There are times when an Exchanger sells the Relinquished (old) Property for a higher value than the purchase price of the property to be acquired, referred to as the Replacement (new) Property. If nothing further is done, the left-over funds would be considered “boot” and fully taxable. An attractive alternative to a taxable event is to utilize the excess funds to make improvements or build from the ground up on the new property, known as an Improvement, Construction, or Build-to-Suit Exchange.
Circumstances Requiring Build-to-Suit and Improvement Exchanges
These fact patterns arise in two different ways. Perhaps the most frequently seen fact pattern is where the client has sold the old property, and identified a potential new property that would result in leftover funds, and the Exchanger wants to use those funds towards improving the new property from ground up or improvements to the existing property. For the purpose of this blog, let’s refer to both the ground up and improvements simply as improvements. The Improvement Exchange can include not only the improvements, but the value of the land purchase as well.
The other variation takes place where the taxpayer actually wishes to acquire the new property and begin the improvements before selling the old property. This scenario may be used if there are weather factors requiring improvements be completed as soon as possible or for a business to relocate in which the new property is needed as soon as the old one is sold. This version is “reverse” in nature since the new property will be acquired before the old one sells. While the order of events in these two scenarios differ, both are handled in the same way as a Reverse Exchange, but a standard Reverse Exchange doesn’t include building or improvements.
Meeting the “Like-Kind” Requirement in Improvement Exchanges
Most people know that IRS Section 1031 involves trading “like-kind” real estate. However, once an Exchanger acquires the new property, any improvements made after the acquisition constitute payment for labor and materials, and those payments would not constitute receipt of “like-kind” real estate.
IRS Rev. Proc. 2000-37
When the IRS came out with rules for this situation in the year 2000, those rules contained a path on how to structure such a transaction so that improvements could be completed with exchange funds prior to acquiring the new property. If structured the way the IRS recommends, the Exchanger will meet the “safe harbor” provided for under the rules. The benefit of being in the safe harbor is that the IRS is approving the structure in advance as to form. Think about the fact that insurance on your home protects you from loss, if applicable. The safe harbor is essentially insurance that protects you against a possible claim, or audit, that your Improvement Exchange fails to meet IRS requirements.
Process of an Improvement Exchange
The process is rather simple and many steps mirror those of a Reverse Exchange. The taxpayer engages with an exchange company, who will, for a fee, agree to acquire the new property at closing and improve it per the Exchanger’s direction. Once the improvements are done, and subject to meeting the 1031 timelines, the taxpayer receives title from the exchange company. That way, the value of the improvements is already “baked into” the value of the property upon Exchanger’s receipt and the Exchanger will get total tax deferral.
Roles in an Improvement Exchange
When doing a conventional exchange of old property for new property, pursuant to other IRS rules, the exchange company acts as a Qualified Intermediary (QI). However, when an exchange company is acting in connection with an Improvement Exchange, it is facilitated by an entity referred to as an Accommodator per the 2000 rules, technically known as a Qualified Exchange Accommodation Titleholder or (EAT). The EAT takes legal title to the new property through a new LLC to separate and insulate it from other Improvement and Reverse Exchanges that it is facilitating for other Exchangers at any given time.
Be advised that in these transactions, doing a reverse exchange does not mean that the forward exchange need not take place. The EAT holds, or parks, title to the new property and allows taxpayers to get the intended improvements in place. However, the QI facilitates the actual 1031 Exchange of the old property for the new property. A reverse exchange is not a substitute for the conventional 1031 exchange.
At times, the exchange company can service both portions of an Improvement Exchange, the forward 1031 exchange and the “parking” improvement portion as the QI and the EAT. Although one exchange company can “wear both hats,” many exchange companies across the country choose only to service forward exchanges. In that case, the QI might refer the client to an EAT that works in tandem with the QI in connection with their respective services. Accruit is one that offers both QI and EAT services.
Increased costs and complexities are a couple reasons that some QIs choose not to offer services for Reverse exchanges. Also, since the EAT needs to take title to the new property, that could result in greater exposure to potential liability, for example, if a person is injured on the property or if there is an environmental issue associated with the property. Some exchange companies prefer to avoid any such exposure.
