3,000 square feet, our homeowner will receive $600,000 for her TDRs. 
The owner of Cherry Hill Farm is a third-generation farmer, raising a variety of crops on the last remaining active farm in the town that was once three-quarters farmland. Development has steadily encroached upon the family farm. Residential subdivisions border the farm on three sides and a county road runs through the middle. Developers have long targeted this property for the potential to build 75 or more homes. At the same time, the family farm, and its farmers market business face increasing pressure from supermarkets and warehouse clubs that sell corn, tomatoes, strawberries, and other competing products for lower prices. As with New York, prices of TDRs in New Jersey vary widely, so we will assume $10,000 per housing credit. (Nearby TDRs ranged from $10,000 to $50,000+ in recent years.) Thus, multiplying $10,000 by 75 housing units, our farming family will receive $750,000 for their TDRs. As in New York, the farming family will retain full ownership of the farm, with a deed restriction prohibiting future non-agricultural development. 
For both transactions, the result is exposure to significant capital gains on the value of the TDRs. The top tax bracket in New York is 10.9%, and in New Jersey it is 10.75%. 
The Benefits to Our Property Owners 
Our New York widow generated approximately $600,000 from the sale of TDRs associated with her brownstone. Absent a 1031 Exchange, she faced a potential tax bill of over $208,000 ($65,400 to the state, $120,000 in federal capital gains, and $22,800 in NIIT). Our New Jersey farmer garnered $750,000 from the sale of TDRs associated with their farm. Without the benefit of a 1031 Exchange, they faced a potential tax bill of nearly $260,000 ($80,625 to the state, $150,000 in federal capital gains, and $28,500 in NIIT). However, because we now know that they can utilize the benefits of a 1031 Exchange, they can defer associated taxes by deploying those funds toward the purchase of qualifying real estate, including management-free options like https://www.accruit.com/blog/passive-real-estate-investments-reits-and-… Statutory Trusts.
The Benefits of TDRs to Developers  
Developers who acquire TDRs from other properties benefit by being able to add height or density to their projects. In the case of our New York City brownstone, for example, the developer may have been able to build a 9,000 square foot duplex instead of a 6,000 square foot single family home. This effectively allows him 50% more density on the lot than he may have had without the TDRs. For the developer who acquired the TDRs from our farm family, perhaps he can now build 150 homes in his new subdivision rather than 75, because he bought that additional density from the farm family.  
The Benefits to the Community at Large  
The TDR system is considered to be a mechanism for controlling urban sprawl by concentrating or encouraging development in a specific direction. The use of TDRs is generally viewed more favorably than imposing harsh zoning restrictions on one area, which could cause landowners in that area to claim that there was an unconstitutional “taking” of their property rights. Instead, TDRs offer those property owners a financial incentive to participate in the conservation of their properties for environment, agricultural, or heritage purposes.  
 
As always, Exchangers are reminded to consult with their tax and legal advisors, as state and local laws differ around the country. Further, under the terms of every Private Letter Ruling, Exchangers are advised that each PLR applies only to that Exchanger on that set of facts. Thus, this blog is not a substitute for the advice of competent tax and legal advisors.  
  
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.    

