1031 Exchange Disaster Relief Extensions Do Not Apply for COVID-19

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IRS Provides Clarity On the Impact of Notice 2020-23 for Taxpayers Engaged In a 1031 Exchange

On April 9, 2020, the IRS Issued Notice 2020-23, an update to Notice 2020-18, “Additional Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic.”

Taxpayers who were currently engaged in a 1031 exchange with a 45-Day Exchange Period or 180-Day Exchange Period deadline between April 1 and July 15, 2020, were given an automatic extension to July 15.

Unfortunately, this notice did not provide clarity for those taxpayers engaged in an exchange with deadlines that fell outside of that window. Many were left wondering whether they were entitled to any relief under Section 17 of Rev. Proc. 2018-58, which would have potentially given them a 120-day extension. The ambiguity of the notice created a great deal of confusion and debate over whether or not Section 17 applied.

1031 Exchange Extensions – Disaster Relief Does Not Apply

On August 11, 2020, the IRS finally published clarification that the 120-day extensions available for typical disaster relief DO NOT APPLY to the COVID-19 disaster relief granted in Notice 2020-23. The IRS confirmed that the sole relief granted for like-kind exchanges was the stated limitation in Notice 2020-23, that only the §1031 deadline that fell between April 1, 2020, and July 14, 2020, could be extended to July 15, 2020.

Click here for more information on this recent publication.

While this is certainly not good news for taxpayers who were hoping to take advantage of the extensions afforded to taxpayers under Section 17 of Rev. Proc. 2018-58, we now have a clear answer.

Please contact Midland 1031 if you have any concerns or questions regarding your exchange.

1031 EXCHANGING YOUR BUSINESS PROPERTY

1031 exchange your business

Internal Revenue Code Section 1031 allows business owners to exchange their real estate for productive use in a trade or business for other like-kind investment or business-use property. No gain or loss will be recognized. Done correctly, business owners can defer their capital gains taxes, depreciation recapture taxes, and alternative minimum taxes (if applicable).

Why would a business owner want to exchange out of his or her current business-use property?

RELOCATION OR EXPANSION/DOWNSIZE OF THE BUSINESS

  • Find a better location to serve clients
  • Expand the number of locations (sell one location and buy multiple locations)
  • Relocate company Headquarters to an updated facility
  • Consolidate locations or buy a smaller building that reduces space and cost

GENERATE MORE INCOME

EXIT STRATEGY FOR BUSINESS OWNER

  • Retiring business owners can sell their real estate for a rental home or condo. Use the acquired property for a vacation rental. After a few years have passed, the owner can convert the property into their residence or a second home.
  • Reduce management obligations. Exchange into more easily managed properties. These properties can include land, triple-net investments, or Delaware Statutory Trusts (DSTs).
  • Use a 1031 exchange as an estate planning tool. Any 1031 exchange property transfers to your heirs upon your passing. The property transfers on a stepped-up basis. The IRS forgives all capital gains and depreciation taxes.

For questions or more information about 1031 Exchanges for business-use property, please contact Midland at 239-333-1031 or schedule a free consultation by clicking here.

TITLE CLOSING AGENT’S RESPONSIBILITY IN A 1031 EXCHANGE

Title Closing Agent's Responsibility In a 1031 Exchange

A 1031 Exchange allows taxpayers to defer taxes when selling investment property. The first step in completing an exchange is establishing a Qualified Intermediary (QI). You must do this before closing. It is essential to know the steps and responsibilities in completing 1031 exchanges.

It is safe to say that no two real estate transactions are the same. If you add a 1031 Exchange into the mix, it can get confusing. Below, we discuss who is responsible for ensuring the exchange’s success.

Here is a list of the QI, Closing Agent, and Taxpayer’s responsibilities in the exchange process:

MIDLAND 1031 (QI) RESPONSIBILITIES IN 1031 EXCHANGES

  • Prepares the necessary exchange documentation for the relinquished and replacement property.
  • Prepares 1031 exchange closing instructions for each transaction.
  • Coordinates with the closing agent/attorney on behalf of the 1031 exchange.
  • Escrows the exchange proceeds.