Costs Associated with Improvement Exchange
On a relative scale, an Improvement Exchange is more costly than the standard forward 1031 exchange. As a practical matter, Exchangers generally have little issue with the higher fee since the service allows them to avoid substantial tax that would otherwise be owed without this technique. The fee to the EAT can be paid out of exchange funds and the fee and other soft costs incurred count making it closer to reach the amount of funds needed to be spent. In fact, the EAT can even reimburse the Exchanger for past and present expenses that the Exchanger has advanced. To make this happen the Exchanger must keep records of the invoice or bill and be able to present evidence that the expense has been paid.
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.
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1031 Exchanges Involving Construction and Property Improvements for Dummies
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1031 Exchanges Involving Construction and Property Improvements for Dummies
There are times when an Exchanger sells the Relinquished (old) Property for a higher value than the purchase price of the property to be acquired, referred to as the Replacement (new) Property. If nothing further is done, the left-over funds would be considered “boot” and fully taxable. An attractive alternative to a taxable event is to utilize the excess funds to make improvements or build from the ground up on the new property, known as an Improvement, Construction, or Build-to-Suit Exchange.
Circumstances Requiring Build-to-Suit and Improvement Exchanges
These fact patterns arise in two different ways. Perhaps the most frequently seen fact pattern is where the client has sold the old property, and identified a potential new property that would result in leftover funds, and the Exchanger wants to use those funds towards improving the new property from ground up or improvements to the existing property. For the purpose of this blog, let’s refer to both the ground up and improvements simply as improvements. The Improvement Exchange can include not only the improvements, but the value of the land purchase as well.
The other variation takes place where the taxpayer actually wishes to acquire the new property and begin the improvements before selling the old property. This scenario may be used if there are weather factors requiring improvements be completed as soon as possible or for a business to relocate in which the new property is needed as soon as the old one is sold. This version is “reverse” in nature since the new property will be acquired before the old one sells. While the order of events in these two scenarios differ, both are handled in the same way as a Reverse Exchange, but a standard Reverse Exchange doesn’t include building or improvements.
Meeting the “Like-Kind” Requirement in Improvement Exchanges
Most people know that IRS Section 1031 involves trading “like-kind” real estate. However, once an Exchanger acquires the new property, any improvements made after the acquisition constitute payment for labor and materials, and those payments would not constitute receipt of “like-kind” real estate.
IRS Rev. Proc. 2000-37
When the IRS came out with rules for this situation in the year 2000, those rules contained a path on how to structure such a transaction so that improvements could be completed with exchange funds prior to acquiring the new property. If structured the way the IRS recommends, the Exchanger will meet the “safe harbor” provided for under the rules. The benefit of being in the safe harbor is that the IRS is approving the structure in advance as to form. Think about the fact that insurance on your home protects you from loss, if applicable. The safe harbor is essentially insurance that protects you against a possible claim, or audit, that your Improvement Exchange fails to meet IRS requirements.
Process of an Improvement Exchange
The process is rather simple and many steps mirror those of a Reverse Exchange. The taxpayer engages with an exchange company, who will, for a fee, agree to acquire the new property at closing and improve it per the Exchanger’s direction. Once the improvements are done, and subject to meeting the 1031 timelines, the taxpayer receives title from the exchange company. That way, the value of the improvements is already “baked into” the value of the property upon Exchanger’s receipt and the Exchanger will get total tax deferral.
Roles in an Improvement Exchange
When doing a conventional exchange of old property for new property, pursuant to other IRS rules, the exchange company acts as a Qualified Intermediary (QI). However, when an exchange company is acting in connection with an Improvement Exchange, it is facilitated by an entity referred to as an Accommodator per the 2000 rules, technically known as a Qualified Exchange Accommodation Titleholder or (EAT). The EAT takes legal title to the new property through a new LLC to separate and insulate it from other Improvement and Reverse Exchanges that it is facilitating for other Exchangers at any given time.
Be advised that in these transactions, doing a reverse exchange does not mean that the forward exchange need not take place. The EAT holds, or parks, title to the new property and allows taxpayers to get the intended improvements in place. However, the QI facilitates the actual 1031 Exchange of the old property for the new property. A reverse exchange is not a substitute for the conventional 1031 exchange.