What are Transferrable Development Rights? 
“Development Rights” are defined as the unused rights to develop a property within the limits set by state or local laws. With states and municipalities increasingly imposing restrictions on new construction, the value of development rights has skyrocketed. Since 1916, more than 140 state and local governments have introduced regulations allowing unused development rights to be transferred to different parcels. Property owners can consult with a local land use professional to determine whether they can benefit from such a program. These rights can then be used to construct improvements, such as buildings with more floor space or height, or to build at higher density than would otherwise be allowed. Consequently, an owner with unused development rights can achieve significant financial gain by selling these Transferable Development Rights (TDRs) to another parcel owner looking to further develop their property.  
The use of TDRs is a planning and preservation tool that is often used to protect agricultural, historic, or environmental resources while accommodating the needs of development. TDRs are the creation of state and local laws around the country that permit the owners of “preservation area” land to carve out the development rights of their property and sell them for use in a “receiving area”, usually nearby. Generally, developers purchase “development credits” and apply them to areas designated for growth at higher densities than would otherwise have been permitted. Once the property owner has sold their development rights, their land will be permanently restricted from further development. 
The Internal Revenue Service addressed the issue of Development Rights in 2008 with the release of PLR 200805012. Simply stated, the question asked in that private letter ruling was whether Development Rights are like-kind for the purposes of IRC Section 1031 to a fee interest in Replacement Property. The IRS noted that state law defined an “interest in real property” to include: 
 “title in fee, a leasehold interest, a beneficial interest, an encumbrance, development rights, air space and air rights, or any other interest with the right to use or occupancy of real property or the right to receive rents, profits, or other income derived from real property.”  
The IRS also noted the Treas. Reg. §1.1031(a)-1(b) provides that “like-kind” refers to the nature or character of the property and not to its grade or quality. Thus, real property in one asset class may be exchanged for real property in another asset class under §1031. The IRS concluded that the Development Rights to be acquired in this 1031 Exchange were like-kind to the fee interest being relinquished in the exchange. 
The IRS addressed a similar issue a year later with the release of PLR 200901020. The specific question to be resolved in this PLR was whether residential density development rights are like-kind to other interests in real estate. As with the earlier PLR, the IRS pointed out that Development Rights constitute interests in real estate under state law. The Exchanger was to dispose of development rights within a 1031 Exchange, and then acquire a fee interest in real estate, an additional leasehold interest in real estate with 30 years or more remaining, and certain land use rights. After a detailed historical analysis of Development Rights and easements in 1031 Exchanges, the IRS concluded that the Development Rights to be transferred by the Exchanger are of like-kind to the fee interest in real estate, a leasehold interest in real estate with 30 years or more remaining, and the land use rights.
In December 2020, the IRS issued the long anticipated Final Regulations for real property transactions under Section 1031. The Regulations provided many examples of what constitutes real property as well as a framework for analyzing items that were not listed. Relevant to this discussion, Treas. Reg. §1.1031(a)-3(a)(5)(i) specifically identified “land development rights” as real property for the purposes of 1031 Exchanges. Additionally, property that is real property under state or local law will also be treated as real property for purposes of Section 1031 under Treas. Reg. §1.1031(a)-3(a)(6). 
Based on this guidance from the IRS, Exchangers may sell or purchase Transferable Development Rights within a properly structured 1031 Exchange. 
To further understand Transferable Development Rights and the utilization of 1031 Exchanges involving TDRs, let’s walk through a hypothetical scenario involving two property owners and how they both can utilize TDRs. 
Utilization of 1031 Exchange with Transferrable Development Rights 
What does the owner of a three-story brownstone in New York have in common with the owner of a 100-acre farm in New Jersey? They each own something that they’re unaware of: Transferable Development Rights. 
Our New York City brownstone is owned by a widow who lives comfortably, though with little money left over each month. She has considered selling her home and moving but is reluctant to do so given the sentimental value of the home and high interest rates. She recently consulted with one of her trusted advisors who suggested that she consider TDRs. Her home is approximately 3,000 square feet on a lot that would allow for a home of up to 6,000 square feet. Because her home is in a ‘special purpose district’, she could sell those unused 3,000 square feet to a developer of a ‘designated receiving zone’, and still retain full ownership of her home and land. While the values of TDRs vary widely across the state, for purposes of this illustration we will assume an incredibly modest $200 per square foot (NYC TDRs ranged from $51 to $223 per square foot in 2013.) Thus, multiplying $200 by 3,000 square feet, our homeowner will receive $600,000 for her TDRs. 
The owner of Cherry Hill Farm is a third-generation farmer, raising a variety of crops on the last remaining active farm in the town that was once three-quarters farmland. Development has steadily encroached upon the family farm. Residential subdivisions border the farm on three sides and a county road runs through the middle. Developers have long targeted this property for the potential to build 75 or more homes. At the same time, the family farm, and its farmers market business face increasing pressure from supermarkets and warehouse clubs that sell corn, tomatoes, strawberries, and other competing products for lower prices. As with New York, prices of TDRs in New Jersey vary widely, so we will assume $10,000 per housing credit. (Nearby TDRs ranged from $10,000 to $50,000+ in recent years.) Thus, multiplying $10,000 by 75 housing units, our farming family will receive $750,000 for their TDRs. As in New York, the farming family will retain full ownership of the farm, with a deed restriction prohibiting future non-agricultural development. 
For both transactions, the result is exposure to significant capital gains on the value of the TDRs. The top tax bracket in New York is 10.9%, and in New Jersey it is 10.75%. 
The Benefits to Our Property Owners 
Our New York widow generated approximately $600,000 from the sale of TDRs associated with her brownstone. Absent a 1031 Exchange, she faced a potential tax bill of over $208,000 ($65,400 to the state, $120,000 in federal capital gains, and $22,800 in NIIT). Our New Jersey farmer garnered $750,000 from the sale of TDRs associated with their farm. Without the benefit of a 1031 Exchange, they faced a potential tax bill of nearly $260,000 ($80,625 to the state, $150,000 in federal capital gains, and $28,500 in NIIT). However, because we now know that they can utilize the benefits of a 1031 Exchange, they can defer associated taxes by deploying those funds toward the purchase of qualifying real estate, including management-free options like https://www.accruit.com/blog/passive-real-estate-investments-reits-and-… Statutory Trusts.
The Benefits of TDRs to Developers  
Developers who acquire TDRs from other properties benefit by being able to add height or density to their projects. In the case of our New York City brownstone, for example, the developer may have been able to build a 9,000 square foot duplex instead of a 6,000 square foot single family home. This effectively allows him 50% more density on the lot than he may have had without the TDRs. For the developer who acquired the TDRs from our farm family, perhaps he can now build 150 homes in his new subdivision rather than 75, because he bought that additional density from the farm family.  
The Benefits to the Community at Large  
The TDR system is considered to be a mechanism for controlling urban sprawl by concentrating or encouraging development in a specific direction. The use of TDRs is generally viewed more favorably than imposing harsh zoning restrictions on one area, which could cause landowners in that area to claim that there was an unconstitutional “taking” of their property rights. Instead, TDRs offer those property owners a financial incentive to participate in the conservation of their properties for environment, agricultural, or heritage purposes.  
 