CLOSING AGENT RESPONSIBILITIES

  • Provides the QI with a copy of the deed, Schedule A, and executed contract.
  • Prepares the closing settlement statement to reflect the QI’s instructions.
  • Sends the proceeds to the QI. Proceeds are not disbursed to the taxpayer unless arranged before closing.
  • Signs the Notice of Assignment of Contract provided by the QI. Provides a copy of the contract to the buyer of the relinquished property. Or, provides a copy to the seller of the replacement property.

CLIENT/TAXPAYER RESPONSIBILITIES

  • Consults with a tax advisor, discussing the potential real estate sale tax liability.
  • Enlists the services of a QI before closing.
  • Reviews and signs all documentation for the exchange before the completion of closing.

Often, sellers don’t realize that a 1031 exchange is an option and need a QI to facilitate the exchange. The title agent can step in and become the hero for the client! Title agents realize that once a client closes on the property, they missed the tax-saving 1031 exchange opportunity. The title agent also knows that a QI is required for this exchange. Title agents go the extra mile to refer their clients to Midland. Midland makes the 1031 exchange process quick and easy. We offer personalized service, security, and expertise for every client.

For questions or more information regarding 1031 exchanges, contact Midland 1031 today. Call us at 239-333-1031 or click here to schedule a free consultation.

REVERSE 1031 EXCHANGES & HOW INVESTORS USE THEM

Reverse 1031 Exchange for Real Estate Investors

In today’s market, investors want the ability to buy profitable real estate assets promptly. If using a 1031 exchange, you must sell your current investment property before purchasing the replacement property. But, what if you find a new investment property before you sell the old? You don’t want to miss your chance at scooping up a great deal. Enter the reverse 1031 exchange.

In a typical 1031 exchange, you sell your current property first. Then, you have 180 days to reinvest the profits from the sale into a new property. This exchange defers capital gains and other taxes. The sale of the relinquished property occurs before the purchase of the new property.

A reverse 1031 exchange allows the opposite to occur. Working within specific guidelines, investors can acquire replacement property before selling their current property. This transaction also allows deferment of all capital gains and other taxes, similar to a standard 1031 exchange.

How does a reverse 1031 exchange work?

Reverse exchanges allow investors to purchase a replacement property before selling the soon-to-be relinquished property. You cannot simultaneously hold title to both the new property and the property you want to sell. There are several IRS rules your transaction must comply with to start and complete a successful reverse exchange. It is crucial that you be well-versed in IRC Section 1031 that governs all exchange transactions.

With that said, below are a few pointers regarding reverse exchanges. These provide you an idea as to whether these investing techniques are right for you:

There are two types of reverse exchanges.

  1. An “exchange last” transaction allows an Exchange Accommodation Titleholder (EAT) to take title to the newly purchased property.
  2. The “exchange first” option enables the EAT to take the sale property title before purchasing the new property.

Either transaction requires an EAT to park one of the properties. Parking one of the properties prevents the investor from holding the title to both properties simultaneously. The IRS formed guidelines for reverse exchanges within their “safe harbor” rule defined in Revenue Procedure 2000-37. In either type of reverse 1031 exchange, a 180-day deadline applies for the transaction.

Rules for reverse exchanges

  • All parties involved must receive notification that the sale/purchase of the investment property is part of a reverse 1031 exchange.
  • You must use a qualified intermediary (QI) such as Midland before purchasing the replacement property. The QI will ensure the new property is titled correctly.
  • The QI establishes an LLC, which takes title to either the new property or the soon-to-be-relinquished property. Note: the LLC is the EAT.
  • In “exchange last” transactions, the EAT takes title to the replacement property at closing. The “exchange first” allows the EAT to take title to the nearing relinquished property before the investor purchases the new property.
  • The EAT owns the parked property and is considered the property owner for tax purposes. However, the EAT does not have the advantages or obligations of owning the property.
  • The investor pays all expenses for that property and collects all income produced until the reverse 1031 exchange is complete.

