1031 EXCHANGE
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| The 1031 Exchange The 1031 exchange allows an investor to trade real estate held for investment for other investment real estate and incur no immediate tax liabilities. Under Section 1031, if you exchange business or investment property solely for business or investment property of a like kind, no gain or loss is recognized until the newly acquired property is sold. Keep in mind that Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, evidence of indebtedness and certain other assets. Fully Tax-Free Exchange For a tax-free 1031 exchange transaction to occur, certain conditions must be met: Property must be "like kind" - Properties are like kind if they are of the same nature or character, even if they differ in grade or quality. Property must be related to business or investment - Exchanged property must be held for productive business or investment use and traded for the same use. New property must be identified within 45 days - The new property that you intend to receive in exchange for your existing property must be identified in writing within 45 days of the first transfer. Transfer must take place within the 180-day window - The like-kind property must be received by one of these two dates (whichever comes sooner): within the 180-day period following the property transfer, or by your tax return due date (including extensions) for the year in which you transferred the property. Let's look at an example: Example - A Tax-Free 1031 Exchange Nate purchased an investment land lot four years ago for $50,000. Today, the fair market value of the land lot is $150,000. Nate is ready to sell the lot, but he is not particularly enthused about paying taxes on the $100,000 gain. He finds a seller, Jill, who has a $150,000 rental property for sale that interests Nate. If Nate and Jill agree to trade their properties, the exchange will be tax free under Section 1031 exchange rules. As an added bonus, Nate may even be able to claim depreciation on the building. Partially Tax-Free Exchange To be completely tax free, the exchange must be solely an exchange of like-kind property. In a perfect world, finding a property with the same trade value is ideal for the 1031 exchange. However, it's difficult to find an equal exchange and, in many cases, one party ends up kicking in some extra cash to make the deal fair. This additional property or cash received is known as "boot", and this gain is taxed up to the amount of the boot received. When there are mortgages on both properties, the mortgages are netted. The party giving up the larger mortgage and getting the smaller mortgage treats the excess as boot. |
WWW.KNOWLEDGEFINANCIAL.COM
What is a 1031 Exchange?
An IRS Code 1031, which has become a popular real estate investment
Strategy, that allows owners to defer capital gains taxes by selling a
property, identifying a like-kind replacement property within 45 days, and
closing escrow on the new property within 180 days. A property owner, that
does not do a 1031 Exchange, is taxed on any gain realized by the sale of
the property. In 1031 Exchange, some or all of the tax on the transaction is
deferred until some time and action in the future, usually until the newly
acquired property is sold without doing a 1031 Exchange. (Presently taxes
can be deferred indefinitely doing successive 1031 Exchanges by
relinquishing one and acquiring another).
What is Revenue Procedure 2002-22?
This is the new guidance from the IRS which makes it clearer and outlines
how to structure a fractional-deed Tenants In Common (TIC) co-ownership of
property by individuals who want to do a tax deferred 1031 Exchange.
What is "like-kind" property?
'Like-kind' can be all types of Real Estate and can be exchanged for other
Real property, such as vacant land for an apartment building or a rental
home for a retail center as long as the guidelines are properly followed.
Can one do a 1031 Exchange with foreign property?
Presently only property located within the fifty United States and the U.S.
Virgin Islands are eligible for a 1031 Exchange.
Can a (TIC) fractionalized co-ownership be considered for 1031
Exchange?
With the Proc. 2002-22 by the IRS in the year 2002, a Tenant In Common (TIC)
fractionalized co-ownership interest is considered like-kind and qualifies
for Section 1031 consideration. The investor's interest in the property must
have been held by the owner for the productive use in trade or business, or
for investment, but not personal property. (Please see “FAQ – Tenant In
Common (TIC) )
What are the identification and closing periods?
The identification and closing periods are very strict time lines and
limitations that have to be adhered to precisely. Once the property that an
owner is selling has closed, s/he has 45 days from the date of sale to
identify like-kind replacement property/s, which terminate at midnight on the
45th day following the transfer date. The property/s that has been identified,
the owners have 180 days to close, which include Saturdays, Sundays or
holidays.
You can select and identify several (or multiple) properties, and even
change your mind about your choices during the period. However, you may
ONLY acquire a property that was identified during the 45-day period, not
after.
What does an Exchange Accommodator (Qualified Intermediary)
do?
The Qualified Intermediary and the Exchange Accommodator is the same
thing. They act as a “safe harbor” approved by the IRS to hold the exchange
proceeds and to make sure that the structure of the exchange is properly
observed. Note that there are many persons who are Disqualified by the IRS
to act as Accommodator: your attorney, your accountant, your broker,
investment banker, or a relative cannot perform the Exchange for you.
The Accommodator does more than just hold the money to avoid
“constructive receipt”, they actually create the mechanism for a trade. In
the case of a Reverse or Improvement Exchange, they provide a safe
harbor for the title of the replacement property to be “parked” until the
exchange is completed.
When will I have to pay taxes on the gains?
The taxes on the gains are ‘recognized’ when the owner disposes of the
Replacement Property and does not get into another 1031 Deferred
Exchange and that becomes a fully taxable transaction. If the owner
continues to execute 1031 Exchanges, the gain may never be recognized
and there are no time or number limits as to when and how many 1031
Exchanges one can do.
Who is eligible to do 1031 Exchanges?
Individuals, Corporations, LLC’s, and Partnerships are eligible to do 1031
Exchanges, providing it is ‘like-kind exchanges. Stocks and partnership
interests are specifically excluded from being considered like-kind to real
estate.
Disclaimer:
Information on this site is only for informational
purposes only. The information provided through
our website is not a substitute for legal and other
professional advice where the facts and
circumstances warrant. If any user requires legal
advice or other professional assistance, each such
user should always consult his or her own legal or
other professional advisors and discuss the facts
and circumstances that apply to the user
An IRS Code 1031, which has become a popular real estate investment
Strategy, that allows owners to defer capital gains taxes by selling a
property, identifying a like-kind replacement property within 45 days, and
closing escrow on the new property within 180 days. A property owner, that
does not do a 1031 Exchange, is taxed on any gain realized by the sale of
the property. In 1031 Exchange, some or all of the tax on the transaction is
deferred until some time and action in the future, usually until the newly
acquired property is sold without doing a 1031 Exchange. (Presently taxes
can be deferred indefinitely doing successive 1031 Exchanges by
relinquishing one and acquiring another).
What is Revenue Procedure 2002-22?
This is the new guidance from the IRS which makes it clearer and outlines
how to structure a fractional-deed Tenants In Common (TIC) co-ownership of
property by individuals who want to do a tax deferred 1031 Exchange.
What is "like-kind" property?
'Like-kind' can be all types of Real Estate and can be exchanged for other
Real property, such as vacant land for an apartment building or a rental
home for a retail center as long as the guidelines are properly followed.
Can one do a 1031 Exchange with foreign property?
Presently only property located within the fifty United States and the U.S.
Virgin Islands are eligible for a 1031 Exchange.
Can a (TIC) fractionalized co-ownership be considered for 1031
Exchange?
With the Proc. 2002-22 by the IRS in the year 2002, a Tenant In Common (TIC)
fractionalized co-ownership interest is considered like-kind and qualifies
for Section 1031 consideration. The investor's interest in the property must
have been held by the owner for the productive use in trade or business, or
for investment, but not personal property. (Please see “FAQ – Tenant In
Common (TIC) )
What are the identification and closing periods?
The identification and closing periods are very strict time lines and
limitations that have to be adhered to precisely. Once the property that an
owner is selling has closed, s/he has 45 days from the date of sale to
identify like-kind replacement property/s, which terminate at midnight on the
45th day following the transfer date. The property/s that has been identified,
the owners have 180 days to close, which include Saturdays, Sundays or
holidays.
You can select and identify several (or multiple) properties, and even
change your mind about your choices during the period. However, you may
ONLY acquire a property that was identified during the 45-day period, not
after.
What does an Exchange Accommodator (Qualified Intermediary)
do?