As always, Exchangers are reminded to consult with their tax and legal advisors, as state and local laws differ around the country. Further, under the terms of every Private Letter Ruling, Exchangers are advised that each PLR applies only to that Exchanger on that set of facts. Thus, this blog is not a substitute for the advice of competent tax and legal advisors.  
  
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.    

What are Transferrable Development Rights? 
“Development Rights” are defined as the unused rights to develop a property within the limits set by state or local laws. With states and municipalities increasingly imposing restrictions on new construction, the value of development rights has skyrocketed. Since 1916, more than 140 state and local governments have introduced regulations allowing unused development rights to be transferred to different parcels. Property owners can consult with a local land use professional to determine whether they can benefit from such a program. These rights can then be used to construct improvements, such as buildings with more floor space or height, or to build at higher density than would otherwise be allowed. Consequently, an owner with unused development rights can achieve significant financial gain by selling these Transferable Development Rights (TDRs) to another parcel owner looking to further develop their property.  
The use of TDRs is a planning and preservation tool that is often used to protect agricultural, historic, or environmental resources while accommodating the needs of development. TDRs are the creation of state and local laws around the country that permit the owners of “preservation area” land to carve out the development rights of their property and sell them for use in a “receiving area”, usually nearby. Generally, developers purchase “development credits” and apply them to areas designated for growth at higher densities than would otherwise have been permitted. Once the property owner has sold their development rights, their land will be permanently restricted from further development. 
The Internal Revenue Service addressed the issue of Development Rights in 2008 with the release of PLR 200805012. Simply stated, the question asked in that private letter ruling was whether Development Rights are like-kind for the purposes of IRC Section 1031 to a fee interest in Replacement Property. The IRS noted that state law defined an “interest in real property” to include: 
 “title in fee, a leasehold interest, a beneficial interest, an encumbrance, development rights, air space and air rights, or any other interest with the right to use or occupancy of real property or the right to receive rents, profits, or other income derived from real property.”  
The IRS also noted the Treas. Reg. §1.1031(a)-1(b) provides that “like-kind” refers to the nature or character of the property and not to its grade or quality. Thus, real property in one asset class may be exchanged for real property in another asset class under §1031. The IRS concluded that the Development Rights to be acquired in this 1031 Exchange were like-kind to the fee interest being relinquished in the exchange. 
The IRS addressed a similar issue a year later with the release of PLR 200901020. The specific question to be resolved in this PLR was whether residential density development rights are like-kind to other interests in real estate. As with the earlier PLR, the IRS pointed out that Development Rights constitute interests in real estate under state law. The Exchanger was to dispose of development rights within a 1031 Exchange, and then acquire a fee interest in real estate, an additional leasehold interest in real estate with 30 years or more remaining, and certain land use rights. After a detailed historical analysis of Development Rights and easements in 1031 Exchanges, the IRS concluded that the Development Rights to be transferred by the Exchanger are of like-kind to the fee interest in real estate, a leasehold interest in real estate with 30 years or more remaining, and the land use rights.
In December 2020, the IRS issued the long anticipated Final Regulations for real property transactions under Section 1031. The Regulations provided many examples of what constitutes real property as well as a framework for analyzing items that were not listed. Relevant to this discussion, Treas. Reg. §1.1031(a)-3(a)(5)(i) specifically identified “land development rights” as real property for the purposes of 1031 Exchanges. Additionally, property that is real property under state or local law will also be treated as real property for purposes of Section 1031 under Treas. Reg. §1.1031(a)-3(a)(6). 
Based on this guidance from the IRS, Exchangers may sell or purchase Transferable Development Rights within a properly structured 1031 Exchange. 
