1031 Exchange Seller Financing Options

seller financing and 1031 exchanges

When initiating a 1031 exchange, you have seller financing options for the sale of your relinquished property. Instead of going to a bank or traditional financial institution for funds to buy your property, the buyer takes an alternate route and uses seller financing. In this scenario, the exchanger is the bank, and they assign the note and mortgage during the closing to the Qualified Intermediary (QI).

The lender is the QI, in this case, “Midland 1031, LLC.” Any payments are payable to “Midland 1031, LLC” and sent to us for deposit in the escrow account established for the exchange.

However, the loan must be paid before closing on the replacement property to complete the exchange successfully. There are three ways to do this:

The Borrower Pays

With this option, the borrower pays the loan off within the 180 day exchange period and before closing on the replacement property.

This example is exactly what it sounds like. The borrower has full responsibility for paying off their loan in its entirety before the exchange period expires and before closing on their new property.

The Exchanger Buys the Note/Loan from the QI

Here, you, the exchanger, take ownership of the note or loan. You give the owner of the note, for example, “Midland 1031, LLC,” the amount of the loan to buy it. A prepared assignment would show you as the lender. The borrower would then make payments to you.

A Third Party Buys the Note

Like the option above, someone else – who is not the exchanger – purchases the note from the lender and now holds responsibility for it. The third party would give Midland the funds to buy the note, and it would be reassigned to them. The borrower would then make payments to the new lender.

It is up to you to find someone to buy the note. This outside party can be a person or an entity such as a business or bank. Traditionally, disqualified persons can buy the note in this case.

For more information on 1031 exchange seller financing options, please get in touch with Midland 1031 on our website or call us at (239) 333-1031.

Understanding the Five Basic Rules of a 1031 Exchange: Net Selling Price

net selling price

What is Net Selling Price?

Net Selling Price (NSP) is the contract sale price of a property minus some of the standard closing costs. In a 1031 exchange, you must buy property equal to or greater than the NSP of the relinquished property. Doing this defers all capital gains. If an investor does not buy a replacement property of enough value, they incur a tax liability.

What if I Don’t Find Property of Equal or Greater Value?

Maximizing tax deferral requires the rolling forward of the Net Selling Price. But, that doesn’t mean you have to use all the funds. If you would like to roll a part of the NSP into a new property and keep a part for yourself, you can do that! This is a partial 1031 exchange. In this case, proceeds rolled forward into a replacement property are tax-sheltered. Also, the proceeds kept out of the exchange are subject to any liable taxation. The key with a partial exchange is to ensure your qualified intermediary (QI) knows that you would like to keep a certain percentage of the proceeds before closing on the relinquished property.

You may have cash left over after the QI acquires the replacement property. If so, the intermediary will pay it to you at the end of the 180 days. That cash—known as “boot”—will be taxed as partial sales proceeds from the sale of your property. It’s generally taxed as a capital gain.

How Do I Calculate Net Selling Price?

It is important to know the difference between the profit made from the sold property and the NSP. These numbers are commonly misunderstood. It is often mistaken that only the profit rolls into a new property purchase for full tax deferral. For example, you bought an investment property for $100,000 and sell it for $150,000. The NSP is $150,000. NSP is not the $50,000 profit on the property. To defer all taxes, you need to push $150,000 to the replacement property in the exchange.

One of the main ways people get into trouble with this exchange is by failing to consider loans. You must consider mortgage loans or other debt on the relinquished property and any debt on the replacement property. If you don’t receive cash back but your liability goes down, that too will be treated as income to you just like cash. To put this into perspective, suppose you had a mortgage of $1 million on the old property. But, your mortgage on the new property you receive in the exchange is only $900,000. You have $100,000 of gain that is also classified as “boot,” and it will be taxed.

To start exchanging or to learn more about 1031 exchanges, call Midland 1031 at (239) 333-1031 or visit our website.

Sam Tennant, Midland 1031 Associate

Written by Sam Tennant

Midland 1031 Associate, Midland IRA, Inc.

Understanding the Five Basic Rules of a 1031 Exchange: Qualified Intermediary

1031 exchange qualified intermediary

When doing a 1031 exchange, you must have a Qualified Intermediary (QI) involved in the process. A QI is a third-party required by the IRS to conduct the exchange. The QI may not be the taxpayer, a lineal descendant of the exchanger, or an agent of the taxpayer. Taxpayer agents include the realtor, attorney, tax advisor, banker, CPA, and employee. Learn more about the role of the QI here.