At times, the exchange company can service both portions of an Improvement Exchange, the forward 1031 exchange and the “parking” improvement portion as the QI and the EAT. Although one exchange company can “wear both hats,” many exchange companies across the country choose only to service forward exchanges. In that case, the QI might refer the client to an EAT that works in tandem with the QI in connection with their respective services. Accruit is one that offers both QI and EAT services.
Increased costs and complexities are a couple reasons that some QIs choose not to offer services for Reverse exchanges. Also, since the EAT needs to take title to the new property, that could result in greater exposure to potential liability, for example, if a person is injured on the property or if there is an environmental issue associated with the property. Some exchange companies prefer to avoid any such exposure.
Costs Associated with Improvement Exchange
On a relative scale, an Improvement Exchange is more costly than the standard forward 1031 exchange. As a practical matter, Exchangers generally have little issue with the higher fee since the service allows them to avoid substantial tax that would otherwise be owed without this technique. The fee to the EAT can be paid out of exchange funds and the fee and other soft costs incurred count making it closer to reach the amount of funds needed to be spent. In fact, the EAT can even reimburse the Exchanger for past and present expenses that the Exchanger has advanced. To make this happen the Exchanger must keep records of the invoice or bill and be able to present evidence that the expense has been paid.
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. -
1031 Exchanges Involving Construction and Property Improvements for Dummies
There are times when an Exchanger sells the Relinquished (old) Property for a higher value than the purchase price of the property to be acquired, referred to as the Replacement (new) Property. If nothing further is done, the left-over funds would be considered “boot” and fully taxable. An attractive alternative to a taxable event is to utilize the excess funds to make improvements or build from the ground up on the new property, known as an Improvement, Construction, or Build-to-Suit Exchange.
Circumstances Requiring Build-to-Suit and Improvement Exchanges
These fact patterns arise in two different ways. Perhaps the most frequently seen fact pattern is where the client has sold the old property, and identified a potential new property that would result in leftover funds, and the Exchanger wants to use those funds towards improving the new property from ground up or improvements to the existing property. For the purpose of this blog, let’s refer to both the ground up and improvements simply as improvements. The Improvement Exchange can include not only the improvements, but the value of the land purchase as well.
The other variation takes place where the taxpayer actually wishes to acquire the new property and begin the improvements before selling the old property. This scenario may be used if there are weather factors requiring improvements be completed as soon as possible or for a business to relocate in which the new property is needed as soon as the old one is sold. This version is “reverse” in nature since the new property will be acquired before the old one sells. While the order of events in these two scenarios differ, both are handled in the same way as a Reverse Exchange, but a standard Reverse Exchange doesn’t include building or improvements.
Meeting the “Like-Kind” Requirement in Improvement Exchanges
Most people know that IRS Section 1031 involves trading “like-kind” real estate. However, once an Exchanger acquires the new property, any improvements made after the acquisition constitute payment for labor and materials, and those payments would not constitute receipt of “like-kind” real estate.
IRS Rev. Proc. 2000-37
When the IRS came out with rules for this situation in the year 2000, those rules contained a path on how to structure such a transaction so that improvements could be completed with exchange funds prior to acquiring the new property. If structured the way the IRS recommends, the Exchanger will meet the “safe harbor” provided for under the rules. The benefit of being in the safe harbor is that the IRS is approving the structure in advance as to form. Think about the fact that insurance on your home protects you from loss, if applicable. The safe harbor is essentially insurance that protects you against a possible claim, or audit, that your Improvement Exchange fails to meet IRS requirements.
Process of an Improvement Exchange
The process is rather simple and many steps mirror those of a Reverse Exchange. The taxpayer engages with an exchange company, who will, for a fee, agree to acquire the new property at closing and improve it per the Exchanger’s direction. Once the improvements are done, and subject to meeting the 1031 timelines, the taxpayer receives title from the exchange company. That way, the value of the improvements is already “baked into” the value of the property upon Exchanger’s receipt and the Exchanger will get total tax deferral.
Roles in an Improvement Exchange
When doing a conventional exchange of old property for new property, pursuant to other IRS rules, the exchange company acts as a Qualified Intermediary (QI). However, when an exchange company is acting in connection with an Improvement Exchange, it is facilitated by an entity referred to as an Accommodator per the 2000 rules, technically known as a Qualified Exchange Accommodation Titleholder or (EAT). The EAT takes legal title to the new property through a new LLC to separate and insulate it from other Improvement and Reverse Exchanges that it is facilitating for other Exchangers at any given time.
