Development

Tag: 1031 Exchange Qualified Intermediary

  • Support Section 1031 Like-Kind Exchanges

    Support Section 1031 Like-Kind Exchanges

    Section 1031 of the tax code positively impacts more than 19,500 communities, supports 568,000 jobs and adds $55 billion in value to our GDP.  1031 like-kind exchanges facilitate repurposing commercial real estate to a more productive use and helps American farmers better finance their operations. President Joe Biden’s proposed American Family Plan places severe limitations on Internal Revenue Code Section 1031 like-kind exchanges. Our communities will be severely impacted if we do not take action to preserve IRS Section 1031. 

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  • The 1031 Exchange Hybrid Solution – Combining Forward and Reverse Exchanges

    Most Section 1031 Like-Kind Exchange transactions involve a taxpayer who sells a relinquished property and then acquires a replacement property within the appropriate guidelines. An increasing number of exchangers are structuring their transactions as 1031 reverse exchanges, wherein the taxpayer first arranges for the acquisition of the replacement property and later sells their relinquished property. But there is a hybrid solution that often is overlooked – this is a combination 1031 exchange goals.
    The Solution: A Combination Forward-Reverse Hybrid 1031 Exchange
    Karen will structure the sale of her small strip center as part of a reverse 1031 exchanges process.
    The sale of the strip center took place on March 1, 2021, and the exchange proceeds were sent directly to Accruit, the qualified intermediary, to be held on her behalf until the purchase of her replacement property. This is necessary because a taxpayer participating in a like-kind exchange cannot be in actual or constructive receipt of the net sale proceeds while the exchange is pending.
    Within 45 days after the closing on the sale, Karen identified a one-half interest in her target replacement property using https://www.accruit.com/blog/what-are-rules-identification-and-receipt-… Rules in 1031 Exchanges. Karen also worked closely with the qualified intermediary, Accruit, to begin the reverse exchange component of her transaction. Accruit, through its affiliate, known as an Exchange Accommodation Titleholder (“EAT”) will take title to the other one-half interest in Karen’s target replacement property.
    Specifically, Karen will lend the additional $500,000 to a new LLC (let us call it Newco LLC), with the EAT as its sole member, which was established specifically for the purpose of facilitating the reverse 1031 exchange. The loan from Karen to Newco LLC will be documented by a note and secured with a pledge of the EAT’s membership interest in Newco LLC.
    Karen ultimately closes on the acquisition of the target replacement property on April 30, 2021, with title vested 50% in her personal name and 50% in Newco LLC, as tenants in common. (Learn more about https://www.accruit.com/blog/fractional-ownership-real-estate”>Tenants in Common.) On June 1, 2021, while the replacement property is held by Karen and Newco, Karen enters a contract to sell the small office building, her second relinquished property, for $540,000, with a closing date of August 20, 2021. At closing, after all closing costs are paid, the net proceeds of $500,000 will be deposited into Karen’s exchange account with Accruit. Karen will acquire the remaining 50% tenancy in common interest from the EAT and will direct Accruit to transfer the funds from the exchange account to the closing agent for this portion of the transaction.  Immediately Upon receipt of those funds the EAT will direct the closing agent to remit that sum to Karen to pay off the loan that was made to the EAT to acquire the new property. Upon payoff of the $500,000 loan owed to Karen, Karen receives full ownership of the replacement property.  In this manner it is the same as if Karen had acquired the replacement property outright from seller.
    The Result
    Karen used the forward exchange for the sale of the strip center and the reverse exchange for the sale of the office building to ultimately acquire 100% of the new building, deferring the taxes on both sales in the process. In doing so, Karen exchanged from two properties worth approximately $1,000,000 into a single, more desirable building worth about the same.

     