CES® Designation

When choosing a QI, a good thing to keep in mind is choosing a QI with a Certified Exchange Specialist® (CES®) on staff. The CES® designation merits knowledge and professionalism in the 1031 exchange industry. Candidates must be knowledgeable of the exchange rules and ethics. They must show competency in performing the critical activities of a QI. An on-staff CES® is a great advantage when deciding which QI should complete your exchange.

The Federation of Exchange Accommodators (FEA) awards the CES® designation. The FEA is an elective ongoing education program. Individuals receiving their CES® designation must pass a comprehensive examination. The examination tests the candidates on 1031 exchange laws and regulations. Candidates must meet specific work experience criteria and stay current with ongoing education. The education requirements are set by the CES® Council.

Why Choose Midland 1031

When you choose a QI that has a CES® on-staff and is an FEA member, you are choosing the best. This QI commits to the code of ethics established by the CES® and FEA. They receive up-to-date information on legislative, tax, and regulatory issues. All could affect your exchange. They are the most knowledgeable exchange intermediaries to assist in your tax-deferred exchange.

Midland 1031 has served clients throughout the US for nearly 30 years. We are a proud member of the FEA and have two CES® on staff. To start your 1031 exchange or to learn more, call us at 239-333-1031. Or, visit the Midland 1031 website here.

Understanding the Five Basic Rules of a 1031 Exchange: Property Type

A 1031 exchange provides taxpayers the opportunity to defer taxes when they sell an investment or business-use property for another business or investment-use property of equal or greater value. These taxes can include capital gains tax, depreciation recapture tax, state taxes, and NIIT tax. Understanding the property type rule of a 1031 exchange is critical to creating a tax shelter. People often think that if they sell a condo or vacant land, they must purchase that same property type to do a 1031 exchange, but this is not the case. If the property you sold had a deed, the property you purchase has a deed, and the property is for investment or business-use only, then it qualifies for an exchange. Some examples of what a real estate investor could exchange include commercial property, rental properties, raw land, and more!

Commercial Properties or Triple Net Leases:

An investor could sell an existing residential rental building and roll the proceeds into a Triple Net Lease (NNN) like a commercial property. The investor, as the landlord, collects the net rental income after the monthly mortgage payment. The advantage of this type of investment is that the tenant pays all operating expenses, property taxes, utilities, insurance premiums, repairs, and maintenance. This type of investment is an attractive option for the investor looking to move away from the management-intensive properties and invest in something that requires less energy.

Rental Properties

An investor could sell vacant land and purchase residential property, such as a house or a condo. With this type of property, an investor can rent the property to provide supplemental income, since you are not allowed to live in it as a primary residence. While the IRS doesn’t have set rules as to how long you should hold a property you plan to exchange, two years has been considered a sufficient amount of time to have shown investment intent. With some planning, you could convert your rental property into your primary residence after those two years and keep the property tax sheltered by the exchange.

Multi-Family Properties

An investor could sell their existing shopping center in exchange for an apartment building. Multi-family properties can be excellent investments, especially in times of low-interest rates.

Owner Occupied Business Property

This property type is one of the most common in 1031 exchanges. Business owners can expand company headquarters or factories by purchasing a large building to suit their needs.

Condos-Hotels

These investments are private units owned by individuals and rented to guests. Many investors find this option appealing because they can avoid all the traditional vacation home maintenance costs while still offering all the amenities that come with the hotel.

Raw Land

Many investors purchase underdeveloped land in the hopes of eventually building on it, whether for personal or business-use. Some hold the property for 10 to 20 years as a retirement project, while others develop the land sooner with a business or strip mall. The opportunities are endless when you purchase vacant land. The key to remember is that it is all in the planning and intent for the property.

Oil and Gas

Many people are unaware that there are numerous oil and gas projects recognized as “like-kind” to all other 1031 exchange properties. Why? Real estate ownership can include mineral rights at fractional interests of a long-term lease. This type of investment has several attractive qualities including potential returns, lack of maintenance, and an unwavering demand for these projects.

You can 1031 exchange any of the above real estate.