Be advised that in these transactions, doing a reverse exchange does not mean that the forward exchange need not take place. The EAT holds, or parks, title to the new property and allows taxpayers to get the intended improvements in place. However, the QI facilitates the actual 1031 Exchange of the old property for the new property. A reverse exchange is not a substitute for the conventional 1031 exchange.
At times, the exchange company can service both portions of an Improvement Exchange, the forward 1031 exchange and the “parking” improvement portion as the QI and the EAT. Although one exchange company can “wear both hats,” many exchange companies across the country choose only to service forward exchanges. In that case, the QI might refer the client to an EAT that works in tandem with the QI in connection with their respective services. Accruit is one that offers both QI and EAT services.
Increased costs and complexities are a couple reasons that some QIs choose not to offer services for Reverse exchanges. Also, since the EAT needs to take title to the new property, that could result in greater exposure to potential liability, for example, if a person is injured on the property or if there is an environmental issue associated with the property. Some exchange companies prefer to avoid any such exposure.
Costs Associated with Improvement Exchange
On a relative scale, an Improvement Exchange is more costly than the standard forward 1031 exchange. As a practical matter, Exchangers generally have little issue with the higher fee since the service allows them to avoid substantial tax that would otherwise be owed without this technique. The fee to the EAT can be paid out of exchange funds and the fee and other soft costs incurred count making it closer to reach the amount of funds needed to be spent. In fact, the EAT can even reimburse the Exchanger for past and present expenses that the Exchanger has advanced. To make this happen the Exchanger must keep records of the invoice or bill and be able to present evidence that the expense has been paid.
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. -
UPDATE: IRS announces tax relief for victims in California
Due to severe winter storms, flooding, and mudslides in California, the IRS has issued extensions of the 45-day and 180-day deadlines for several counties in California.
The Disaster Date is January 8, 2023. The ORIGINAL General postponement date was May 15, 2023.
UPDATED 10/16/23: This news release has been updated to change the filing and payment deadlines from Oct. 16, 2023 to Nov. 16, 2023. The Nov. 16 deadline also applies to the quarterly payroll and excise tax returns normally due on Oct. 31, 2023.
UPDATED 2/23/23: Updated to change the filing and payment deadlines from May 15, 2023 to Oct. 16, 2023.
The Disaster Date is listed above. Note that some disasters occur on a single date; others, such as flooding, occur over a period of days and the Disaster Date above is preceded by beginning or began.
Victims of severe winter storms, flooding, and mudslides in California beginning January 8, 2023, now have until May 15, 2023, to file various individual and business tax returns and make tax payments, the Internal Revenue Service announced today.
Following the disaster declaration issued by the Federal Emergency Management Agency, individuals and households affected by severe winter storms, flooding, and mudslides that reside or have a business in Colusa, El Dorado, Glenn, Humboldt, Los Angeles, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Ventura, Yolo, and Yuba counties qualify for tax relief.
An “Affected Taxpayer” includes individuals who live, and businesses whose principal place of business is located in, the Covered Disaster Area. Affected Taxpayers are entitled to relief regardless of where the relinquished property or replacement property is located. Affected Taxpayers may choose either the General Postponement relief under Section 6 OR the Alternative relief under Section 17 of Rev. Proc. 2018-58. Taxpayers who do not meet the definition of Affected Taxpayers do not qualify for Section 6 General Postponement relief.
Option One: General Postponement under Section 6 of Rev. Proc. 2018-58 (Affected Taxpayers only). Any 45-day deadline or 180-day deadline (for either a forward or reverse exchange) that falls on or after the Disaster Date above is postponed to the General Postponement Date. The General Postponement applies regardless of the date the Relinquished Property was transferred (or the parked property acquired by the EAT) and is available to Affected Taxpayers regardless of whether their exchange began before or after the Disaster Date.