  • The 1031 Exchange Hybrid Solution – Combining Forward and Reverse Exchanges

    Most Section 1031 Like-Kind Exchange transactions involve a taxpayer who sells a relinquished property and then acquires a replacement property within the appropriate guidelines. An increasing number of exchangers are structuring their transactions as 1031 reverse exchanges, wherein the taxpayer first arranges for the acquisition of the replacement property and later sells their relinquished property. But there is a hybrid solution that often is overlooked – this is a combination 1031 exchange goals.
    The Solution: A Combination Forward-Reverse Hybrid 1031 Exchange
    Karen will structure the sale of her small strip center as part of a reverse 1031 exchanges process.
    The sale of the strip center took place on March 1, 2021, and the exchange proceeds were sent directly to Accruit, the qualified intermediary, to be held on her behalf until the purchase of her replacement property. This is necessary because a taxpayer participating in a like-kind exchange cannot be in actual or constructive receipt of the net sale proceeds while the exchange is pending.
    Within 45 days after the closing on the sale, Karen identified a one-half interest in her target replacement property using https://www.accruit.com/blog/what-are-rules-identification-and-receipt-… Rules in 1031 Exchanges. Karen also worked closely with the qualified intermediary, Accruit, to begin the reverse exchange component of her transaction. Accruit, through its affiliate, known as an Exchange Accommodation Titleholder (“EAT”) will take title to the other one-half interest in Karen’s target replacement property.
    Specifically, Karen will lend the additional $500,000 to a new LLC (let us call it Newco LLC), with the EAT as its sole member, which was established specifically for the purpose of facilitating the reverse 1031 exchange. The loan from Karen to Newco LLC will be documented by a note and secured with a pledge of the EAT’s membership interest in Newco LLC.
    Karen ultimately closes on the acquisition of the target replacement property on April 30, 2021, with title vested 50% in her personal name and 50% in Newco LLC, as tenants in common. (Learn more about https://www.accruit.com/blog/fractional-ownership-real-estate”>Tenants in Common.) On June 1, 2021, while the replacement property is held by Karen and Newco, Karen enters a contract to sell the small office building, her second relinquished property, for $540,000, with a closing date of August 20, 2021. At closing, after all closing costs are paid, the net proceeds of $500,000 will be deposited into Karen’s exchange account with Accruit. Karen will acquire the remaining 50% tenancy in common interest from the EAT and will direct Accruit to transfer the funds from the exchange account to the closing agent for this portion of the transaction.  Immediately Upon receipt of those funds the EAT will direct the closing agent to remit that sum to Karen to pay off the loan that was made to the EAT to acquire the new property. Upon payoff of the $500,000 loan owed to Karen, Karen receives full ownership of the replacement property.  In this manner it is the same as if Karen had acquired the replacement property outright from seller.
    The Result
    Karen used the forward exchange for the sale of the strip center and the reverse exchange for the sale of the office building to ultimately acquire 100% of the new building, deferring the taxes on both sales in the process. In doing so, Karen exchanged from two properties worth approximately $1,000,000 into a single, more desirable building worth about the same.

     

  • The 1031 Exchange Hybrid Solution – Combining Forward and Reverse Exchanges

    Most Section 1031 Like-Kind Exchange transactions involve a taxpayer who sells a relinquished property and then acquires a replacement property within the appropriate guidelines. An increasing number of exchangers are structuring their transactions as 1031 reverse exchanges, wherein the taxpayer first arranges for the acquisition of the replacement property and later sells their relinquished property. But there is a hybrid solution that often is overlooked – this is a combination 1031 exchange goals.
    The Solution: A Combination Forward-Reverse Hybrid 1031 Exchange
    Karen will structure the sale of her small strip center as part of a reverse 1031 exchanges process.
    The sale of the strip center took place on March 1, 2021, and the exchange proceeds were sent directly to Accruit, the qualified intermediary, to be held on her behalf until the purchase of her replacement property. This is necessary because a taxpayer participating in a like-kind exchange cannot be in actual or constructive receipt of the net sale proceeds while the exchange is pending.
    Within 45 days after the closing on the sale, Karen identified a one-half interest in her target replacement property using https://www.accruit.com/blog/what-are-rules-identification-and-receipt-… Rules in 1031 Exchanges. Karen also worked closely with the qualified intermediary, Accruit, to begin the reverse exchange component of her transaction. Accruit, through its affiliate, known as an Exchange Accommodation Titleholder (“EAT”) will take title to the other one-half interest in Karen’s target replacement property.
    Specifically, Karen will lend the additional $500,000 to a new LLC (let us call it Newco LLC), with the EAT as its sole member, which was established specifically for the purpose of facilitating the reverse 1031 exchange. The loan from Karen to Newco LLC will be documented by a note and secured with a pledge of the EAT’s membership interest in Newco LLC.
    Karen ultimately closes on the acquisition of the target replacement property on April 30, 2021, with title vested 50% in her personal name and 50% in Newco LLC, as tenants in common. (Learn more about https://www.accruit.com/blog/fractional-ownership-real-estate”>Tenants in Common.) On June 1, 2021, while the replacement property is held by Karen and Newco, Karen enters a contract to sell the small office building, her second relinquished property, for $540,000, with a closing date of August 20, 2021. At closing, after all closing costs are paid, the net proceeds of $500,000 will be deposited into Karen’s exchange account with Accruit. Karen will acquire the remaining 50% tenancy in common interest from the EAT and will direct Accruit to transfer the funds from the exchange account to the closing agent for this portion of the transaction.  Immediately Upon receipt of those funds the EAT will direct the closing agent to remit that sum to Karen to pay off the loan that was made to the EAT to acquire the new property. Upon payoff of the $500,000 loan owed to Karen, Karen receives full ownership of the replacement property.  In this manner it is the same as if Karen had acquired the replacement property outright from seller.
    The Result
    Karen used the forward exchange for the sale of the strip center and the reverse exchange for the sale of the office building to ultimately acquire 100% of the new building, deferring the taxes on both sales in the process. In doing so, Karen exchanged from two properties worth approximately $1,000,000 into a single, more desirable building worth about the same.