The Qualified Intermediary and the Exchange Accommodator is the same
thing. They act as a “safe harbor” approved by the IRS to hold the exchange
proceeds and to make sure that the structure of the exchange is properly
observed. Note that there are many persons who are Disqualified by the IRS
to act as Accommodator: your attorney, your accountant, your broker,
investment banker, or a relative cannot perform the Exchange for you.
The Accommodator does more than just hold the money to avoid
“constructive receipt”, they actually create the mechanism for a trade. In
the case of a Reverse or Improvement Exchange, they provide a safe
harbor for the title of the replacement property to be “parked” until the
exchange is completed.
When will I have to pay taxes on the gains?
The taxes on the gains are ‘recognized’ when the owner disposes of the
Replacement Property and does not get into another 1031 Deferred
Exchange and that becomes a fully taxable transaction. If the owner
continues to execute 1031 Exchanges, the gain may never be recognized
and there are no time or number limits as to when and how many 1031
Exchanges one can do.
Who is eligible to do 1031 Exchanges?
Individuals, Corporations, LLC’s, and Partnerships are eligible to do 1031
Exchanges, providing it is ‘like-kind exchanges. Stocks and partnership
interests are specifically excluded from being considered like-kind to real
estate.
Disclaimer:
Information on this site is only for informational
purposes only. The information provided through
our website is not a substitute for legal and other
professional advice where the facts and
circumstances warrant. If any user requires legal
advice or other professional assistance, each such
user should always consult his or her own legal or
other professional advisors and discuss the facts
and circumstances that apply to the user
1031 Exchange, Tax Saving Tips for Real Estate Investors and landlords. 1031 Like-Kind Exchanges and Multi-Family Investments: A Very Profitable
Combination!
"How To Explode Your Wealth With 1031 Tax-Deferred Exchanges"
Combination!
"How To Explode Your Wealth With 1031 Tax-Deferred Exchanges"
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ADVANTAGE AND DISADVANTAGE OF REAL ESTATE
Tax Advantages -
Your rental income may be tax free if you do not receive net cash flow after expenses are
deducted. This means that your mortgage is being paid down and you own more of the total
value of the property (rather than just
controlling it), but you do not pay taxes on the money that is doing this for you. In addition to
this, you can also pull out tax-free money by refinancing your loan if the property
appreciates and the interest rates have
fallen. Lastly, you may be able to avoid paying taxes on the sale of a rental property if you
sell it and reinvest the money in another property (called switching or tax-free exchange).
Disadvantages of Rental Real Estate
For every upside, there is a downside, and rental real estate is no different. Rental real
estate may expose you to the following:
Liability - What happens if a stair breaks under your tenant's feet? With the increase in
frivolous lawsuits and the unquantifiable nature of "emotional distress", liability can be a
scary thing. Providing someone with shelter
in return for money puts you and the tenant in a relationship where both parties bear
responsibility. You have to be certain that the property you are renting out meets all
government codes.
Unexpected Expenses - What do you do when you pull up the basement carpet and find a
crack that opens onto the abyss? It is impossible to prepare for every expense related to
owning rental property, so there are
bound to be some unexpected ones. Things such as boilers, plumbing and fixtures often
need to be replaced and are not prohibitively expensive. However, faulty wiring, bad
foundations, compromised roofing and the
like can be very expensive to repair. If you can't find a way to pay for repairs, you will be
left without a tenant and with the grim prospect of selling the property at a significant
discount. Also, as building codes evolve over
time, lead paint, asbestos, cedar roofing tiles and other materials that passed inspection in
the past may be reevaluated to your disadvantage.
Bad Tenants - No one wants to have to use a collection agency to collect overdue rent.
Unfortunately, almost every landlord has a story that involves police cars escorting his or
her tenant out of the property - erasing all
hopes of getting the five months' worth of overdue rent. Bad tenants can also increase your
unexpected expenses and even hit you with a lawsuit.
Vacancy - No money coming in means that you have to make the payments out of your own
pocket. If you have an emergency fund for the rental property, you will be able to survive
long vacancies with little trouble. If
you don't have one, you may find yourself scrambling to pay the rent to the harshest
landlord of all - the bank.
Tips
Minimizing the disadvantages of owning real estate is actually quite simple. While you
won't be able to eliminate the pitfalls completely, following these guidelines will take the
teeth out of their bite.
Keep Your Expectations Reasonable - Have the goal of positive cash flow, but don't expect
to be purchasing a new yacht at year's end. If you keep your expectations in check, you
won't be tempted to jack up the rent
and push out good tenants.
Find a Balance between Earnings and Effort - Are you "hands on", or should you work with
a property management firm? Current income doesn't seem so great if you are putting in
another full-time shift working on your
rental property. There are property management firms that will run your rental property for a
percentage of the rental income.
Know the Rules - Federal and state laws outline your responsibilities and liabilities, so you
can't claim ignorance when something happens. You will have to do some reading;
nevertheless, it is better to spend 20 hours in
the library than in the courtroom.
Have the Property Inspected - One of the best ways to avoid unexpected expenses is to
have the property inspected by a professional before you buy it.
Make Sure Your Leases Are Legal - If you make a mistake on the lease, you will find it
more difficult to litigate if a tenant violates the terms.
Take the Time To Call References and Run Credit Checks - Too many landlords rush to fill a
vacancy rather than taking the time to make sure the prospective tenant is a better option
than an empty property. If you have
time, you may want to drive by a prospective tenant's current living space - that is what
your property will probably look like when that tenant lives there.
Join the Landlords' Association in Your Area - Joining an association will provide you with
a wealth of experience as well as sample leases, copies of laws and regulations, and lists
of decent lawyers, contractors and
inspectors. Some associations may even allow you to join before you buy a rental property.
Make Friends with a Lawyer, a Tax Professional and a Banker - If you find that you like
owning rental properties, a network including these three professionals will be essential if
you want to increase your holdings.
Make Sure You Have the Right Kind of Insurance - After learning the rules, you will need to
buy insurance to cover your liability. You will need the help of an insurance professional to
select the proper package for your
type of rental property.
Create an Emergency Fund - This is essentially money earmarked for unexpected expenses
that are not covered by insurance. There is no set amount for an emergency fund, some say
20% of the value of the property,
but anything is better than nothing. If you are getting current income from a property, you
can pool that money into an emergency fund.
Conclusion
Investing in a rental property can be an excellent decision if you go into it informed.
Consider these words from Donald Trump: "It's tangible. It's solid. It's beautiful. It's artistic
… I just love real estate
Tax Advantages -
Your rental income may be tax free if you do not receive net cash flow after expenses are
deducted. This means that your mortgage is being paid down and you own more of the total
value of the property (rather than just
controlling it), but you do not pay taxes on the money that is doing this for you. In addition to
this, you can also pull out tax-free money by refinancing your loan if the property
appreciates and the interest rates have
fallen. Lastly, you may be able to avoid paying taxes on the sale of a rental property if you
sell it and reinvest the money in another property (called switching or tax-free exchange).
Disadvantages of Rental Real Estate
For every upside, there is a downside, and rental real estate is no different. Rental real
estate may expose you to the following:
Liability - What happens if a stair breaks under your tenant's feet? With the increase in
frivolous lawsuits and the unquantifiable nature of "emotional distress", liability can be a
scary thing. Providing someone with shelter
in return for money puts you and the tenant in a relationship where both parties bear
responsibility. You have to be certain that the property you are renting out meets all
government codes.
Unexpected Expenses - What do you do when you pull up the basement carpet and find a
crack that opens onto the abyss? It is impossible to prepare for every expense related to
owning rental property, so there are
bound to be some unexpected ones. Things such as boilers, plumbing and fixtures often
need to be replaced and are not prohibitively expensive. However, faulty wiring, bad
foundations, compromised roofing and the
like can be very expensive to repair. If you can't find a way to pay for repairs, you will be
left without a tenant and with the grim prospect of selling the property at a significant
discount. Also, as building codes evolve over
time, lead paint, asbestos, cedar roofing tiles and other materials that passed inspection in
the past may be reevaluated to your disadvantage.