Option Two: Section 17 Alternative (Available to (1) Affected Taxpayers and (2) other taxpayers who have difficulty meeting the exchange deadlines because of the disaster. See Rev. Proc. 2018-58, Section 17 for conditions constituting “difficulty”). Option Two is only available if the relinquished property was transferred (or the parked property was acquired by the EAT) on or before the Disaster Date. Any 45-day or 180-day deadline that falls on or after the Disaster Date is extended to THE LONGER OF: (1) 120 days from such deadline; OR (2) the General Postponement Date. Note the date may not be extended beyond one year or the due date (including extensions) of the tax return for the year of the disposition of the relinquished property (typically, if an extension was filed, 9/15 for corporations and partnerships and 10/15 for other taxpayers). -
UPDATE: IRS announces tax relief for victims in California
Due to severe winter storms, flooding, and mudslides in California, the IRS has issued extensions of the 45-day and 180-day deadlines for several counties in California.
The Disaster Date is January 8, 2023. The ORIGINAL General postponement date was May 15, 2023.
UPDATED 10/16/23: This news release has been updated to change the filing and payment deadlines from Oct. 16, 2023 to Nov. 16, 2023. The Nov. 16 deadline also applies to the quarterly payroll and excise tax returns normally due on Oct. 31, 2023.
UPDATED 2/23/23: Updated to change the filing and payment deadlines from May 15, 2023 to Oct. 16, 2023.
The Disaster Date is listed above. Note that some disasters occur on a single date; others, such as flooding, occur over a period of days and the Disaster Date above is preceded by beginning or began.
Victims of severe winter storms, flooding, and mudslides in California beginning January 8, 2023, now have until May 15, 2023, to file various individual and business tax returns and make tax payments, the Internal Revenue Service announced today.
Following the disaster declaration issued by the Federal Emergency Management Agency, individuals and households affected by severe winter storms, flooding, and mudslides that reside or have a business in Colusa, El Dorado, Glenn, Humboldt, Los Angeles, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Ventura, Yolo, and Yuba counties qualify for tax relief.
An “Affected Taxpayer” includes individuals who live, and businesses whose principal place of business is located in, the Covered Disaster Area. Affected Taxpayers are entitled to relief regardless of where the relinquished property or replacement property is located. Affected Taxpayers may choose either the General Postponement relief under Section 6 OR the Alternative relief under Section 17 of Rev. Proc. 2018-58. Taxpayers who do not meet the definition of Affected Taxpayers do not qualify for Section 6 General Postponement relief.
Option One: General Postponement under Section 6 of Rev. Proc. 2018-58 (Affected Taxpayers only). Any 45-day deadline or 180-day deadline (for either a forward or reverse exchange) that falls on or after the Disaster Date above is postponed to the General Postponement Date. The General Postponement applies regardless of the date the Relinquished Property was transferred (or the parked property acquired by the EAT) and is available to Affected Taxpayers regardless of whether their exchange began before or after the Disaster Date.
Option Two: Section 17 Alternative (Available to (1) Affected Taxpayers and (2) other taxpayers who have difficulty meeting the exchange deadlines because of the disaster. See Rev. Proc. 2018-58, Section 17 for conditions constituting “difficulty”). Option Two is only available if the relinquished property was transferred (or the parked property was acquired by the EAT) on or before the Disaster Date. Any 45-day or 180-day deadline that falls on or after the Disaster Date is extended to THE LONGER OF: (1) 120 days from such deadline; OR (2) the General Postponement Date. Note the date may not be extended beyond one year or the due date (including extensions) of the tax return for the year of the disposition of the relinquished property (typically, if an extension was filed, 9/15 for corporations and partnerships and 10/15 for other taxpayers). -
UPDATE: IRS announces tax relief for victims in California
Due to severe winter storms, flooding, and mudslides in California, the IRS has issued extensions of the 45-day and 180-day deadlines for several counties in California.
The Disaster Date is January 8, 2023. The ORIGINAL General postponement date was May 15, 2023.
UPDATED 10/16/23: This news release has been updated to change the filing and payment deadlines from Oct. 16, 2023 to Nov. 16, 2023. The Nov. 16 deadline also applies to the quarterly payroll and excise tax returns normally due on Oct. 31, 2023.
UPDATED 2/23/23: Updated to change the filing and payment deadlines from May 15, 2023 to Oct. 16, 2023.
The Disaster Date is listed above. Note that some disasters occur on a single date; others, such as flooding, occur over a period of days and the Disaster Date above is preceded by beginning or began.