     

  • The Myth of the 1031 Exchange Cooperation Clause

    In this post, we will take a brief look into the evolution of Section 1031 to show why it was critical along the way to make use of an “Exchange Cooperation Clause” and why, as the rules changed over time, such use is no longer necessary.
    The Starker case
    Section 1031 made its way into the Tax Code in 1921, nearly a hundred years ago. At that time, until the mid-1980s, the sale and purchase were thought to need to take place “simultaneously”, after all, isn’t that the commonsense definition of a trade between two people? Apparently not. Beginning in the late 1970s and continuing into the mid-1980s, in the landmark case of Starker vs. U.S., it was determined by a Federal District Court in California that there did not appear to be any requirement in the plain language of Section 1031 of simultaneity.

    “No gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment”.

    This seemingly innocuous ruling opened up a Pandora’s Box of opportunity, not to mention confusion. The period of time for completing the trade with his buyer in the Starker case was five years. In 1986, shortly after the decision came out, Congress chose a legislative fix. It agreed that Section 1031 did not require the exchange of the properties to take place at the same time but decided to limit the open ended duration to complete the trade of the one for the other to 180 days. Essentially that limited time period still allowed the two transactions to be close enough in time to be considered to be tied to one another. But anything of a longer period simply broke the link between the sale and the purchase into unrelated (for tax purposes) transactions.
    Identification and purchase period to qualify for 1031 exchange
    As for the opportunity presented, taxpayers had

  • The Myth of the 1031 Exchange Cooperation Clause

    In this post, we will take a brief look into the evolution of Section 1031 to show why it was critical along the way to make use of an “Exchange Cooperation Clause” and why, as the rules changed over time, such use is no longer necessary.
    The Starker case
    Section 1031 made its way into the Tax Code in 1921, nearly a hundred years ago. At that time, until the mid-1980s, the sale and purchase were thought to need to take place “simultaneously”, after all, isn’t that the commonsense definition of a trade between two people? Apparently not. Beginning in the late 1970s and continuing into the mid-1980s, in the landmark case of Starker vs. U.S., it was determined by a Federal District Court in California that there did not appear to be any requirement in the plain language of Section 1031 of simultaneity.

    “No gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment”.

    This seemingly innocuous ruling opened up a Pandora’s Box of opportunity, not to mention confusion. The period of time for completing the trade with his buyer in the Starker case was five years. In 1986, shortly after the decision came out, Congress chose a legislative fix. It agreed that Section 1031 did not require the exchange of the properties to take place at the same time but decided to limit the open ended duration to complete the trade of the one for the other to 180 days. Essentially that limited time period still allowed the two transactions to be close enough in time to be considered to be tied to one another. But anything of a longer period simply broke the link between the sale and the purchase into unrelated (for tax purposes) transactions.
    Identification and purchase period to qualify for 1031 exchange
    As for the opportunity presented, taxpayers had

  • The Myth of the 1031 Exchange Cooperation Clause

    In this post, we will take a brief look into the evolution of Section 1031 to show why it was critical along the way to make use of an “Exchange Cooperation Clause” and why, as the rules changed over time, such use is no longer necessary.
    The Starker case
    Section 1031 made its way into the Tax Code in 1921, nearly a hundred years ago. At that time, until the mid-1980s, the sale and purchase were thought to need to take place “simultaneously”, after all, isn’t that the commonsense definition of a trade between two people? Apparently not. Beginning in the late 1970s and continuing into the mid-1980s, in the landmark case of Starker vs. U.S., it was determined by a Federal District Court in California that there did not appear to be any requirement in the plain language of Section 1031 of simultaneity.

    “No gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment”.

