Tag: 1031 exchange

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.

There are many requirements to ensure for a compliant 1031 exchange. One frequently posed question by potential exchangers pertains to what property is considered “like-kind” to another property. It relates to the term “like-kind” referring to two real estate assets of a similar nature irrespective of class or quality, that (if exchanged by the rules) can be replaced without realizing any taxable gain.
The Internal Revenue Code (IRC) Section 1031 defines like-kind property as any property held for investment or use in a trade or business. The relinquished property and the replacement must be of like-kind to qualify for exchange treatment. Put simply, both properties involved in the exchange must be for use in a trade or business, or investment purposes. So, for example, although a personal residence or a vacation home is real estate, since it is held for personal use and not for investment, it would not qualify for exchange treatment. Property held as part of a dealer’s or developer’s inventory also does not qualify.
What is “Like-Kind”? 
The rules provide that the words “like-kind” reference the nature or character of the property and not its class or quality. Under the Regulations, things to consider include “the respective interests in the physical properties, the nature of the title conveyed, the rights of the parties, and the duration of the interests.” Based on these provisions, like-kind is defined in the tax code quite liberally in that any real estate is like- kind to any other type of real estate. For example, whether the real estate is improved or unimproved is not significant. Many court cases and rulings have addressed the like-kind standard for real property. Regulations provide examples of like-kind real property, some of which are obvious, others less so. Below are examples of real property interests that can be exchanged for any other type of real estate:

Strip center for multi-family rental
Vacant lot for improved property
Improvements on property not already owned
Oil, gas and other mineral interests
Water rights
Cell tower, billboard and fiber optic cable easements
Conservation easements

The Regulations also require the replacement property be located within the United States and some of its territories and possessions to qualify as like-kind for property sold in the United States. For example, a taxpayer cannot use proceeds from the sale of an office building in Dallas to acquire an investment property in Mexico. While a Mexican condominium investment sounds like a great retirement plan after the extended rental period is over, it’s not going to pass muster with the IRS when it comes to Section 1031. Property located outside the United States is like-kind only to other property located outside of the United States.
Like-Kind Requirements Takeaways

Like-kind real estate are assets of the same nature or character, irrespective of class or quality that can be exchanged without realizing tax liability under Section 1031
Properties must be held use in a trade or business, or investment purposes but do not need to be similar in class or quality
Any type of real estate is like-kind to any other real estate interest
Many non-traditional real estate interests are like-kind to conventional interests
Properties must be in the United States and some US territories and possessions in order to qualify as like-kind to other properties in the United States

https://cta-redirect.hubspot.com/cta/redirect/6205670/3affec8d-f739-49b… alt=”free download: understanding a like-kind exchange” class=”hs-cta-img” height=”150″ id=”hs-cta-img-3affec8d-f739-49b0-a02b-d35ffc3abed1″ src=”https://no-cache.hubspot.com/cta/default/6205670/3affec8d-f739-49b0-a02…; style=”border-width:0px;” width=”1320″ />https://js.hscta.net/cta/current.js”> hbspt.cta.load(6205670, ‘3affec8d-f739-49b0-a02b-d35ffc3abed1’, {});
 
Be sure to discuss 1031 exchange plans with a trusted Qualified Intermediary such as Accruit. Following the like-kind requirements is just one of several rules that must be adhered to in order to complete a successful

There are many requirements to ensure for a compliant 1031 exchange. One frequently posed question by potential exchangers pertains to what property is considered “like-kind” to another property. It relates to the term “like-kind” referring to two real estate assets of a similar nature irrespective of class or quality, that (if exchanged by the rules) can be replaced without realizing any taxable gain.
The Internal Revenue Code (IRC) Section 1031 defines like-kind property as any property held for investment or use in a trade or business. The relinquished property and the replacement must be of like-kind to qualify for exchange treatment. Put simply, both properties involved in the exchange must be for use in a trade or business, or investment purposes. So, for example, although a personal residence or a vacation home is real estate, since it is held for personal use and not for investment, it would not qualify for exchange treatment. Property held as part of a dealer’s or developer’s inventory also does not qualify.
What is “Like-Kind”? 
The rules provide that the words “like-kind” reference the nature or character of the property and not its class or quality. Under the Regulations, things to consider include “the respective interests in the physical properties, the nature of the title conveyed, the rights of the parties, and the duration of the interests.” Based on these provisions, like-kind is defined in the tax code quite liberally in that any real estate is like- kind to any other type of real estate. For example, whether the real estate is improved or unimproved is not significant. Many court cases and rulings have addressed the like-kind standard for real property. Regulations provide examples of like-kind real property, some of which are obvious, others less so. Below are examples of real property interests that can be exchanged for any other type of real estate:

Strip center for multi-family rental
Vacant lot for improved property
Improvements on property not already owned
Oil, gas and other mineral interests
Water rights
Cell tower, billboard and fiber optic cable easements
Conservation easements

The Regulations also require the replacement property be located within the United States and some of its territories and possessions to qualify as like-kind for property sold in the United States. For example, a taxpayer cannot use proceeds from the sale of an office building in Dallas to acquire an investment property in Mexico. While a Mexican condominium investment sounds like a great retirement plan after the extended rental period is over, it’s not going to pass muster with the IRS when it comes to Section 1031. Property located outside the United States is like-kind only to other property located outside of the United States.
Like-Kind Requirements Takeaways

Like-kind real estate are assets of the same nature or character, irrespective of class or quality that can be exchanged without realizing tax liability under Section 1031
Properties must be held use in a trade or business, or investment purposes but do not need to be similar in class or quality
Any type of real estate is like-kind to any other real estate interest
Many non-traditional real estate interests are like-kind to conventional interests
Properties must be in the United States and some US territories and possessions in order to qualify as like-kind to other properties in the United States

https://cta-redirect.hubspot.com/cta/redirect/6205670/3affec8d-f739-49b… alt=”free download: understanding a like-kind exchange” class=”hs-cta-img” height=”150″ id=”hs-cta-img-3affec8d-f739-49b0-a02b-d35ffc3abed1″ src=”https://no-cache.hubspot.com/cta/default/6205670/3affec8d-f739-49b0-a02…; style=”border-width:0px;” width=”1320″ />https://js.hscta.net/cta/current.js”> hbspt.cta.load(6205670, ‘3affec8d-f739-49b0-a02b-d35ffc3abed1’, {});
 
Be sure to discuss 1031 exchange plans with a trusted Qualified Intermediary such as Accruit. Following the like-kind requirements is just one of several rules that must be adhered to in order to complete a successful

There are many requirements to ensure for a compliant 1031 exchange. One frequently posed question by potential exchangers pertains to what property is considered “like-kind” to another property. It relates to the term “like-kind” referring to two real estate assets of a similar nature irrespective of class or quality, that (if exchanged by the rules) can be replaced without realizing any taxable gain.
The Internal Revenue Code (IRC) Section 1031 defines like-kind property as any property held for investment or use in a trade or business. The relinquished property and the replacement must be of like-kind to qualify for exchange treatment. Put simply, both properties involved in the exchange must be for use in a trade or business, or investment purposes. So, for example, although a personal residence or a vacation home is real estate, since it is held for personal use and not for investment, it would not qualify for exchange treatment. Property held as part of a dealer’s or developer’s inventory also does not qualify.
What is “Like-Kind”? 
The rules provide that the words “like-kind” reference the nature or character of the property and not its class or quality. Under the Regulations, things to consider include “the respective interests in the physical properties, the nature of the title conveyed, the rights of the parties, and the duration of the interests.” Based on these provisions, like-kind is defined in the tax code quite liberally in that any real estate is like- kind to any other type of real estate. For example, whether the real estate is improved or unimproved is not significant. Many court cases and rulings have addressed the like-kind standard for real property. Regulations provide examples of like-kind real property, some of which are obvious, others less so. Below are examples of real property interests that can be exchanged for any other type of real estate:

Strip center for multi-family rental
Vacant lot for improved property
Improvements on property not already owned
Oil, gas and other mineral interests
Water rights
Cell tower, billboard and fiber optic cable easements
Conservation easements

The Regulations also require the replacement property be located within the United States and some of its territories and possessions to qualify as like-kind for property sold in the United States. For example, a taxpayer cannot use proceeds from the sale of an office building in Dallas to acquire an investment property in Mexico. While a Mexican condominium investment sounds like a great retirement plan after the extended rental period is over, it’s not going to pass muster with the IRS when it comes to Section 1031. Property located outside the United States is like-kind only to other property located outside of the United States.
Like-Kind Requirements Takeaways

Like-kind real estate are assets of the same nature or character, irrespective of class or quality that can be exchanged without realizing tax liability under Section 1031
Properties must be held use in a trade or business, or investment purposes but do not need to be similar in class or quality
Any type of real estate is like-kind to any other real estate interest
Many non-traditional real estate interests are like-kind to conventional interests
Properties must be in the United States and some US territories and possessions in order to qualify as like-kind to other properties in the United States

https://cta-redirect.hubspot.com/cta/redirect/6205670/3affec8d-f739-49b… alt=”free download: understanding a like-kind exchange” class=”hs-cta-img” height=”150″ id=”hs-cta-img-3affec8d-f739-49b0-a02b-d35ffc3abed1″ src=”https://no-cache.hubspot.com/cta/default/6205670/3affec8d-f739-49b0-a02…; style=”border-width:0px;” width=”1320″ />https://js.hscta.net/cta/current.js”> hbspt.cta.load(6205670, ‘3affec8d-f739-49b0-a02b-d35ffc3abed1’, {});
 
Be sure to discuss 1031 exchange plans with a trusted Qualified Intermediary such as Accruit. Following the like-kind requirements is just one of several rules that must be adhered to in order to complete a successful

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. 
 