The only types of real estate that do not qualify for 1031 exchanges are:

  1. Primary residences
  2. Second homes with no rental history
  3. Second homes with minimal rental history
  4. Property with no intent for business or investment-use

By deferring taxes, you now have more money to acquire a larger property or even multiple properties.

To start exchanging or to learn more about 1031 exchanges, call Midland 1031 at 239-333-1031 or visit www.midland1031.com.

1031 Exchange Centennial

1031 Exchange Centennial

2021 marks the 1031 exchange centennial.

A 1031 exchange is the process of selling an investment property in exchange for a new investment property. As long as this transaction is a “trade up” in value and debt, taxes are completely deferred. This is possible through Section 1031 of the Internal Revenue Code.

Needed Now More Than Ever

Section 1031 has been an essential part of the federal tax code for 100 years. In today’s world, 1031s help the real estate market recover from the effects of COVID-19. Many retail and office spaces are vacant or underutilized as businesses move to a virtual operating model. 1031 exchanges play a crucial role in repositioning that real estate for its best use.

The tax benefits investors receive with a 1031 exchange drive real estate recovery. Exchanges help stimulate growth in many industries and help businesses across the country.

Industry studies have shown that Section 1031 cultivates many benefits. These benefits include shorter holding periods for the productive reinvestment of capital. They also include accelerated transactional activity and increased investment levels. Exchanges increase job creation and faster economic growth. 1031s help to promote conservation and environmental policies, which are becoming increasingly critical. Investors can exchange conservation easements to improve water quality, reduce soil erosion, and maintain essential wetland and wildlife habitats. Farmers and ranchers use 1031s to enhance their operation quality. 1031s also allow farmers to acquire higher grade land or combine acreage.

The Test of Time

The economic and investment benefits of Section 1031 have remained relevant and withstood the test of time. Without the tax-deferral benefits that 1031 exchanges provide, business owners and investors may be forced to downsize without enough cash flow to acquire replacement property or could be required to pay tax on the gain and depreciation recapture.

The best way to ensure the retention of IRC Section 1031 is to tell your legislators about how 1031 exchanges have worked for you. Express that you want to preserve Section 1031 in any future tax reform legislation. Click here to contact US Senators and Representatives today.

For questions about 1031 exchanges, contact Midland 1031. Call us at (239) 333-1031 or visit our website.

Using Airbnb as a Rental Strategy for 1031 Exchange Properties

Using Airbnb for 1031 Exchange Properties

Using Airbnb for 1031 Exchange properties has become one of the biggest and best platforms with which real estate investors host and rent their properties. This strategy has allowed some investment properties to remain profitable even during the severe dip in travel during the COVID-19 pandemic. Whether you have stayed in an Airbnb rental yourself or heard about the endless short-term rental possibilities from a friend, hosting your investment property on Airbnb has added a new take on the traditional rental process.

This article primarily discusses Airbnb. But, many platforms allow real estate investors to rent their investment properties. We discuss other platforms in more detail later in the article. Midland 1031’s role as Qualified Intermediary is limited to acting as a qualified intermediary within the meaning of Regulations section 1.1031(k)-1(g)(4) for Federal and state income tax purposes. In this regard, Midland 1031 is not providing other legal, investment, or due diligence services. The taxpayer/exchanger must direct all investment transactions and choose the investment(s) for the exchange.

Benefits of Hosting Your Investment Property on Airbnb

The primary benefit of completing a 1031 Exchange is tax deferment. An additional benefit from using a 1031 Exchange is that it allows flexibility to diversify what type of real estate the taxpayer invests in, such as going from traditional rental to Airbnb. Aside from the 1031 Exchange benefits, Airbnb offers a new level of benefits to investment property owners in the modern age.

Control

Upon signing a lease with long-term tenants, you are already losing a large amount of control over your property. With Airbnb, you can check in on your home more frequently. In this case, the platform also allows you to control how you get paid. Has the thought of possibly having to chase down tenants for monthly rent or having to go through the painful process of evicting them ever crossed your mind? Hosting on Airbnb requires guests to pay before their stay, guaranteeing your rental income. You may also set up cancellation fees and terms that provide additional income and protection for your rental properties.