Bad Tenants - No one wants to have to use a collection agency to collect overdue rent.
Unfortunately, almost every landlord has a story that involves police cars escorting his or
her tenant out of the property - erasing all
hopes of getting the five months' worth of overdue rent. Bad tenants can also increase your
unexpected expenses and even hit you with a lawsuit.
Vacancy - No money coming in means that you have to make the payments out of your own
pocket. If you have an emergency fund for the rental property, you will be able to survive
long vacancies with little trouble. If
you don't have one, you may find yourself scrambling to pay the rent to the harshest
landlord of all - the bank.
Tips
Minimizing the disadvantages of owning real estate is actually quite simple. While you
won't be able to eliminate the pitfalls completely, following these guidelines will take the
teeth out of their bite.
Keep Your Expectations Reasonable - Have the goal of positive cash flow, but don't expect
to be purchasing a new yacht at year's end. If you keep your expectations in check, you
won't be tempted to jack up the rent
and push out good tenants.
Find a Balance between Earnings and Effort - Are you "hands on", or should you work with
a property management firm? Current income doesn't seem so great if you are putting in
another full-time shift working on your
rental property. There are property management firms that will run your rental property for a
percentage of the rental income.
Know the Rules - Federal and state laws outline your responsibilities and liabilities, so you
can't claim ignorance when something happens. You will have to do some reading;
nevertheless, it is better to spend 20 hours in
the library than in the courtroom.
Have the Property Inspected - One of the best ways to avoid unexpected expenses is to
have the property inspected by a professional before you buy it.
Make Sure Your Leases Are Legal - If you make a mistake on the lease, you will find it
more difficult to litigate if a tenant violates the terms.
Take the Time To Call References and Run Credit Checks - Too many landlords rush to fill a
vacancy rather than taking the time to make sure the prospective tenant is a better option
than an empty property. If you have
time, you may want to drive by a prospective tenant's current living space - that is what
your property will probably look like when that tenant lives there.
Join the Landlords' Association in Your Area - Joining an association will provide you with
a wealth of experience as well as sample leases, copies of laws and regulations, and lists
of decent lawyers, contractors and
inspectors. Some associations may even allow you to join before you buy a rental property.
Make Friends with a Lawyer, a Tax Professional and a Banker - If you find that you like
owning rental properties, a network including these three professionals will be essential if
you want to increase your holdings.
Make Sure You Have the Right Kind of Insurance - After learning the rules, you will need to
buy insurance to cover your liability. You will need the help of an insurance professional to
select the proper package for your
type of rental property.
Create an Emergency Fund - This is essentially money earmarked for unexpected expenses
that are not covered by insurance. There is no set amount for an emergency fund, some say
20% of the value of the property,
but anything is better than nothing. If you are getting current income from a property, you
can pool that money into an emergency fund.
Conclusion
Investing in a rental property can be an excellent decision if you go into it informed.
Consider these words from Donald Trump: "It's tangible. It's solid. It's beautiful. It's artistic
… I just love real estate
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Financial News, Business News, Market News.-- and 11 Great things to Do With
Your Money in Financial Crisis, in Difficult Economic Time!
Banking and Finance; Top online banking service and solution for everyone
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technology
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Personal Finance, Us Financial System
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| Let's consider another example: Example - A Partially Tax-Free 1031 Exchange Nate owns a building with a fair market value of $200,000, with an adjusted basis of $100,000 (no mortgage remaining). He exchanges it for Jill's building, which has a fair market value of $150,000 (no mortgage), plus $50,000 in cash. What is Nate's gain? In this example, Nate receives cash, or boot, of $50,000 in addition to the new property, so he has an actual gain of $50,000 on the exchange. Rules and Regulations The 1031 exchange will not allow you to avoid capital gains taxes in all cases. For example, the exchange of U.S. real estate for real estate in another country will not qualify for tax-free exchange status. Furthermore, trades involving property used for personal purposes - such as exchanging a personal residence for a rental property - will not receive the tax-free treatment afforded under Section 1031. Finally, if either party subsequently disposes of the exchanged property within a two-year period, the exchanged property will become subject to tax. For tax reporting purposes, the basis of the old property is carried over to the new property. This is important to understand in a tax-free exchange, because the taxes due are not forgiven, they are simply postponed until the sale of the new property. In order to record the Section 1031 exchange with the Internal Revenue Service, you'll need to file Form 8824 with your tax return for the year of the like-kind exchange. A tax-free exchange is not recommended if the transaction will result in a loss, since losses cannot be deducted in tax-free exchanges. In these cases, you might be better off selling the asset and using the proceeds to buy the new property. (To learn more, read Selling Losing Securities For A Tax Advantage.) Selling a Principal Residence Most of this article is related to the treatment of real estate property used for business or investment, but what about personal residences? If you sell (or exchange) your principal residence at a gain, up to $250,000 of the gain may be excluded from income ($500,000 if married and filing jointly), provided that you owned and occupied it as a principal residence for an aggregate of at least two years in the five-year period ending on the date of sale. There is a two-year waiting period if you claimed another sale within the previous two years. (For more on selling a personal residence, see Is it true that you can sell your home and not pay capital gains tax?) Conclusion The increased number of real estate sales since the start of this decade has allowed many people to receive favorable tax treatment from the federal government. As a result, however, a tremendous amount of tax revenue has been lost; new regulations that would make some serious changes to the tax advantages currently available on real estate gains are already circulating in Congress. If you're thinking about selling your real estate assets, it might be a good idea to take advantage of Section 1031 before Congress can make any changes. |
CAPITAL GAIN TO IRA = A self-directed Roth IRA
gives you the ability to have invest in real estate and have all the
profits stay within the IRA. Money from your IRA's can be invested
in real estate and when you sell your real estate long-term
investment you can just return the capital gain back to your IRA
account.
gives you the ability to have invest in real estate and have all the
profits stay within the IRA. Money from your IRA's can be invested
in real estate and when you sell your real estate long-term
investment you can just return the capital gain back to your IRA
account.
Capital Gains Reduction through Installment Sale:
The installment sale allows the taxpayer to sell a property and
defer portions of the gain to future years. While this is not a
complete deferral, it can be useful.
Installment Sale: Is when a real estate seller sells with owner
financing then the seller pays taxes based on the payment receive
The installment sale allows the taxpayer to sell a property and
defer portions of the gain to future years. While this is not a
complete deferral, it can be useful.
Installment Sale: Is when a real estate seller sells with owner
financing then the seller pays taxes based on the payment receive
Saving on capital gain taxes for long-term
investment.
The amount of taxes uncle Sam takes as capital gain does not
have to be large in fact, the long-term capital gains rate is the
lowest it has been for decades.
Capital gains are taxed two ways, the long-term and the
short-term.
Long-term means the asset was owned for more than one-year
and short-term was for less than one year.
Short term capital gains are considered and treated just like
income
investment.
The amount of taxes uncle Sam takes as capital gain does not
have to be large in fact, the long-term capital gains rate is the
lowest it has been for decades.
Capital gains are taxed two ways, the long-term and the
short-term.
Long-term means the asset was owned for more than one-year
and short-term was for less than one year.
Short term capital gains are considered and treated just like
income
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REAL ESTATE TAX SAVING FOR INVESTORS AND
LANDLORDS
Real estate investments have been on the rise for
while and on the fall for while. In the up and down
market the investors are increasingly faced with real-
estate specific tax issues. With appreciated stock, you
can sell your shares over a number of years to spread
out the capital gains. Unfortunately, investment real
estate is not granted the same luxury; the entire gain
amount must be claimed on your taxes in the year the
property is sold. In this article, we explain one way to
avoid taxes when selling real estate: the Internal
Revenue Code Section 1031 exchange.

Dealing with Appreciated Real Estate
One downside of real estate investments is that they
are not liquid assets like stocks or bonds. Even in
today's booming market, it can sometimes take more
than a year to settle a real estate deal. If you've
decided to sell your real estate and get out while the
getting is good, you may be faced with a hefty tax bill
on your gain. You could mitigate this tax burden by
controlling the year in which title and possession
passes and, therefore, the year in which you report the
profit or loss on the transaction. In other words, you
can set the transfer of ownership to a year in which
you expect to have a lower tax burden. However, if your
income is steady and paying tax on the gain looks
inevitable, you may want to consider using the IRC
Section 1031 exchange. (For further reading, see A
Long-Term Mindset Meets Dreaded Capital Gains
Tax.)