There are additional requirements for each type of reverse exchange other than the 180-day rule. So, before you do any 1031 exchange, check with your lender, tax advisor, and a qualified intermediary. Reverse 1031 exchanges are incredibly beneficial but are also somewhat complex. To reap the benefits, you must ensure compliance with all rules and regulations.

For additional and more detailed information about reverse 1031 exchanges, call Midland today at 239-333-1031. Or, click here to schedule a free consultation. Our Certified Exchange Specialists® (CES®) explain the process and guide you through every exchange step.

MY 1031 REVERSE EXCHANGE IS COMPLETE, NOW WHAT?

1031 Exchange an Investor's Secret Weapon

You found the perfect replacement investment property. After purchasing it, you successfully sold your relinquished property by setting up a Reverse 1031 Exchange. You have deferred your capital gains and depreciation recapture for 2019. However, a new LLC owns your replacement property. You established the LLC expressly for the reverse 1031 exchange. How can you transfer the replacement property into your name as the original exchange taxpayer?

First, it is essential to follow through and complete the rest of the process. This way, you own the replacement property. Once you complete your reverse exchange, your QI will forward you an assignment document. The assignment document assigns the LLC’s interest from the exchange accommodation titleholder (EAT) to you (the exchange taxpayer). The EAT and you will execute the assignment. This assignment document also assigns the ownership of the LLC’s property to you, the taxpayer. This assignment makes you the manager of the LLC and the owner of the replacement property.

Simultaneously, submit the appropriate amendment to the state about the LLC formation. Doing this ensures the state records you as the new member/owner/manager of the LLC. Once the LLC formation amendment has been processed and recorded, you can do one of the following:

Next Steps

  1. Keep the property in the name of the LLC and maintain the LLC. Typically, requirements to file an annual report and pay an annual fee exist.
  2. Have a deed prepared that transfers the LLC’s replacement property to you (or the taxpayer entity in place during the exchange).
      • Ensure coverage if you transfer the property from the LLC to your name.
      • Ask your insurance company to ensure coverage will continue under your name.
      • Check with your loan officer (if applicable) to ensure that the transfer of title will not affect your loan terms or conditions.

Finally, once you have verified that the items listed above are not affected by the transfer via deed, your attorney may prepare the deed and record it. The property is now in your name (or the taxpayer entity during the exchange).

Are you just getting started? Complete this form to start a 1031 reverse exchange!

SECTION 199A FINAL REGS – GOOD NEWS FOR 1031 EXCHANGES

Section 199A Final Regulations for 1031 Exchanges

The proposed regs under Section 199A left many taxpayers and advisors scratching their heads as to the impact it would have on those taxpayers looking to complete a tax-deferred exchange under Section 1031.  One interpretation of the proposed regs could have meant that taxpayers would have to choose between the benefit of the 1031 exchange or Section 199A, but they could not enjoy the benefits of both.

The proposed regs would have inadvertently penalized an individual or pass-through entity doing a 1031 exchange based on how it was proposing to define the unadjusted basis immediately after acquisition (UBIA) of the replacement property.

Thankfully, the final regs have provided much-needed clarification that has resulted in a win for those individuals (or pass-through entities) looking to take advantage of the benefits of both the 1031 exchange and section 199A deduction.

Be sure and check out our resources to understand the entire process of 1031 exchanges. We are expert QI’s and can clearly explain the issues involving the 1031 exchange timeline and process that must be followed. Additionally, investors are often interested in learning about the advantages of exchanges beyond the potential for tax savings.

Our team of experts is ready to hear about your situation and answer any questions you have. Contact us today to learn how Midland 1031 can help you.

A 1031 EXCHANGE IS STILL AN INVESTOR’S SECRET WEAPON

1031 Exchange an Investor's Secret Weapon

A 1031 Exchange is the best-kept secret in the tax code. A 1031 exchange allows owners to sell an investment property and buy like-kind property without paying capital gains tax. No other section of the Internal Revenue Code allows owners of capital assets to defer taxes indefinitely.

