Tag: 1031 exchange rules

After the real estate transactions in a 1031 exchange have been completed, there is a final step to report the exchange to the IRS so that the deferral is recognized. 1031 like-kind exchange, Form 8824 will need to be prepared and filed with the Internal Revenue Service (IRS).
What is Form 8824?
Titled, “Like-Kind Exchanges (and section 1043 conflict-of-interest sales),” Form 8824 serves two primary purposes:

To allow business owners to report the deferral of gains through Section 1031 exchange, including:

Description of the like-kind property (given up)
Description of the like-kind property (received)
Date the given-up property was originally acquired
Date the received property was actually received

Part one also asks if any like-kind property was either sold to or purchased from a related party. If the answer is yes, then the form’s preparer must complete Part II. If the answer is no, then the preparer may skip Part II and move on to complete Part III.
Part II – Related Party Information
It’s interesting to note, this section does not require any calculations. It simply asks for some basic information about the related party transaction, including:

The related party’s name, address and relationship
Timing of any dispositions (by the related party) of the property received from property owner
Timing of dispositions related to the property acquired

Background on Related Parties
Part II addresses very specific concerns regarding what is known as basis shifting. In these transactions, 1031 Exchange Qualified Intermediary and facilitates 1031 exchanges. Always consult your CPA or tax advisor for advice pertaining to your specific tax situation. For more information, visit www.accruit.com or call (800) 237-1031.

After the real estate transactions in a 1031 exchange have been completed, there is a final step to report the exchange to the IRS so that the deferral is recognized. 1031 like-kind exchange, Form 8824 will need to be prepared and filed with the Internal Revenue Service (IRS).
What is Form 8824?
Titled, “Like-Kind Exchanges (and section 1043 conflict-of-interest sales),” Form 8824 serves two primary purposes:

To allow business owners to report the deferral of gains through Section 1031 exchange, including:

Description of the like-kind property (given up)
Description of the like-kind property (received)
Date the given-up property was originally acquired
Date the received property was actually received

Part one also asks if any like-kind property was either sold to or purchased from a related party. If the answer is yes, then the form’s preparer must complete Part II. If the answer is no, then the preparer may skip Part II and move on to complete Part III.
Part II – Related Party Information
It’s interesting to note, this section does not require any calculations. It simply asks for some basic information about the related party transaction, including:

The related party’s name, address and relationship
Timing of any dispositions (by the related party) of the property received from property owner
Timing of dispositions related to the property acquired

Background on Related Parties
Part II addresses very specific concerns regarding what is known as basis shifting. In these transactions, 1031 Exchange Qualified Intermediary and facilitates 1031 exchanges. Always consult your CPA or tax advisor for advice pertaining to your specific tax situation. For more information, visit www.accruit.com or call (800) 237-1031.

That is the question.
We probably answer at least one phone call or email every day regarding how members of a partnership, limited liability company or other form of partnership who want to sell a property and go their separate ways may do so and still use a essential requirement for the exchange.
The conventional wisdom— and in most cases, the safest approach—is to have the partnership proceed to closing of the old property and have Accruit, as the Qualified Intermediary, receive the exchange value per the 1031 Tax Deferred Exchange agreement. After the closing of the relinquished property, the partners will identify replacement properties which may be different types, i.e. multi-family residential, commercial/warehouse or any other property that is investment or business use property. Accruit will then acquire the various replacement properties on behalf of the partnership/taxpayer. The partners then agree to a special allocation within the partnership to track the profits and losses for the properties and allocate them to the rearranged partner groups during the subsequent holding period. After the partnership has held the properties in that arrangement for at least a couple of years, it will then distribute the property to the partners as tenants in common or to the new partner groups as new partnerships.
Keep in mind, there are still some adventurous souls who engage in drop and swap transactions involving short holding periods after the redemption of the partnership interests in return for the tenancy in common interests that are exchanged. They have relied on a long line of taxpayer-friendly federal cases such as In the Matter of the Appeal of Sharon Mitchell (OTA Case No. 18011715) (January 18, 2020). Admittedly, when looking at these transactions either through the lens of Federal or state law and none of the partners are cashing out but doing exchanges, albeit into different property , the continuity of investment argument should be persuasive.
The answer to the opening question, unfortunately, is there is no clear test for the period of qualified use prior to a sale and exchange. It’s always important for anyone stuck in a partnership and contemplating an exchange with partners of diverging interests to talk to their tax advisors as soon as possible to avoid the pitfalls outlined above.