LANDLORDS
Real estate investments have been on the rise for
while and on the fall for while. In the up and down
market the investors are increasingly faced with real-
estate specific tax issues. With appreciated stock, you
can sell your shares over a number of years to spread
out the capital gains. Unfortunately, investment real
estate is not granted the same luxury; the entire gain
amount must be claimed on your taxes in the year the
property is sold. In this article, we explain one way to
avoid taxes when selling real estate: the Internal
Revenue Code Section 1031 exchange.

Dealing with Appreciated Real Estate
One downside of real estate investments is that they
are not liquid assets like stocks or bonds. Even in
today's booming market, it can sometimes take more
than a year to settle a real estate deal. If you've
decided to sell your real estate and get out while the
getting is good, you may be faced with a hefty tax bill
on your gain. You could mitigate this tax burden by
controlling the year in which title and possession
passes and, therefore, the year in which you report the
profit or loss on the transaction. In other words, you
can set the transfer of ownership to a year in which
you expect to have a lower tax burden. However, if your
income is steady and paying tax on the gain looks
inevitable, you may want to consider using the IRC
Section 1031 exchange. (For further reading, see A
Long-Term Mindset Meets Dreaded Capital Gains
Tax.)
The 1031 Exchange
The 1031 exchange allows an investor to trade real
estate held for investment for other investment real
estate and incur no immediate tax liabilities. Under
Section 1031, if you exchange business or investment
property solely for business or investment property of a
like kind, no gain or loss is recognized until the newly
acquired property is sold. Keep in mind that Section 1031
does not apply to exchanges of inventory, stocks, bonds,
notes, evidence of indebtedness and certain other
assets.
Fully Tax-Free Exchange
For a tax-free 1031 exchange transaction to occur, certain
conditions must be met:
Property must be "like kind" - Properties are like kind if
they are of the same nature or character, even if they
differ in grade or quality.
Property must be related to business or investment -
Exchanged property must be held for productive
business or investment use and traded for the same use.
New property must be identified within 45 days - The new
property that you intend to receive in exchange for your
existing property must be identified in writing within 45
days of the first transfer.
Transfer must take place within the 180-day window -
The like-kind property must be received by one of these
two dates (whichever comes sooner): within the 180-day
period following the property transfer, or by your tax return
due date (including extensions) for the year in which you
transferred the property.
The 1031 exchange allows an investor to trade real
estate held for investment for other investment real
estate and incur no immediate tax liabilities. Under
Section 1031, if you exchange business or investment
property solely for business or investment property of a
like kind, no gain or loss is recognized until the newly
acquired property is sold. Keep in mind that Section 1031
does not apply to exchanges of inventory, stocks, bonds,
notes, evidence of indebtedness and certain other
assets.
Fully Tax-Free Exchange
For a tax-free 1031 exchange transaction to occur, certain
conditions must be met:
Property must be "like kind" - Properties are like kind if
they are of the same nature or character, even if they
differ in grade or quality.
Property must be related to business or investment -
Exchanged property must be held for productive
business or investment use and traded for the same use.
New property must be identified within 45 days - The new
property that you intend to receive in exchange for your
existing property must be identified in writing within 45
days of the first transfer.
Transfer must take place within the 180-day window -
The like-kind property must be received by one of these
two dates (whichever comes sooner): within the 180-day
period following the property transfer, or by your tax return
due date (including extensions) for the year in which you
transferred the property.
A 1031 exchange allows you defer your
taxes as long as you put the money into
another property. This means you have
more money to use as a down payment
to buy an even bigger property, and more
monthly spendable income.
1031 exchanges are more flexible than
many people realize. For instance, you
can do a "multi-property exchange",
where you sell a bunch of small
properties and buy a single big one.
taxes as long as you put the money into
another property. This means you have
more money to use as a down payment
to buy an even bigger property, and more
monthly spendable income.
1031 exchanges are more flexible than
many people realize. For instance, you
can do a "multi-property exchange",
where you sell a bunch of small
properties and buy a single big one.
LONG-TERM CAPITAL GAINS
As an investor in real estate, you need to know exactly what the
tax policies are so that you can make the most profit from your
investment. Learning how to calculate your long-term capital
gains will reduce any unseen costs during the process of your
real estate sale. You probably already realize that your capital
gains taxes are calculated by taking into consideration all of
the costs that you accrued during the purchase, along with any
improvements that you made, and then subtracting the
expenses from your pay-out upon sale. What you may not have
recognized is that capital gains are taxed differently if your
investment qualifies as a short-term investment as opposed to
a long-term investment.
For IRS taxing purposes, a short-term investment is the label
applied to investments with a holding period of less than one
year. The capital gains tax rates applied to these short-term
investments equal normal income tax rates. On the other
hand, real estate investments with a holding period of longer
than one year qualify as long-term investments. Long-term
investments receive a discounted tax rate which, depending on
your marginal tax bracket, is either 5 percent or 15 percent.
To figure out the holding period for your investment for the
purpose of determining short- or long-term capital gains taxes,
use the date you bought the property and the date you sold the
property. Keep in mind that a holding period of exactly one year
or less is considered a short-term investment. Savvy investors
that plan their investment activities to reduce their taxes as
much as possible may delay the sale of a profitable
investment until that investment qualifies for the reduced tax
rate granted to long-term capital gains.
Long-term capital gains can also be assigned different tax
rates depending on the type of asset at hand. Real estate
investments have their own policies and exemptions, as an
example of one type of long-term investment. So when you
plan your real estate investing strategy, make sure that you are
knowledgeable about the taxes you will be required to pay and
how to keep as much money as possible. When in doubt,
consult a tax professional to help you minimize the amount of
capital gains taxes required. This has the potential of saving
you a lot of money.
As an investor in real estate, you need to know exactly what the
tax policies are so that you can make the most profit from your
investment. Learning how to calculate your long-term capital
gains will reduce any unseen costs during the process of your
real estate sale. You probably already realize that your capital
gains taxes are calculated by taking into consideration all of
the costs that you accrued during the purchase, along with any
improvements that you made, and then subtracting the
expenses from your pay-out upon sale. What you may not have
recognized is that capital gains are taxed differently if your
investment qualifies as a short-term investment as opposed to
a long-term investment.
For IRS taxing purposes, a short-term investment is the label
applied to investments with a holding period of less than one
year. The capital gains tax rates applied to these short-term
investments equal normal income tax rates. On the other
hand, real estate investments with a holding period of longer
than one year qualify as long-term investments. Long-term
investments receive a discounted tax rate which, depending on
your marginal tax bracket, is either 5 percent or 15 percent.
To figure out the holding period for your investment for the
purpose of determining short- or long-term capital gains taxes,
use the date you bought the property and the date you sold the
property. Keep in mind that a holding period of exactly one year
or less is considered a short-term investment. Savvy investors
that plan their investment activities to reduce their taxes as
much as possible may delay the sale of a profitable
investment until that investment qualifies for the reduced tax
rate granted to long-term capital gains.
Long-term capital gains can also be assigned different tax
rates depending on the type of asset at hand. Real estate
investments have their own policies and exemptions, as an
example of one type of long-term investment. So when you
plan your real estate investing strategy, make sure that you are
knowledgeable about the taxes you will be required to pay and
how to keep as much money as possible. When in doubt,
consult a tax professional to help you minimize the amount of
capital gains taxes required. This has the potential of saving
you a lot of money.
REAL ESTATE SECRETS ON CAPITAL GAINS!
You may feel uncertain about what a capital gains
tax is and how real estate capital gains taxes are
figured. Once you know more about how these
taxes affect your bottom line, you will feel more
confident in making the best decision for your
investments. Think about real estate capital gains
taxes in terms of buying and selling stock. Once you
have sold a stock, you then must pay taxes on the
difference between the amount you paid for the
stock and the amount you received from the sale of
the stock. When you sell real estate, the same
principle applies, although there are some
circumstances that change the application of the tax.