Flexibility

With Airbnb, you are in control of when your property is available for rent. As a host, you can block off dates on your Airbnb calendar that become unavailable to any potential renters. For example, if you were leaving town on vacation and didn’t want to worry about renters in your property while you are gone, you could block off those dates for peace of mind. Another situation might occur where the property runs into a significant issue that needs repairing, but you would like to wait a couple of weeks to pay for the repairs.

Profitability

When leasing a rental property to a long-term tenant, the monthly rental payment is typically locked in at a specific rate that doesn’t reflect the seasonal activity. When listing on Airbnb, the host is usually able to charge more on a nightly basis. Based on the specific property and its location, it is possible to charge more per night during a busy season or a high-demand location. With the fluctuation of pricing available and the opportunity for longer or shorter stays, Airbnb could easily be more profitable than the traditional long-term renter.

Other platforms allow you to rent your investment property as a vacation rental. Vrbo, which stands for Vacation Rental By Owner, has been around since 1995 and allows individuals to post their entire homes for rent via their website or app. Booking.com was founded in 1996. It offers accommodations that include hotels, apartments, homes, and other unique stays around the world.

Rules for Using Airbnb for 1031 Exchange Properties

There are two possible ways to utilize a 1031 Exchange while also using Airbnb to rent the property. You already own a property that you are renting through Airbnb that you would like to sell, or you are looking to purchase a rental property. Either way, the key with a rental property that you would like to rent on Airbnb is the intent to hold the property for investment use.

When deciding whether or not a vacation home, such as one hosted on Airbnb, qualifies for a 1031 Exchange, here are a few rules to follow:

  • Relinquished property is owned by the taxpayer for at least 24 months immediately prior to the exchange
  • Within each of the two 12-month periods prior to the sale/exchange, the taxpayer rents the property to a third party at fair market rental rates for at least 14 days or more
  • Within each of the two 12-month periods prior to the sale/exchange, the taxpayer’s personal use of the property does not exceed the greater of 14 days or 10% of the number of days that the property is rented

Midland 1031 is a qualified intermediary and has handled all types of 1031 Exchanges. We have two Certified Exchange Specialists® on staff. If you have any questions about 1031 Exchanges and rental properties, please contact us today!

Delaware Statutory Trust (DST): A More Passive Real Estate Investing Option

Delaware Statutory Trust (DST) - A More Passive Real Estate Investing Option

Tax-deferred exchanges of investment and business-use property have been around in the United States since 1921 and have led to what is commonly known today as 1031 exchanges. A 1031 exchange allows real estate investors who hold business-use or investment property to defer capital gains taxes if another business-use or investment property of equal or greater value is purchased from the sale proceeds. These exchanges have benefitted many real estate investors over the years by freeing up capital by deferring their capital gains taxes and enabling them to invest in either more properties or properties with higher income potential.

However, real estate investing can be rather time-consuming, and not every investor can continue to commit the time it takes to invest in real estate. Additionally, real estate investors can find it difficult to go and view properties they would like to potentially exchange for their current property (or properties), which can potentially increase their risk. These factors have led to the rise in demand for another option for real estate investors to use their 1031 exchange funds more passively while still maintaining their tax deferral status on their exchange funds. This option is called a Delaware Statutory Trust (DST).

WHAT IS A DELAWARE STATUTORY TRUST?

A Delaware Statutory Trust (DST) is a vehicle in which real estate investors can participate in 1031 exchanges without being the sole owner or manager of the properties owned through the exchange. Basically, investors can purchase an interest in a DST with their exchange funds. The DST typically has a portfolio of properties with different industry concentrations (office space, student housing, healthcare, etc.). In return, DST investors get a percentage of the income that the DST properties generate, which depends upon the amount of your investment in the DST.

WHY INVEST IN A DST?

There are several advantages investors can benefit from when choosing to participate in a DST. The following are just a few of several benefits that Delaware Statutory Trust investors can experience:

  1. There are no property management responsibilities that fall on the investors. The DST sponsor handles property management decisions on behalf of the investors, contributing to the more passive nature of a DST investment.
  2. Unlike a Tenants in Common (TIC) structure, obtaining financing for the DST investment portfolio is a much simpler task, as a lender to a TIC would have to approve up to 35 different borrowers. In contrast, a lender would only have to approve one borrower in a DST, the sponsor. This benefit of the DST allows for swift financing and, subsequently, speedy access to funds for the sponsor.
  3. DST investors can enjoy limited personal liability in this investment structure. If a DST were to fail and go into bankruptcy, the most that investors usually will lose is the amount of their investment into the DST. Stipulations limit DST lenders in the trust from going after other assets of the DST investors. Because of this fact, no LLC arrangement is necessary when investing in a DST. Because no LLC is necessary, no annual state filing fees are required, which could affect an investor’s return.