That is the question.
We probably answer at least one phone call or email every day regarding how members of a partnership, limited liability company or other form of partnership who want to sell a property and go their separate ways may do so and still use a essential requirement for the exchange.
The conventional wisdom— and in most cases, the safest approach—is to have the partnership proceed to closing of the old property and have Accruit, as the Qualified Intermediary, receive the exchange value per the 1031 Tax Deferred Exchange agreement. After the closing of the relinquished property, the partners will identify replacement properties which may be different types, i.e. multi-family residential, commercial/warehouse or any other property that is investment or business use property. Accruit will then acquire the various replacement properties on behalf of the partnership/taxpayer. The partners then agree to a special allocation within the partnership to track the profits and losses for the properties and allocate them to the rearranged partner groups during the subsequent holding period. After the partnership has held the properties in that arrangement for at least a couple of years, it will then distribute the property to the partners as tenants in common or to the new partner groups as new partnerships.
Keep in mind, there are still some adventurous souls who engage in drop and swap transactions involving short holding periods after the redemption of the partnership interests in return for the tenancy in common interests that are exchanged. They have relied on a long line of taxpayer-friendly federal cases such as In the Matter of the Appeal of Sharon Mitchell (OTA Case No. 18011715) (January 18, 2020). Admittedly, when looking at these transactions either through the lens of Federal or state law and none of the partners are cashing out but doing exchanges, albeit into different property , the continuity of investment argument should be persuasive.
The answer to the opening question, unfortunately, is there is no clear test for the period of qualified use prior to a sale and exchange. It’s always important for anyone stuck in a partnership and contemplating an exchange with partners of diverging interests to talk to their tax advisors as soon as possible to avoid the pitfalls outlined above.

That is the question.
We probably answer at least one phone call or email every day regarding how members of a partnership, limited liability company or other form of partnership who want to sell a property and go their separate ways may do so and still use a essential requirement for the exchange.
The conventional wisdom— and in most cases, the safest approach—is to have the partnership proceed to closing of the old property and have Accruit, as the Qualified Intermediary, receive the exchange value per the 1031 Tax Deferred Exchange agreement. After the closing of the relinquished property, the partners will identify replacement properties which may be different types, i.e. multi-family residential, commercial/warehouse or any other property that is investment or business use property. Accruit will then acquire the various replacement properties on behalf of the partnership/taxpayer. The partners then agree to a special allocation within the partnership to track the profits and losses for the properties and allocate them to the rearranged partner groups during the subsequent holding period. After the partnership has held the properties in that arrangement for at least a couple of years, it will then distribute the property to the partners as tenants in common or to the new partner groups as new partnerships.
Keep in mind, there are still some adventurous souls who engage in drop and swap transactions involving short holding periods after the redemption of the partnership interests in return for the tenancy in common interests that are exchanged. They have relied on a long line of taxpayer-friendly federal cases such as In the Matter of the Appeal of Sharon Mitchell (OTA Case No. 18011715) (January 18, 2020). Admittedly, when looking at these transactions either through the lens of Federal or state law and none of the partners are cashing out but doing exchanges, albeit into different property , the continuity of investment argument should be persuasive.
The answer to the opening question, unfortunately, is there is no clear test for the period of qualified use prior to a sale and exchange. It’s always important for anyone stuck in a partnership and contemplating an exchange with partners of diverging interests to talk to their tax advisors as soon as possible to avoid the pitfalls outlined above.

 No useful reason exists to think of or treat a closing like litigation although it does happen.  Everyone involved needs to work together in a cooperative way to consummate the deal.  Real estate law is a function of locality and custom in many respects; however, we will generally review some commonalities in the closing of a real estate transaction.  
Most real estate transactions begin with a written contract and end with a closing.  The following parties are typically involved in negotiating, performing and closing on the contract:

Seller
Buyer
Real estate agents
Attorneys (depending on locality and complexity)
Lender (if not a cash deal or other financing arrangement)
Title company

All agreements for the purchase and sale of real estate must be in writing.  The contract sets forth the conditions under which the seller agrees to transfer and the buyer agrees to purchase the property.  The contract may be lengthy or pithy, complex or straightforward, but its ultimate purpose is to convey ownership of the property to the buyer under mutually agreed upon terms.  
Occasionally, a real estate transaction may involve an IRC Section 1031 tax-deferred exchange. The tax code and treasury regulations also provide certain rules that address conveying real estate in a tax deferred exchange.  A qualified intermediary (QI) is generally required and is a person or entity that is not a “disqualified person” as defined under the tax code.  For the most part,

 No useful reason exists to think of or treat a closing like litigation although it does happen.  Everyone involved needs to work together in a cooperative way to consummate the deal.  Real estate law is a function of locality and custom in many respects; however, we will generally review some commonalities in the closing of a real estate transaction.  
Most real estate transactions begin with a written contract and end with a closing.  The following parties are typically involved in negotiating, performing and closing on the contract:

Seller
Buyer
Real estate agents
Attorneys (depending on locality and complexity)
Lender (if not a cash deal or other financing arrangement)
Title company

All agreements for the purchase and sale of real estate must be in writing.  The contract sets forth the conditions under which the seller agrees to transfer and the buyer agrees to purchase the property.  The contract may be lengthy or pithy, complex or straightforward, but its ultimate purpose is to convey ownership of the property to the buyer under mutually agreed upon terms.  
Occasionally, a real estate transaction may involve an IRC Section 1031 tax-deferred exchange. The tax code and treasury regulations also provide certain rules that address conveying real estate in a tax deferred exchange.  A qualified intermediary (QI) is generally required and is a person or entity that is not a “disqualified person” as defined under the tax code.  For the most part,

 No useful reason exists to think of or treat a closing like litigation although it does happen.  Everyone involved needs to work together in a cooperative way to consummate the deal.  Real estate law is a function of locality and custom in many respects; however, we will generally review some commonalities in the closing of a real estate transaction.  
Most real estate transactions begin with a written contract and end with a closing.  The following parties are typically involved in negotiating, performing and closing on the contract:

Seller
Buyer
Real estate agents
Attorneys (depending on locality and complexity)
Lender (if not a cash deal or other financing arrangement)
Title company

All agreements for the purchase and sale of real estate must be in writing.  The contract sets forth the conditions under which the seller agrees to transfer and the buyer agrees to purchase the property.  The contract may be lengthy or pithy, complex or straightforward, but its ultimate purpose is to convey ownership of the property to the buyer under mutually agreed upon terms.  
Occasionally, a real estate transaction may involve an IRC Section 1031 tax-deferred exchange. The tax code and treasury regulations also provide certain rules that address conveying real estate in a tax deferred exchange.  A qualified intermediary (QI) is generally required and is a person or entity that is not a “disqualified person” as defined under the tax code.  For the most part,

When selling or purchasing an investment property in a IRS 1031 exchange purposes are:

Real estate broker’s commissions, finder or referral fees
Owner’s title insurance premiums
Closing agent fees (title, escrow or attorney closing fees)
Attorney or tax advisor fees related to the sale or the purchase of the property
Recording and filing fees, documentary or transfer tax fees

Closing expenses which result in a taxable event are:

Pro-rated rents
Security deposits
Utility payments
Property taxes and insurance
Associations dues
Repairs and maintenance costs
Insurance premiums
Loan acquisition fees: points, appraisals, mortgage insurance, lenders title insurance, inspections and other loan processing fees and costs

To reduce the taxable consequences of these operating, financing and other closing fees, try to:

Pay security deposits, pro-rated rents and any repair or maintenance costs outside of closing, or deposit these amounts in escrow with the closing agent.
Treat accrued interest, prorated property tax payments or security deposits as non-recourse debt that the exchanger is relieved of on the sale of their old property, which could be offset against the debt assumed on the replacement property. Note: this would only work if mortgage debt is obtained on the replacement property purchase that exceeds the mortgage debt paid off on the sale of the relinquished property.
Match any prepaid taxes or association dues credited to the investor against the unallowable closing expenses listed on the settlement statement.

Check with your tax advisor prior to the closing to review the closing settlement statements to determine if there is an opportunity to

When selling or purchasing an investment property in a IRS 1031 exchange purposes are:

Real estate broker’s commissions, finder or referral fees
Owner’s title insurance premiums
Closing agent fees (title, escrow or attorney closing fees)
Attorney or tax advisor fees related to the sale or the purchase of the property
Recording and filing fees, documentary or transfer tax fees

Closing expenses which result in a taxable event are:

Pro-rated rents
Security deposits
Utility payments
Property taxes and insurance
Associations dues
Repairs and maintenance costs
Insurance premiums
Loan acquisition fees: points, appraisals, mortgage insurance, lenders title insurance, inspections and other loan processing fees and costs

To reduce the taxable consequences of these operating, financing and other closing fees, try to:

Pay security deposits, pro-rated rents and any repair or maintenance costs outside of closing, or deposit these amounts in escrow with the closing agent.
Treat accrued interest, prorated property tax payments or security deposits as non-recourse debt that the exchanger is relieved of on the sale of their old property, which could be offset against the debt assumed on the replacement property. Note: this would only work if mortgage debt is obtained on the replacement property purchase that exceeds the mortgage debt paid off on the sale of the relinquished property.
Match any prepaid taxes or association dues credited to the investor against the unallowable closing expenses listed on the settlement statement.

Check with your tax advisor prior to the closing to review the closing settlement statements to determine if there is an opportunity to