To decide what your capital gain is, the first step is
to write down the purchase price of the home. The
term “purchase price” refers to the actual sale price
of the home, regardless of the amount that you
contributed at the closing table. You can then find
out what your adjustments will be based on the
cost of the purchase, the cost of the sale, and the
cost of improvements.
When you determine the total cost of the purchase,
you should also include any attorney or transfer
fees you incurred during the purchase, as well as
the cost for any inspections. Be aware that you can’t
count any points that you may have paid on your
mortgage when you figure the cost of the purchase.
The cost of the sale includes the inspection and
attorney’s fees, as well as the real estate
commission and any money you invested in
making improvements to your home to increase the
value before you sold it.
Any improvements such as the addition of a pool or
deck, or any extra rooms that have been added,
should be totaled. Exceptions here would be
anything you repaired or replaced that already
existed within the property before. Installing a new
air-conditioning unit, for example, would not be able
to be counted toward the cost of improvements.
The next step in figuring your capital gain is to add
the total of all three types of adjustments to the
purchase price. You will then need to subtract the
newly totaled costs from the amount that you
receive for your home when it sells. This is your
capital gain.
There are some exemptions that you are eligible for
if you have lived in the home as your main dwelling
for two out of the previous five years, have not sold
or traded another home for the two years prior, and
meet criteria termed by the IRS as “unforeseen
circumstances.” These circumstances include
losing your job, getting a divorce, or experiencing a
family medical emergency. Calculating your real
estate capital gains is relatively easy, but if you have
any questions, you may want to seek the advice of a
real estate tax professional or attorney.
You may feel uncertain about what a capital gains
tax is and how real estate capital gains taxes are
figured. Once you know more about how these
taxes affect your bottom line, you will feel more
confident in making the best decision for your
investments. Think about real estate capital gains
taxes in terms of buying and selling stock. Once you
have sold a stock, you then must pay taxes on the
difference between the amount you paid for the
stock and the amount you received from the sale of
the stock. When you sell real estate, the same
principle applies, although there are some
circumstances that change the application of the tax.
To decide what your capital gain is, the first step is
to write down the purchase price of the home. The
term “purchase price” refers to the actual sale price
of the home, regardless of the amount that you
contributed at the closing table. You can then find
out what your adjustments will be based on the
cost of the purchase, the cost of the sale, and the
cost of improvements.
When you determine the total cost of the purchase,
you should also include any attorney or transfer
fees you incurred during the purchase, as well as
the cost for any inspections. Be aware that you can’t
count any points that you may have paid on your
mortgage when you figure the cost of the purchase.
The cost of the sale includes the inspection and
attorney’s fees, as well as the real estate
commission and any money you invested in
making improvements to your home to increase the
value before you sold it.
Any improvements such as the addition of a pool or
deck, or any extra rooms that have been added,
should be totaled. Exceptions here would be
anything you repaired or replaced that already
existed within the property before. Installing a new
air-conditioning unit, for example, would not be able
to be counted toward the cost of improvements.
The next step in figuring your capital gain is to add
the total of all three types of adjustments to the
purchase price. You will then need to subtract the
newly totaled costs from the amount that you
receive for your home when it sells. This is your
capital gain.
There are some exemptions that you are eligible for
if you have lived in the home as your main dwelling
for two out of the previous five years, have not sold
or traded another home for the two years prior, and
meet criteria termed by the IRS as “unforeseen
circumstances.” These circumstances include
losing your job, getting a divorce, or experiencing a
family medical emergency. Calculating your real
estate capital gains is relatively easy, but if you have
any questions, you may want to seek the advice of a
real estate tax professional or attorney.
THE LATEST CAPITAL GAINS TAX RATES
Knowing more about capital gains tax rates is not as complicated as you
may think. In reality, the guidelines are really quite easy. Capital gains tax
rates are paid by people (individuals and trustees), who have made a profit
on their investments for the year. Companies, in this case, pay a “corporate
tax” instead of the capital gains tax.
Anybody who has a capital gain should report it on their tax return. Any
amount owed the Internal Revenue Service will be payable by April 15 of
the subsequent year.
In the United States, people pay tax on the total net gain of their capital
investments and capital gains are usually taxed at a more favorable rate
than regular income. This is intended to provide incentive for investors to
make capital investments and to help finance economic activity. The taxed
rate in turn depends on the investor’s tax bracket.
Short-term capital gains are taxed at the investor’s normal income tax rate,
and are described as investments held for a year or less. Long-term capital
gains include investments held over one year and are taxed at a lesser rate
than the short-term gains.
In 2003, the capital gains tax rate was decreased to 15 percent and then to
5 percent for people in the lowest two income brackets. These 5 percent tax
rates will be in effect through 2011; if the tax cut is not extended at that
time, the rate will return to rate of 2003, which was 20 percent.
The 15 percent tax rate on capital gains, formerly scheduled to terminate
in 2008, was extended through 2010 as a result of the Tax Reconciliation
Act, which passed in 2006.
This Tax Act carries the following additional implications:
In 2008, 2009, and 2010, the tax rate on entitled dividends and continuous
capital gains will be zero percent for people in the 10 percent and 15
percent income tax brackets.
After 2010, dividends will be taxed at the taxpayer's normal income tax
rate, regardless of tax bracket.
After 2010, the continuous capital gains tax rate will go to 20 percent
(currently at 10 percent for taxpayers in the 15 percent tax bracket).
After 2010, the 18 percent capital gains tax rate on investments held at
least five years (8 percent for taxpayers within the 15 percent tax bracket)
will be reinstated.
So these favorable capital gains tax rates will remain in effect for a while
yet, which is good news for investors!
Knowing more about capital gains tax rates is not as complicated as you
may think. In reality, the guidelines are really quite easy. Capital gains tax
rates are paid by people (individuals and trustees), who have made a profit
on their investments for the year. Companies, in this case, pay a “corporate
tax” instead of the capital gains tax.
Anybody who has a capital gain should report it on their tax return. Any
amount owed the Internal Revenue Service will be payable by April 15 of
the subsequent year.
In the United States, people pay tax on the total net gain of their capital
investments and capital gains are usually taxed at a more favorable rate
than regular income. This is intended to provide incentive for investors to
make capital investments and to help finance economic activity. The taxed
rate in turn depends on the investor’s tax bracket.
Short-term capital gains are taxed at the investor’s normal income tax rate,
and are described as investments held for a year or less. Long-term capital
gains include investments held over one year and are taxed at a lesser rate
than the short-term gains.
In 2003, the capital gains tax rate was decreased to 15 percent and then to
5 percent for people in the lowest two income brackets. These 5 percent tax
rates will be in effect through 2011; if the tax cut is not extended at that
time, the rate will return to rate of 2003, which was 20 percent.
The 15 percent tax rate on capital gains, formerly scheduled to terminate
in 2008, was extended through 2010 as a result of the Tax Reconciliation
Act, which passed in 2006.
This Tax Act carries the following additional implications:
In 2008, 2009, and 2010, the tax rate on entitled dividends and continuous
capital gains will be zero percent for people in the 10 percent and 15
percent income tax brackets.
After 2010, dividends will be taxed at the taxpayer's normal income tax
rate, regardless of tax bracket.
After 2010, the continuous capital gains tax rate will go to 20 percent
(currently at 10 percent for taxpayers in the 15 percent tax bracket).
After 2010, the 18 percent capital gains tax rate on investments held at
least five years (8 percent for taxpayers within the 15 percent tax bracket)
will be reinstated.