    This seemingly innocuous ruling opened up a Pandora’s Box of opportunity, not to mention confusion. The period of time for completing the trade with his buyer in the Starker case was five years. In 1986, shortly after the decision came out, Congress chose a legislative fix. It agreed that Section 1031 did not require the exchange of the properties to take place at the same time but decided to limit the open ended duration to complete the trade of the one for the other to 180 days. Essentially that limited time period still allowed the two transactions to be close enough in time to be considered to be tied to one another. But anything of a longer period simply broke the link between the sale and the purchase into unrelated (for tax purposes) transactions.
    Identification and purchase period to qualify for 1031 exchange
    As for the opportunity presented, taxpayers had

  • Revive a 1031 Exchange Opportunity Through Rescission

    Often times, a 1031 qualified intermediary (QI) will receive a panicked phone call from a taxpayer who closed the sale of their relinquished property, received the sale proceeds and then realized they could have deferred substantial taxes in a Section 1031 exchange. In many of these instances there may not be an opportunity to revive the exchange, however, in some cases, the taxpayer may be able to breathe new life into what was thought to be a lost cause.
    Can you do a 1031 exchange after closing?
    The use of rescission has long been recognized in law generally in connection with transactions not related to 1031 exchanges. However, the Internal Revenue Service (“IRS”) has allowed the use of rescission to correct a problem with an exchange transaction. “Rescission” is not defined in the Internal Revenue Code or the Treasury Regulations, which are the source of most rules used to advise taxpayers. Rather, rescission is a concept which some courts have allowed, and the IRS has blessed, specifically in Penn v. Robertson, 115 F2d 167, 40-2 U.S. Tax Cas. (CCH) P. 9707 (CCA 4th Cir. 1940).
    As an example, consider an individual taxpayer closes the sale of a parcel of land in February 2020 for a sizable gain. The taxpayer receives the sale proceeds but later finds out they could have deferred substantial tax liability by doing a 1031 exchange. As long as the taxpayer makes the decision to rescind the transaction in the same tax-reporting period–in this example before 2020 year-end–the taxpayer can contact the buyer and they can agree to rescind the transaction. Of course, should the buyer not be willing to cooperate, or should there be a buyer’s lender who does not wish to participate, this process may not be feasible.
    Seller and buyer agree to rescind. What happens next?
    When a rescission is properly completed, the IRS treats the sale as if it never happened, as long as the taxpayer receives the property back from the buyer and the buyer receives the full purchase price back from the taxpayer on or before the end of the tax reporting period for the taxpayer. The parties may agree they were laboring under mutual mistake of fact or some other reason for the decision to rescind. Another important consideration is when the rescission of the transaction is complete, the parties should have no further obligations to each other to take any further action. If these criteria are met, pursuant to the authorities cited above, the parties are in the exact position they were prior to the sale. The taxpayer and the buyer can then undertake another sale and purchase transaction and close the transaction with the participation of a QI company, like Accruit, receiving the exchange proceeds so it can help process the taxpayer’s 1031 exchange. In order to ease the burden on the buyer during rescission, it may be helpful if the taxpayer agrees to pay for any buyer expenses incurred in accommodating the taxpayer.
    Typically, the QI company is not in a position to provide legal advice regarding the rescission process or provide any rescission agreement. There are numerous attorneys and CPA’s nationwide who are knowledgeable in this area of the law and who can help advise the taxpayer.
    Do you have an uncommon situation that you have questions about? https://www.accruit.com/contact-us”>Ask our experts. 
     