To further understand Transferable Development Rights and the utilization of 1031 Exchanges involving TDRs, let’s walk through a hypothetical scenario involving two property owners and how they both can utilize TDRs. 
Utilization of 1031 Exchange with Transferrable Development Rights 
What does the owner of a three-story brownstone in New York have in common with the owner of a 100-acre farm in New Jersey? They each own something that they’re unaware of: Transferable Development Rights. 
Our New York City brownstone is owned by a widow who lives comfortably, though with little money left over each month. She has considered selling her home and moving but is reluctant to do so given the sentimental value of the home and high interest rates. She recently consulted with one of her trusted advisors who suggested that she consider TDRs. Her home is approximately 3,000 square feet on a lot that would allow for a home of up to 6,000 square feet. Because her home is in a ‘special purpose district’, she could sell those unused 3,000 square feet to a developer of a ‘designated receiving zone’, and still retain full ownership of her home and land. While the values of TDRs vary widely across the state, for purposes of this illustration we will assume an incredibly modest $200 per square foot (NYC TDRs ranged from $51 to $223 per square foot in 2013.) Thus, multiplying $200 by 3,000 square feet, our homeowner will receive $600,000 for her TDRs. 
The owner of Cherry Hill Farm is a third-generation farmer, raising a variety of crops on the last remaining active farm in the town that was once three-quarters farmland. Development has steadily encroached upon the family farm. Residential subdivisions border the farm on three sides and a county road runs through the middle. Developers have long targeted this property for the potential to build 75 or more homes. At the same time, the family farm, and its farmers market business face increasing pressure from supermarkets and warehouse clubs that sell corn, tomatoes, strawberries, and other competing products for lower prices. As with New York, prices of TDRs in New Jersey vary widely, so we will assume $10,000 per housing credit. (Nearby TDRs ranged from $10,000 to $50,000+ in recent years.) Thus, multiplying $10,000 by 75 housing units, our farming family will receive $750,000 for their TDRs. As in New York, the farming family will retain full ownership of the farm, with a deed restriction prohibiting future non-agricultural development. 
For both transactions, the result is exposure to significant capital gains on the value of the TDRs. The top tax bracket in New York is 10.9%, and in New Jersey it is 10.75%. 
The Benefits to Our Property Owners 
Our New York widow generated approximately $600,000 from the sale of TDRs associated with her brownstone. Absent a 1031 Exchange, she faced a potential tax bill of over $208,000 ($65,400 to the state, $120,000 in federal capital gains, and $22,800 in NIIT). Our New Jersey farmer garnered $750,000 from the sale of TDRs associated with their farm. Without the benefit of a 1031 Exchange, they faced a potential tax bill of nearly $260,000 ($80,625 to the state, $150,000 in federal capital gains, and $28,500 in NIIT). However, because we now know that they can utilize the benefits of a 1031 Exchange, they can defer associated taxes by deploying those funds toward the purchase of qualifying real estate, including management-free options like https://www.accruit.com/blog/passive-real-estate-investments-reits-and-… Statutory Trusts.
The Benefits of TDRs to Developers  
Developers who acquire TDRs from other properties benefit by being able to add height or density to their projects. In the case of our New York City brownstone, for example, the developer may have been able to build a 9,000 square foot duplex instead of a 6,000 square foot single family home. This effectively allows him 50% more density on the lot than he may have had without the TDRs. For the developer who acquired the TDRs from our farm family, perhaps he can now build 150 homes in his new subdivision rather than 75, because he bought that additional density from the farm family.  
The Benefits to the Community at Large  
The TDR system is considered to be a mechanism for controlling urban sprawl by concentrating or encouraging development in a specific direction. The use of TDRs is generally viewed more favorably than imposing harsh zoning restrictions on one area, which could cause landowners in that area to claim that there was an unconstitutional “taking” of their property rights. Instead, TDRs offer those property owners a financial incentive to participate in the conservation of their properties for environment, agricultural, or heritage purposes.  
 