So these favorable capital gains tax rates will remain in effect for a while
yet, which is good news for investors!
| Real Estate Assistance Program For Home-Buyers & sellers FREE MONEY: EARN CASH BACK; BUYERS AND SELLERS YOU CAN PUT MONEY BACK IN YOUR POCKET... Earn a cash back bonus. CLICK HERE... When you buy or sell a home through Real Estate Assistance Program With us ... GET BACK UP TO $2,500.00 ------------------------------------------------ ------------ FREE ONLINE AD: COMPLETELY FREE, ABSOLUTELY FREE ADVERTISEMENT ON THREE DIFFERENT WEBSITES; NO FEES, NO CHARGES, NO COSTS TO YOU. .. CLICK HERE ... |
FIVE REASONS TO EXCHANGE
“INVESTORS CAN MEET MANY OBJECTIVES UNDER IRC §1031”
Section 1031 tax deferred exchanges continue to increase in popularity as more investors
nationwide discover the wide range of investment objectives that can be easily met through
exchanging.
I. PRESERVATION OF EQUITY
A properly structured exchange provides real estate investors with the opportunity to defer 100%
of both Federal and State capital gain taxes. This essentially equals an interest-free, no-term
loan on taxes due until the property is sold for cash! Often the capital gain taxes are deferred
indefinitely because many investors continue to exchange from one property to the next,
dramatically increasing the value of their real estate investments with each exchange!
II. LEVERAGE
Many investors exchange from a property where they have a high equity position, or one that is
“free and clear”, into a much more valuable property. A larger property produces more cash flow
and provides greater depreciation benefits, which therefore increase the investors’ return on their
investment.
III. DIVERSIFICATION
Exchangers have a number of opportunities for diversification through exchanges. One option is
to diversify into another geographic region, such as exchanging out of one apartment building
in Denver, Colorado, for two additional apartments – one in Los Angeles, California, and the
other in Dallas, Texas. Another diversification alternative is acquiring a different property type,
such as exchanging from several residential units to a small retail strip center.
IV. MANAGEMENT RELIEF
Some investors accumulate several single-family rentals over the years. The on-going
maintenance and management of what can be a far-reaching group of properties can be
lessened by exchanging these properties for one property better suited to on-site maintenance
and management. Exchanging into a single apartment complex with a resident manager is a
good example of this strategy.
V. ESTATE PLANNING
Sometimes a number of family members inherit one large property and disagree about what
they want to do with it. Some want to continue holding the investment and some desire to sell it
immediately for cash. By exchanging from one large property into several smaller properties, an
investor can designate that, after their death, each heir will receive a different property, which
they can either hold or sell.
TM 1031 Exchange and Asset Preservation, Inc. do not give tax or legal advice. The
information contained herein should not be relied upon as a substitute for tax or legal advice
obtained from a competent tax and/or legal advisor.
(c) Copyright 2005 Stewart Title Guaranty Company
“INVESTORS CAN MEET MANY OBJECTIVES UNDER IRC §1031”
Section 1031 tax deferred exchanges continue to increase in popularity as more investors
nationwide discover the wide range of investment objectives that can be easily met through
exchanging.
I. PRESERVATION OF EQUITY
A properly structured exchange provides real estate investors with the opportunity to defer 100%
of both Federal and State capital gain taxes. This essentially equals an interest-free, no-term
loan on taxes due until the property is sold for cash! Often the capital gain taxes are deferred
indefinitely because many investors continue to exchange from one property to the next,
dramatically increasing the value of their real estate investments with each exchange!
II. LEVERAGE
Many investors exchange from a property where they have a high equity position, or one that is
“free and clear”, into a much more valuable property. A larger property produces more cash flow
and provides greater depreciation benefits, which therefore increase the investors’ return on their
investment.
III. DIVERSIFICATION
Exchangers have a number of opportunities for diversification through exchanges. One option is
to diversify into another geographic region, such as exchanging out of one apartment building
in Denver, Colorado, for two additional apartments – one in Los Angeles, California, and the
other in Dallas, Texas. Another diversification alternative is acquiring a different property type,
such as exchanging from several residential units to a small retail strip center.
IV. MANAGEMENT RELIEF
Some investors accumulate several single-family rentals over the years. The on-going
maintenance and management of what can be a far-reaching group of properties can be
lessened by exchanging these properties for one property better suited to on-site maintenance
and management. Exchanging into a single apartment complex with a resident manager is a
good example of this strategy.
V. ESTATE PLANNING
Sometimes a number of family members inherit one large property and disagree about what
they want to do with it. Some want to continue holding the investment and some desire to sell it
immediately for cash. By exchanging from one large property into several smaller properties, an
investor can designate that, after their death, each heir will receive a different property, which
they can either hold or sell.
TM 1031 Exchange and Asset Preservation, Inc. do not give tax or legal advice. The
information contained herein should not be relied upon as a substitute for tax or legal advice
obtained from a competent tax and/or legal advisor.
(c) Copyright 2005 Stewart Title Guaranty Company
1033 Exchange
Section 1033 of the IRS tax code covers various forms of involuntary conversion of taxpayer
property. Conversions occurs when property is destroyed, stolen, condemned or disposed of
under threat of condemnation and the taxpayer receives other property or money in payment
(e.g., insurance proceeds or a condemnation award).
Depending on the type of property and type of conversion different rules apply. Below is a
summary of different involuntary conversions. The text below is for general informational
purposes only and is not meant as legal or tax advice. Facts and circumstance can vary and it
is important that the taxpayer consult their tax professional.
The election to defer all or part of the gain realized in an involuntary conversion is made by
excluding the gain from the gross income on the tax return for the year in which it is realized
using Form 4797.
Taxpayer mush provide details of the involuntary conversion, details on the replacement
property purchased or notification that they plan on purchasing a replacement property
(length of time to purchase qualified replacement property varies, see below).
Replacement Property can be other property similar or related in service or use to the
converted property or an 80% control of a corporation owning the replacement property. An
actual purchase must take place. Title must have passed, an enforceable contract of purchase
is not sufficient.
In situations involving real property used in a trade or business (other than inventory or property
held primarily for sale) or as an investment the replacement property does not need to be
similar or related in service or use to the converted property but needs to be "like-kind."
The "like-kind" test is more liberal than the "similar use" standard. The "like-kind" standard is
not applicable to the acquisition of 80% control of a corporation or the involuntary conversion
by fire, storm or other casualty.
Replacement Period
Purchase of replacement property must be completed within a period of time that begins on
the actual date of the destruction, condemnation or the date on which the threat or
imminence of condemnation or requisition begins, whichever is earlier.
Generally the replacement period ends two years after the close of the first tax year in which
any part of the gain on the conversion is realized. For business or investment real property
(other than inventory) the replacement period ends three years, rather than two years after the
close of the first tax year in which any part of the gain is realized. This three year period does
not apply to property involuntarily converted through destruction (casualty) or theft.
Source of Funds
Funds from any source can be used to purchase the replacement property. The purchase price
of replacement property could include mortgages. If Principal Residence is involuntarily
converted any gain may be excluded up to $250,000/$500,000 (single/married).
If gain is above these thresholds taxpayer may defer recognizing the excess by purchasing a
qualified replacement property. The sale of land within a reasonable time following the
destruction of a principal residence can quality as part of the involuntary conversion.
The replacement period for principal residence in a declared disaster area is four years. For
property located in the Hurricane Katrina disaster area the replacement period is five years if
substantially all of the use of the replacement property is in the disaster area.
Property lost in Presidentially Declared Disasters that is compulsorily or involuntarily converted
need not be replaced with "similar or related" property. In such circumstances no gain is
recognized by the receipt of insurance proceed for unscheduled personal property that was
part of the personal residence.
Livestock
Destruction or loss of livestock can be classified as an involuntary conversion. The generally
applicable rule of two years for purchasing replacement property is extended to four years
when weather related conditions result in the area being eligible for federal assistance.
If it is not feasible because of weather related, soil or other environmental contaminations to
replace the involuntarily converted property other property including real estate used in
farming can qualify as replacement property. Real property only qualifies if the conversion was
due to soil or other environmental contaminations.
The taxpayer can request an extension of the replacement period. The extension is filed with
the IRS district director where the return was filed. There currently is no IRS form to file for
extensions.