In simple terms, section 1031 states, “No gain or loss shall be recognized on the exchange of property held for business or investment if such property is exchanged solely for property of like-kind.” If you buy up in value on your next real estate purchase, you will pay no tax. If you buy down in value, there is an opportunity to defer part of the capital gains tax.

THERE ARE MANY ADVANTAGES TO EXCHANGES

  1. Transfer investment property from one location to another. 1031 exchange investors who move can exchange for properties closer to home. An exchange may also be a way to buy a replacement property in a site ideal for future retirement.
  2. Improve current cash returns without sacrificing equity. Retirement or other lifestyle changes may cause an investor to search for an investment property that produces a higher income. Exchanging allows investors to swap for a higher income property without incurring any tax liability.
  3. Gain greater investment appreciation without a large tax bill. Some high-bracket 1031 exchange investors may wish to forego current income to accumulate future equity. Using a tax-deferred exchange makes it possible for investors to “sell high and buy low.” It also allows investors’ profits to continue working for them.
  4. Diversify or consolidate investments. Changes in an investor’s philosophy may necessitate real estate portfolio changes. Exchanging makes it possible for an investor to sell a group of properties and transfer the equity into one larger property. It is also an excellent tool to redistribute investment risk among a variety of property types and locations.
  5. Reduce or eliminate management hassles. Exchange an investment property that requires frequent, time-consuming attention for one requiring less hands-on management or professionally managed.

The like-kind provision is quite broad and includes Land, Rental, and Business property. Exchange any of these properties for the other. We have assembled a few tips for a smooth 1031 exchange here.

SOME TIMELINES MUST BE FOLLOWED WITH A 1031 EXCHANGE.

Identification Period: Within 45 days of selling the relinquished property, the taxpayer must identify suitable replacement properties. This 45-day rule is very strict. There are no extensions if the 45th day falls on a Saturday, Sunday, or legal holiday.

Exchange Period: the taxpayer must receive the replacement property within the “exchange period.” This period ends within the earlier of 180 days after the taxpayer transfers the relinquished property or, the due date for the tax return in the year the relinquished property occurs. This 180-day rule is stringent and not extended if the 180th day should fall on a Saturday, Sunday, or legal holiday.

The rules also require that the taxpayer uses a safe harbor to hold the proceeds while the exchange is in progress. The only practical, safe harbor for taxpayers is a Qualified Intermediary (QI). A QI will assist in two major tasks, preparing your exchange agreement and escrowing your equity proceeds during the exchange.

In conclusion, 1031 Exchanges can be a powerful investment tool. With a little planning between your tax advisor and Qualified Intermediary, the client has a great opportunity to save a substantial amount in capital gain taxes. Please feel free to contact us and see if we can help you save with a 1031 exchange.

A 1031 EXCHANGE VS. OPPORTUNITY ZONE INVESTMENT

1031 Exchange vs Opportunity Zone Investment

What is an Opportunity Zone Investment?

The Tax Cuts and Jobs Act (TCIA) created a new investment called an Opportunity Zone on December 22, 2017. This Act encourages taxpayers to invest capital through private investments. Investing in businesses and real estate in distressed communities spurs economic development. Many real estate investors who have used 1031 exchanges are curious about this new real estate investment possibility. The new regulations have opened up more great options for real estate investors and warrants discussion. Many of our clients have asked us which is the right way to go.

Click here for IRS FAQs for Opportunity Zone Investments.

Should I do a 1031 exchange or an Opportunity Zone investment? 

Below is a chart comparing a 1031 Exchange to investing in an Opportunity Zone. Both are tax-deferred strategies that have different requirements and benefits.