As always, Exchangers are reminded to consult with their tax and legal advisors, as state and local laws differ around the country. Further, under the terms of every Private Letter Ruling, Exchangers are advised that each PLR applies only to that Exchanger on that set of facts. Thus, this blog is not a substitute for the advice of competent tax and legal advisors.  
  
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.    

What is the Exchange Cooperation Clause? 
The Exchange Cooperation Clause, was an additional document instated after the Starker Case ruling which allowed 1031 Exchanges to be non-simultaneous, it required the Buyer of property involved in an exchange to “cooperate” with the exchange.    
Why was the Exchange Cooperation Clause Needed?  
To better understand how the Clause came into effect, it is beneficial to start from the inception of Section 1031. IRC Section 1031 first made its way into the Tax Code in 1921, providing tax deferral when there was a “continuity of investment”. In this time period, it was thought that an exchange of Relinquished Property for Replacement Property had to be simultaneous and therefore “identification” of Replacement Property was irrelevant. 
In 1983, simultaneous exchanges were no longer required as a result of the decision in the

What is the Exchange Cooperation Clause? 
The Exchange Cooperation Clause, was an additional document instated after the Starker Case ruling which allowed 1031 Exchanges to be non-simultaneous, it required the Buyer of property involved in an exchange to “cooperate” with the exchange.    
Why was the Exchange Cooperation Clause Needed?  
To better understand how the Clause came into effect, it is beneficial to start from the inception of Section 1031. IRC Section 1031 first made its way into the Tax Code in 1921, providing tax deferral when there was a “continuity of investment”. In this time period, it was thought that an exchange of Relinquished Property for Replacement Property had to be simultaneous and therefore “identification” of Replacement Property was irrelevant. 
In 1983, simultaneous exchanges were no longer required as a result of the decision in the