Comparing Sections 1033 and 1031
A 1033 Exchange does not require the use of a qualified intermediary (you can take the
proceeds of the sale as long as you reinvest them according to the rules within 2 to 3 years)
while 1031 Exchanges require the funds be placed with a neutral third party. Also the taxpayer
can complete the exchange by making improvements in property already owned unlike a
1031 exchange that requires that a new property be purchased.
Taxpayers should carefully review their situation with their tax/legal advisor in both the
planning and execution phase of doing a 1033 exchange. As with all major investment
decisions it is important that you consult with your tax and/or legal counsel prior to making a
final decision. Above information provided for general informational purposes only and is not
meant as legal or accounting advice.
Section 1033 of the IRS tax code covers various forms of involuntary conversion of taxpayer
property. Conversions occurs when property is destroyed, stolen, condemned or disposed of
under threat of condemnation and the taxpayer receives other property or money in payment
(e.g., insurance proceeds or a condemnation award).
Depending on the type of property and type of conversion different rules apply. Below is a
summary of different involuntary conversions. The text below is for general informational
purposes only and is not meant as legal or tax advice. Facts and circumstance can vary and it
is important that the taxpayer consult their tax professional.
The election to defer all or part of the gain realized in an involuntary conversion is made by
excluding the gain from the gross income on the tax return for the year in which it is realized
using Form 4797.
Taxpayer mush provide details of the involuntary conversion, details on the replacement
property purchased or notification that they plan on purchasing a replacement property
(length of time to purchase qualified replacement property varies, see below).
Replacement Property can be other property similar or related in service or use to the
converted property or an 80% control of a corporation owning the replacement property. An
actual purchase must take place. Title must have passed, an enforceable contract of purchase
is not sufficient.
In situations involving real property used in a trade or business (other than inventory or property
held primarily for sale) or as an investment the replacement property does not need to be
similar or related in service or use to the converted property but needs to be "like-kind."
The "like-kind" test is more liberal than the "similar use" standard. The "like-kind" standard is
not applicable to the acquisition of 80% control of a corporation or the involuntary conversion
by fire, storm or other casualty.
Replacement Period
Purchase of replacement property must be completed within a period of time that begins on
the actual date of the destruction, condemnation or the date on which the threat or
imminence of condemnation or requisition begins, whichever is earlier.
Generally the replacement period ends two years after the close of the first tax year in which
any part of the gain on the conversion is realized. For business or investment real property
(other than inventory) the replacement period ends three years, rather than two years after the
close of the first tax year in which any part of the gain is realized. This three year period does
not apply to property involuntarily converted through destruction (casualty) or theft.
Source of Funds
Funds from any source can be used to purchase the replacement property. The purchase price
of replacement property could include mortgages. If Principal Residence is involuntarily
converted any gain may be excluded up to $250,000/$500,000 (single/married).
If gain is above these thresholds taxpayer may defer recognizing the excess by purchasing a
qualified replacement property. The sale of land within a reasonable time following the
destruction of a principal residence can quality as part of the involuntary conversion.
The replacement period for principal residence in a declared disaster area is four years. For
property located in the Hurricane Katrina disaster area the replacement period is five years if
substantially all of the use of the replacement property is in the disaster area.
Property lost in Presidentially Declared Disasters that is compulsorily or involuntarily converted
need not be replaced with "similar or related" property. In such circumstances no gain is
recognized by the receipt of insurance proceed for unscheduled personal property that was
part of the personal residence.
Livestock
Destruction or loss of livestock can be classified as an involuntary conversion. The generally
applicable rule of two years for purchasing replacement property is extended to four years
when weather related conditions result in the area being eligible for federal assistance.
If it is not feasible because of weather related, soil or other environmental contaminations to
replace the involuntarily converted property other property including real estate used in
farming can qualify as replacement property. Real property only qualifies if the conversion was
due to soil or other environmental contaminations.
The taxpayer can request an extension of the replacement period. The extension is filed with
the IRS district director where the return was filed. There currently is no IRS form to file for
extensions.
Comparing Sections 1033 and 1031
A 1033 Exchange does not require the use of a qualified intermediary (you can take the
proceeds of the sale as long as you reinvest them according to the rules within 2 to 3 years)
while 1031 Exchanges require the funds be placed with a neutral third party. Also the taxpayer
can complete the exchange by making improvements in property already owned unlike a
1031 exchange that requires that a new property be purchased.
Taxpayers should carefully review their situation with their tax/legal advisor in both the
planning and execution phase of doing a 1033 exchange. As with all major investment
decisions it is important that you consult with your tax and/or legal counsel prior to making a
final decision. Above information provided for general informational purposes only and is not
meant as legal or accounting advice.
1033 Tax Deferred Exchange Frequently Asked Questions (1033 Exchange FAQs)
The following 1033 tax-deferred exchange frequently asked questions (FAQs) have been compiled by our
team of tax-deferred exchange experts to provide our clients and their advisors with answers to the most
commonly raised questions regarding Section 1033 of the Internal Revenue Code.
Exeter 1031 Exchange Services, LLC provides these tax-deferred exchange frequently asked questions as
a courtesy to our clients and their advisors. While every effort has been made to provide correct, accurate
and useful information, Exeter 1031 Exchange Services, LLC does not warrant or guarantee the
information and/or opinions in any way, nor provide endorsements for any of the authors contained
herein. Please read our legal terms and conditions.
What is an “Involuntary conversion”?
How do I elect to complete a 1033 exchange?
What requirements must I meet to defer my tax liability on the involuntary conversion of property under
Section 1033?
What does “Similar or related in service or use” mean?
I lost my home in a recent disaster. Does Section 1033 apply to my loss?
Didn't Find Your Question?
Do you have a 1033 tax-deferred exchange question and can't seem to locate an answer? Ask the team
of 1033 tax-deferred exchange specialists at Exeter 1031 Exchange Services, LLC and we WILL get you
an answer. Email your questions or comments to Exeter 1031 Exchange Services, LLC at ASK Exeter, or
post your question on our Exeter Discussion Board, or contact one of our national branch office locations
for assistance.
Call Exeter 24/7
Our Senior 1031 Exchange Specialists are also available 24 hours a day, 7 days a week, 365 days a year
to answer your 1033 tax-deferred exchange questions. Simply click here to schedule an immediate call
back from one of our Senior 1031 Exchange Advisors.
--------------------------------------------------------------------------------
Here are the Answers to your 1033 Exchange Frequently Asked Questions
What is an “Involuntary conversion”?
Under Section 1033, an involuntary conversion is defined as a destruction or loss of the property through
casualty, theft or condemnation action pursuant to government powers of eminent domain, and the
resulting compensation from such destruction or condemnation. [IRC Section 1033(a)].
Even though the sale and/or compensation for the property were essentially forced on the taxpayer, the
taxpayer is still liable for any capital gain tax liability on the compensation received. However, if the
property is subject to an “involuntary conversion”, the taxpayer has the ability to defer the payment of the
depreciation recapture and capital gain taxes on the involuntary conversion under the non-recognition
provisions of Section 1033. [IRC Section 1033].
How Do I elect to complete a 1033 exchange?
No gain or loss is required to be reported on the tax return for the year of sale or loss. The taxpayer should
however speak which their CPA to make sure the details relevant to the conversion and/or loss are
reported the year in which they occurred and to notify the CPA that the taxpayer intends to complete a
1033 exchange, as if for whatever reason the exchange can not be completed, then it will be necessary
for the CPA to file an amended return reporting the gain. [Regs. Section 1.1033(a)- 2(c)(2)].
What requirements must I meet to defer my tax liability on the involuntary conversion of property under
Section 1033?
If it is clear that the manner in which the taxpayer lost the property was in fact a qualified “involuntary
conversion”, then there are two real qualifications the taxpayer must meet to be eligible for non-
recognition of gain under Section 1033.
First, Section 1033 only allows non-recognition of gain where the replacement property is purchased
within the applicable time guidelines. In cases of casualty or theft, the property must be replaced within
a period of two years after the end of the first taxable year in which any part of the gain is realized, in the
case of eminent domain, the property must be replaced within three years after the end of the first
taxable year in which any part of the gain is realized. [IRC Section 1033].