  • Revive a 1031 Exchange Opportunity Through Rescission

    Often times, a 1031 qualified intermediary (QI) will receive a panicked phone call from a taxpayer who closed the sale of their relinquished property, received the sale proceeds and then realized they could have deferred substantial taxes in a Section 1031 exchange. In many of these instances there may not be an opportunity to revive the exchange, however, in some cases, the taxpayer may be able to breathe new life into what was thought to be a lost cause.
    Can you do a 1031 exchange after closing?
    The use of rescission has long been recognized in law generally in connection with transactions not related to 1031 exchanges. However, the Internal Revenue Service (“IRS”) has allowed the use of rescission to correct a problem with an exchange transaction. “Rescission” is not defined in the Internal Revenue Code or the Treasury Regulations, which are the source of most rules used to advise taxpayers. Rather, rescission is a concept which some courts have allowed, and the IRS has blessed, specifically in Penn v. Robertson, 115 F2d 167, 40-2 U.S. Tax Cas. (CCH) P. 9707 (CCA 4th Cir. 1940).
    As an example, consider an individual taxpayer closes the sale of a parcel of land in February 2020 for a sizable gain. The taxpayer receives the sale proceeds but later finds out they could have deferred substantial tax liability by doing a 1031 exchange. As long as the taxpayer makes the decision to rescind the transaction in the same tax-reporting period–in this example before 2020 year-end–the taxpayer can contact the buyer and they can agree to rescind the transaction. Of course, should the buyer not be willing to cooperate, or should there be a buyer’s lender who does not wish to participate, this process may not be feasible.
    Seller and buyer agree to rescind. What happens next?
    When a rescission is properly completed, the IRS treats the sale as if it never happened, as long as the taxpayer receives the property back from the buyer and the buyer receives the full purchase price back from the taxpayer on or before the end of the tax reporting period for the taxpayer. The parties may agree they were laboring under mutual mistake of fact or some other reason for the decision to rescind. Another important consideration is when the rescission of the transaction is complete, the parties should have no further obligations to each other to take any further action. If these criteria are met, pursuant to the authorities cited above, the parties are in the exact position they were prior to the sale. The taxpayer and the buyer can then undertake another sale and purchase transaction and close the transaction with the participation of a QI company, like Accruit, receiving the exchange proceeds so it can help process the taxpayer’s 1031 exchange. In order to ease the burden on the buyer during rescission, it may be helpful if the taxpayer agrees to pay for any buyer expenses incurred in accommodating the taxpayer.
    Typically, the QI company is not in a position to provide legal advice regarding the rescission process or provide any rescission agreement. There are numerous attorneys and CPA’s nationwide who are knowledgeable in this area of the law and who can help advise the taxpayer.
    Do you have an uncommon situation that you have questions about? https://www.accruit.com/contact-us”>Ask our experts. 
     

  • Revive a 1031 Exchange Opportunity Through Rescission

    Often times, a 1031 qualified intermediary (QI) will receive a panicked phone call from a taxpayer who closed the sale of their relinquished property, received the sale proceeds and then realized they could have deferred substantial taxes in a Section 1031 exchange. In many of these instances there may not be an opportunity to revive the exchange, however, in some cases, the taxpayer may be able to breathe new life into what was thought to be a lost cause.
    Can you do a 1031 exchange after closing?
    The use of rescission has long been recognized in law generally in connection with transactions not related to 1031 exchanges. However, the Internal Revenue Service (“IRS”) has allowed the use of rescission to correct a problem with an exchange transaction. “Rescission” is not defined in the Internal Revenue Code or the Treasury Regulations, which are the source of most rules used to advise taxpayers. Rather, rescission is a concept which some courts have allowed, and the IRS has blessed, specifically in Penn v. Robertson, 115 F2d 167, 40-2 U.S. Tax Cas. (CCH) P. 9707 (CCA 4th Cir. 1940).
    As an example, consider an individual taxpayer closes the sale of a parcel of land in February 2020 for a sizable gain. The taxpayer receives the sale proceeds but later finds out they could have deferred substantial tax liability by doing a 1031 exchange. As long as the taxpayer makes the decision to rescind the transaction in the same tax-reporting period–in this example before 2020 year-end–the taxpayer can contact the buyer and they can agree to rescind the transaction. Of course, should the buyer not be willing to cooperate, or should there be a buyer’s lender who does not wish to participate, this process may not be feasible.
    Seller and buyer agree to rescind. What happens next?
    When a rescission is properly completed, the IRS treats the sale as if it never happened, as long as the taxpayer receives the property back from the buyer and the buyer receives the full purchase price back from the taxpayer on or before the end of the tax reporting period for the taxpayer. The parties may agree they were laboring under mutual mistake of fact or some other reason for the decision to rescind. Another important consideration is when the rescission of the transaction is complete, the parties should have no further obligations to each other to take any further action. If these criteria are met, pursuant to the authorities cited above, the parties are in the exact position they were prior to the sale. The taxpayer and the buyer can then undertake another sale and purchase transaction and close the transaction with the participation of a QI company, like Accruit, receiving the exchange proceeds so it can help process the taxpayer’s 1031 exchange. In order to ease the burden on the buyer during rescission, it may be helpful if the taxpayer agrees to pay for any buyer expenses incurred in accommodating the taxpayer.
    Typically, the QI company is not in a position to provide legal advice regarding the rescission process or provide any rescission agreement. There are numerous attorneys and CPA’s nationwide who are knowledgeable in this area of the law and who can help advise the taxpayer.
    Do you have an uncommon situation that you have questions about? https://www.accruit.com/contact-us”>Ask our experts.