Victims of severe winter storms, flooding, and mudslides in California beginning January 8, 2023, now have until May 15, 2023, to file various individual and business tax returns and make tax payments, the Internal Revenue Service announced today.
Following the disaster declaration issued by the Federal Emergency Management Agency, individuals and households affected by severe winter storms, flooding, and mudslides that reside or have a business in Colusa, El Dorado, Glenn, Humboldt, Los Angeles, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Ventura, Yolo, and Yuba counties qualify for tax relief.
An “Affected Taxpayer” includes individuals who live, and businesses whose principal place of business is located in, the Covered Disaster Area. Affected Taxpayers are entitled to relief regardless of where the relinquished property or replacement property is located. Affected Taxpayers may choose either the General Postponement relief under Section 6 OR the Alternative relief under Section 17 of Rev. Proc. 2018-58. Taxpayers who do not meet the definition of Affected Taxpayers do not qualify for Section 6 General Postponement relief.
Option One: General Postponement under Section 6 of Rev. Proc. 2018-58 (Affected Taxpayers only). Any 45-day deadline or 180-day deadline (for either a forward or reverse exchange) that falls on or after the Disaster Date above is postponed to the General Postponement Date. The General Postponement applies regardless of the date the Relinquished Property was transferred (or the parked property acquired by the EAT) and is available to Affected Taxpayers regardless of whether their exchange began before or after the Disaster Date.
Option Two: Section 17 Alternative (Available to (1) Affected Taxpayers and (2) other taxpayers who have difficulty meeting the exchange deadlines because of the disaster. See Rev. Proc. 2018-58, Section 17 for conditions constituting “difficulty”). Option Two is only available if the relinquished property was transferred (or the parked property was acquired by the EAT) on or before the Disaster Date. Any 45-day or 180-day deadline that falls on or after the Disaster Date is extended to THE LONGER OF: (1) 120 days from such deadline; OR (2) the General Postponement Date. Note the date may not be extended beyond one year or the due date (including extensions) of the tax return for the year of the disposition of the relinquished property (typically, if an extension was filed, 9/15 for corporations and partnerships and 10/15 for other taxpayers). -
1031 Exchange Tax Straddling for 2023
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. -
1031 Exchange Tax Straddling for 2023
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. -
1031 Exchange Tax Straddling for 2023
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. -
IRS Announces Tax Relief for Parts of Louisiana by to seawater intrusion
Due to seawater intrusion, the IRS has issued Tax Relief for parts of Louisiana.
The General postponement date is February 15, 2024.
Individuals that reside or have a business within Jefferson, Orleans, Plaquemines, and St. Bernard parishes in Louisiana qualify for tax relief.
An “Affected Taxpayer” includes individuals who live, and businesses whose principal place of business is located in, the Covered Disaster Area. Affected Taxpayers are entitled to relief regardless of where the relinquished property or replacement property is located. Affected Taxpayers may choose either the General Postponement relief under Section 6 OR the Alternative relief under Section 17 of Rev. Proc. 2018-58. Taxpayers who do not meet the definition of Affected Taxpayers do not qualify for Section 6 General Postponement relief.
Option One: General Postponement under Section 6 of Rev. Proc. 2018-58 (Affected Taxpayers only). Any 45-day deadline or 180-day deadline (for either a forward or reverse exchange) that falls on or after the Disaster Date above is postponed to the General Postponement Date. The General Postponement applies regardless of the date the Relinquished Property was transferred (or the parked property acquired by the EAT) and is available to Affected Taxpayers regardless of whether their exchange began before or after the Disaster Date.
Option Two: Section 17 Alternative (Available to (1) Affected Taxpayers and (2) other taxpayers who have difficulty meeting the exchange deadlines because of the disaster. See Rev. Proc. 2018-58, Section 17 for conditions constituting “difficulty”). Option Two is only available if the relinquished property was transferred (or the parked property was acquired by the EAT) on or before the Disaster Date. Any 45-day or 180-day deadline that falls on or after the Disaster Date is extended to THE LONGER OF: (1) 120 days from such deadline; OR (2) the General Postponement Date. Note the date may not be extended beyond one year or the due date (including extensions) of the tax return for the year of the disposition of the relinquished property (typically, if an extension was filed, 9/15 for corporations and partnerships and 10/15 for other taxpayers).