Second, Section 1033 requires that the property lost to involuntary conversion be replaced with like-kind
property. This is similar to the like-kind provision under Section 1031, but no where near as liberal. In
order to be deemed like-kind under Section 1033, any proceeds received must be reinvested in property
that is “similar or related in service or use” to the property lost, and hence is a much stricter standard than
the like-kind standard used under IRC Section 1031 [IRC Section 1033(a)(2)].
What does “Similar or related in service or use” mean?
For purposes of Section 1033, the restriction means that the end use of the new property must be
substantially similar to the end use of the old property. So for example, a taxpayer that lost timberland
property used for logging could not replace that property with a parking lot and qualify for non-
recognition under Section 1033.
Property that has been condemned enjoys more liberal treatment, and instead of being judged by the
“similar or related in use” standard, is determined by expansive definition of like-kind similar to that of
Section 1031. This means for the purposes of condemned property, the replacement property will be
deemed to be like-kind and the requirements met so long as both the condemned and the replacement
property are characterized as real property at law. [IRC Section 1033(g)(1)].
If the property that has been involuntary converted is a leasehold interest, then the lessee's use of the
property is not determinative for purposes of the like-kind requirement under Section 1033. Rather, the
determination of whether or not the replacement property constitutes like-kind property will be based on
the similarity of the lessor’s interest in the property, in such characteristics as the management and tenant
requirements. [See Rev. Rul. 71- 41, 1971-1 CB 223].
I lost my home in a recent disaster. Does Section 1033 apply to my loss?
Yes. In fact, there are special rules that apply if you lost your home in a Presidentially declared natural
disaster. In cases where the converted property is in a declared disaster zone, the rules relating to
application of Section 121 (see “Frequently Asked Questions under Section 121”) are substantially more
liberal.
On property destroyed/lost in a Presidentially declared disaster, Section 1033 provides that any proceeds
received for the residence or its contents are treated as received for the conversion of a single item of
property, and any replacement property similar or related in service or use to the residence or the
contents will qualify as replacement property for the purposes of Section 1033.
Further, if the taxpayer has lost property in a Presidentally declared disaster, as opposed to a ordinary
casualty), Section 1033 gives the taxpayer a two year extension on the replacement period, so the
taxpayer has a total of four (4) years in which to replace the lost property. [IRC Section 1033(h)].
The following 1033 tax-deferred exchange frequently asked questions (FAQs) have been compiled by our
team of tax-deferred exchange experts to provide our clients and their advisors with answers to the most
commonly raised questions regarding Section 1033 of the Internal Revenue Code.
Exeter 1031 Exchange Services, LLC provides these tax-deferred exchange frequently asked questions as
a courtesy to our clients and their advisors. While every effort has been made to provide correct, accurate
and useful information, Exeter 1031 Exchange Services, LLC does not warrant or guarantee the
information and/or opinions in any way, nor provide endorsements for any of the authors contained
herein. Please read our legal terms and conditions.
What is an “Involuntary conversion”?
How do I elect to complete a 1033 exchange?
What requirements must I meet to defer my tax liability on the involuntary conversion of property under
Section 1033?
What does “Similar or related in service or use” mean?
I lost my home in a recent disaster. Does Section 1033 apply to my loss?
Didn't Find Your Question?
Do you have a 1033 tax-deferred exchange question and can't seem to locate an answer? Ask the team
of 1033 tax-deferred exchange specialists at Exeter 1031 Exchange Services, LLC and we WILL get you
an answer. Email your questions or comments to Exeter 1031 Exchange Services, LLC at ASK Exeter, or
post your question on our Exeter Discussion Board, or contact one of our national branch office locations
for assistance.
Call Exeter 24/7
Our Senior 1031 Exchange Specialists are also available 24 hours a day, 7 days a week, 365 days a year
to answer your 1033 tax-deferred exchange questions. Simply click here to schedule an immediate call
back from one of our Senior 1031 Exchange Advisors.
--------------------------------------------------------------------------------
Here are the Answers to your 1033 Exchange Frequently Asked Questions
What is an “Involuntary conversion”?
Under Section 1033, an involuntary conversion is defined as a destruction or loss of the property through
casualty, theft or condemnation action pursuant to government powers of eminent domain, and the
resulting compensation from such destruction or condemnation. [IRC Section 1033(a)].
Even though the sale and/or compensation for the property were essentially forced on the taxpayer, the
taxpayer is still liable for any capital gain tax liability on the compensation received. However, if the
property is subject to an “involuntary conversion”, the taxpayer has the ability to defer the payment of the
depreciation recapture and capital gain taxes on the involuntary conversion under the non-recognition
provisions of Section 1033. [IRC Section 1033].
How Do I elect to complete a 1033 exchange?
No gain or loss is required to be reported on the tax return for the year of sale or loss. The taxpayer should
however speak which their CPA to make sure the details relevant to the conversion and/or loss are
reported the year in which they occurred and to notify the CPA that the taxpayer intends to complete a
1033 exchange, as if for whatever reason the exchange can not be completed, then it will be necessary
for the CPA to file an amended return reporting the gain. [Regs. Section 1.1033(a)- 2(c)(2)].
What requirements must I meet to defer my tax liability on the involuntary conversion of property under
Section 1033?
If it is clear that the manner in which the taxpayer lost the property was in fact a qualified “involuntary
conversion”, then there are two real qualifications the taxpayer must meet to be eligible for non-
recognition of gain under Section 1033.
First, Section 1033 only allows non-recognition of gain where the replacement property is purchased
within the applicable time guidelines. In cases of casualty or theft, the property must be replaced within
a period of two years after the end of the first taxable year in which any part of the gain is realized, in the
case of eminent domain, the property must be replaced within three years after the end of the first
taxable year in which any part of the gain is realized. [IRC Section 1033].
Second, Section 1033 requires that the property lost to involuntary conversion be replaced with like-kind
property. This is similar to the like-kind provision under Section 1031, but no where near as liberal. In
order to be deemed like-kind under Section 1033, any proceeds received must be reinvested in property
that is “similar or related in service or use” to the property lost, and hence is a much stricter standard than
the like-kind standard used under IRC Section 1031 [IRC Section 1033(a)(2)].
What does “Similar or related in service or use” mean?
For purposes of Section 1033, the restriction means that the end use of the new property must be
substantially similar to the end use of the old property. So for example, a taxpayer that lost timberland
property used for logging could not replace that property with a parking lot and qualify for non-
recognition under Section 1033.
Property that has been condemned enjoys more liberal treatment, and instead of being judged by the
“similar or related in use” standard, is determined by expansive definition of like-kind similar to that of
Section 1031. This means for the purposes of condemned property, the replacement property will be
deemed to be like-kind and the requirements met so long as both the condemned and the replacement
property are characterized as real property at law. [IRC Section 1033(g)(1)].
If the property that has been involuntary converted is a leasehold interest, then the lessee's use of the
property is not determinative for purposes of the like-kind requirement under Section 1033. Rather, the
determination of whether or not the replacement property constitutes like-kind property will be based on
the similarity of the lessor’s interest in the property, in such characteristics as the management and tenant
requirements. [See Rev. Rul. 71- 41, 1971-1 CB 223].
I lost my home in a recent disaster. Does Section 1033 apply to my loss?
Yes. In fact, there are special rules that apply if you lost your home in a Presidentially declared natural
disaster. In cases where the converted property is in a declared disaster zone, the rules relating to
application of Section 121 (see “Frequently Asked Questions under Section 121”) are substantially more
liberal.
On property destroyed/lost in a Presidentially declared disaster, Section 1033 provides that any proceeds
received for the residence or its contents are treated as received for the conversion of a single item of
property, and any replacement property similar or related in service or use to the residence or the
contents will qualify as replacement property for the purposes of Section 1033.
Further, if the taxpayer has lost property in a Presidentally declared disaster, as opposed to a ordinary
casualty), Section 1033 gives the taxpayer a two year extension on the replacement period, so the
taxpayer has a total of four (4) years in which to replace the lost property. [IRC Section 1033(h)].