Comparison of a 1031 Exchange to an Opportunity Zone

1031 EXCHANGE OPPORTUNITY ZONE
Only business or investment-use property qualifies Allows for any type of investment that has a capital gain
No time restrictions as long as ‘held for investment’ Investment time restrictions 5, 7, 10 years
Tax-deferral and possible tax exclusion with proper planning Tax-deferral and possible tax exclusion after 10 years
Any US investment or business-use property Limited to Qualified Opportunity Zones
Must purchase within 180 calendar days Must purchase within 180 calendar days
Must purchase replacement asset for equal or greater value to defer capital gains May purchase replacement asset with taxable gain proceeds only
May invest in any real property Must invest through a Qualified Opportunity Fund (OF)

As the comparison indicates, a good deal of the decision comes down to the property’s location and the timeline. We strongly encourage you to discuss both strategies with your tax advisor. In doing this, you will determine which course of action would best suit your needs and objectives.

Contact Midland 1031 today to discuss the details of your situation.

5 BENEFITS OF A 1031 EXCHANGE BESIDES DEFERRING TAXES

5 Benefits of a 1031 Exchange Besides Deferring Taxes

Real estate investors use 1031 exchanges to reap the main benefit of deferring capital gains tax. Successful exchanges allow this deferment. They also allow the deferment of other taxes upon the sale of investment property. These savings can be huge. Bonus: there are five additional benefits of a 1031 exchange other than deferring taxes.

The deferment of taxes helps investors build more capital to invest. The benefits below present an additional attraction and investment flexibility. But, it is critical to understand that certain regulations apply. There are timing rules in which your property must meet. There are also limits on the types of property that qualify for an exchange. Internal Revenue Code section 1031 explains the allowances in great detail.

Savvy investors use 1031s for many reasons besides deferring taxes

5 Benefits of a 1031 Exchange Besides Tax-Deferment infographic
5 Benefits of a 1031 Exchange Besides Tax-Deferment

Besides these five benefits of a 1031 exchange, additional advantages may suit your individual investing goals. Download our free 1031 Exchanges Made Easy Guide or contact Midland 1031 today. We perform hundreds of exchanges every year for our clients. We’ll help you determine if this investing maneuver is the right technique for you.

Midland is a qualified intermediary with Certified Exchange Specialists® on staff. We ensure all elements of your exchange are performed seamlessly and in compliance with IRS regulations.

Defer Capital Gains Tax Using a 1031 When You Sell Investment Property

Defer Capital Gains Tax Using a 1031 Exchange Selling Investment Property

Savvy investors use 1031 exchanges to defer capital gains tax on the sale of investment property. These transactions also provide an avenue to defer depreciation recapture, healthcare, and state taxes. The IRS allows 1031 exchanges, so they are a perfectly legal investment strategy. However, there are specific criteria you must meet to reap the full benefits of an exchange.

HOW 1031 EXCHANGES HELP INVESTORS DEFER CAPITAL GAINS TAX

1031 exchanges are also called “like-kind” exchanges. Successful exchanges entail the sale of one property and the use of those proceeds to purchase new property. Only investment or business-use property qualifies for an exchange.

The IRS requires investors to use a Qualified Intermediary to facilitate exchanges. Investors have 180 days to complete the exchange to defer capital gains taxes. The clock starts ticking the day the original property sells. At that point, investors must identify replacement property within 45 days. To clarify, you can purchase one or more replacement properties with the proceeds from the relinquished property’s sale. However, the new property’s total cost should be equal to or greater than the original parcel’s Net Selling Price (NSP).

Midland 1031 HugeTaxes Info

Investors appreciate the benefits of 1031 exchanges. Investors defer capital gains tax every time they use exchanges to buy and sell real estate. In fact, investors strategically use 1031s to defer those taxes to capture additional capital to reinvest. Another key point? Exchanges are used to acquire real estate in other states and to diversify or consolidate different types of property.

To learn about additional benefits of 1031 exchanges, read this article.

You can also contact Midland 1031 if you have questions. As a qualified intermediary, our firm handles hundreds of 1031 exchanges each year that help our clients defer capital gains taxes and use those saved funds to reinvest. We are always here to help!