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. 
 

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. 
 

In a sale of real estate, it’s common for the seller, the taxpayer in a 1031 exchange, to receive money down from the buyer in the sale and to carry a note for the additional sum due. The taxpayer facilitates financing for the buyer in this way to make the transaction happen. Sometimes this arrangement is entered into because both parties wish to close, but the buyer’s conventional financing is taking more time than expected. If the buyer can procure the financing from the institutional lender before the taxpayer closes on their replacement property, the note may simply be substituted for cash from the buyer’s loan. Regardless of the circumstance for seller financing, without further steps, the taxpayer’s use of the value of the note toward the purchase of the replacement property will be taxable.
In a non-exchange context there is no problem in the taxpayer carrying back a note from the buyer. However, under the exchange regulations, the actual or constructive receipt of the note would run afoul of qualified intermediary.
The taxpayer and qualified intermediary should also be careful in timing when the note is assigned to the taxpayer. There is a natural tendency to pass the note simultaneously upon receipt by the qualified intermediary of the equivalent amount of cash. After all, the client is putting into the exchange account the exact same value that is being taken out. However, because the regulations prohibit the taxpayer from the “right to receive money or other property” during the pendency of the exchange transaction, it is probably a safer practice to to assign the note to the seller simultaneously with the acquisition of the replacement property or after the replacement property has been acquired. Some qualified intermediaries will provide a form they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
For more information about 1031 exchanges, contact Accruit by calling (800) 237-1031 or emailing info@accruit.com today! 

In a sale of real estate, it’s common for the seller, the taxpayer in a 1031 exchange, to receive money down from the buyer in the sale and to carry a note for the additional sum due. The taxpayer facilitates financing for the buyer in this way to make the transaction happen. Sometimes this arrangement is entered into because both parties wish to close, but the buyer’s conventional financing is taking more time than expected. If the buyer can procure the financing from the institutional lender before the taxpayer closes on their replacement property, the note may simply be substituted for cash from the buyer’s loan. Regardless of the circumstance for seller financing, without further steps, the taxpayer’s use of the value of the note toward the purchase of the replacement property will be taxable.
In a non-exchange context there is no problem in the taxpayer carrying back a note from the buyer. However, under the exchange regulations, the actual or constructive receipt of the note would run afoul of qualified intermediary.
The taxpayer and qualified intermediary should also be careful in timing when the note is assigned to the taxpayer. There is a natural tendency to pass the note simultaneously upon receipt by the qualified intermediary of the equivalent amount of cash. After all, the client is putting into the exchange account the exact same value that is being taken out. However, because the regulations prohibit the taxpayer from the “right to receive money or other property” during the pendency of the exchange transaction, it is probably a safer practice to to assign the note to the seller simultaneously with the acquisition of the replacement property or after the replacement property has been acquired. Some qualified intermediaries will provide a form they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
For more information about 1031 exchanges, contact Accruit by calling (800) 237-1031 or emailing info@accruit.com today! 

In a sale of real estate, it’s common for the seller, the taxpayer in a 1031 exchange, to receive money down from the buyer in the sale and to carry a note for the additional sum due. The taxpayer facilitates financing for the buyer in this way to make the transaction happen. Sometimes this arrangement is entered into because both parties wish to close, but the buyer’s conventional financing is taking more time than expected. If the buyer can procure the financing from the institutional lender before the taxpayer closes on their replacement property, the note may simply be substituted for cash from the buyer’s loan. Regardless of the circumstance for seller financing, without further steps, the taxpayer’s use of the value of the note toward the purchase of the replacement property will be taxable.
In a non-exchange context there is no problem in the taxpayer carrying back a note from the buyer. However, under the exchange regulations, the actual or constructive receipt of the note would run afoul of qualified intermediary.
The taxpayer and qualified intermediary should also be careful in timing when the note is assigned to the taxpayer. There is a natural tendency to pass the note simultaneously upon receipt by the qualified intermediary of the equivalent amount of cash. After all, the client is putting into the exchange account the exact same value that is being taken out. However, because the regulations prohibit the taxpayer from the “right to receive money or other property” during the pendency of the exchange transaction, it is probably a safer practice to to assign the note to the seller simultaneously with the acquisition of the replacement property or after the replacement property has been acquired. Some qualified intermediaries will provide a form they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
For more information about 1031 exchanges, contact Accruit by calling (800) 237-1031 or emailing info@accruit.com today!