Delaware Statutory Trusts can offer 1031 exchange users a more passive and diversified real estate investing option, all while not sacrificing the tax benefits given to them through the exchange process. If you are interested in identifying DSTs to invest your exchange funds in, contact your financial advisor to see if it is a right fit for you. For more information regarding 1031 exchanges, contact Midland 1031.

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or authorized representative must direct all investment transactions and choose the account’s investment(s). Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

Year-End 1031 Exchanges Need to Take Additional Action to Take Advantage of the Full 180 Days

Year-End 1031 Exchanges Need to Take Additional Action

A 1031 exchange is a valuable tool for real estate investors looking to shelter gains from the sale of their investment or business-use property.

1031 is a section of the tax code that essentially allows a taxpayer to defer the capital gains on the sale of investment or business-use property, provided they follow a few simple rules:

  • To entirely defer capital gains, buy property(ies) equal to or higher than the relinquished property’s value
  • Use a Qualified Intermediary
  • Purchase property that is like-kind
  • Identify replacement property(ies) within 45 days of closing on the sale of the relinquished property
  • Complete the exchange by the earlier of either the due date of the taxpayer’s tax return (including extensions) or 180 days from closing on the sale of the relinquished property

Year-End 1031 Exchanges From Mid-October to December 31

Most taxpayers automatically get the benefit of the full 180-day 1031 exchange deadline. For those beginning a year-end 1031 exchange between mid-October and December 31, additional action is needed to take advantage of the full 180 days.

If the relinquished property was transferred between October 17 and December 31, you may request an extension to file your taxes. Otherwise, the income tax return would be due April 15 (March 15 for corporate and partnership taxpayers). This date would be the deadline for closing on all replacement property, even though it is less than 180 days. If the taxpayer wants to have the full 180 days, they must request an automatic extension of time to file their return.

Taxpayers should consult with their accountant well in advance to allow ample time to have a request for extension filed on their behalf. The extension request must be filed to receive the full 180-day timeframe of exchanges started more than 180 days before the year-end.

Taxpayers should avoid filing their taxes and then filing an amended return after completing the exchange.

For more information regarding 1031 exchanges, please contact Midland 1031.

1031 Exchange Florida – Real Estate Investors Flock to Naples

Naples 1031 Exchange & Real Estate IRA

Naples, Florida, is a sleepy retirement town that is no more. Naples boasts a robust economy and an even better real estate market. Real estate investors in Naples use two main strategies in their portfolios. They use self-directed IRAs and 1031 Exchanges. Both strategies use business and investment real estate. Self-directed IRAs and exchanges reduce taxes and maximize wealth.

NAPLES 1031 EXCHANGES

Naples investors are smart. The most popular strategy used is the 1031 Exchange. Rather than paying capital gains tax, with a 1031 exchange, you defer all taxes. A 1031 tax-free exchange is one of the oldest tax strategies in the code. 1031s allow investors to defer taxes on the sale of their investment real estate. As long as investors buy real estate of equal or greater value, they defer all taxes. Midland 1031 has been helping clients in Naples for over 22 years.

1031 Exchanges are the biggest real estate drivers. To complete a 1031 exchange, you need a qualified intermediary. Midland 1031 has served as a Qualified Intermediary (QI) throughout the US for over 23 years. We have assisted clients with thousands of exchanges. Most importantly, Midland is the only QI company in SW Florida with two 1031 CES® on staff. There are fewer than 100 CES® in the United States.

WHICH NAPLES PROPERTIES QUALIFY FOR A 1031 EXCHANGE?

There are many types of 1031 exchanges, including delayed, simultaneous, reverse, and specialty. The rules are not hard. But, you need to make sure your exchange is set up correctly before selling your relinquished property.

  • Single-family homes
  • Condos
  • Raw land
  • Business properties
  • Multi-family properties
  • And other deeded real estate

NAPLES SELF-DIRECTED IRA INVESTMENTS

Self-directed IRAs allow investors to diversify their portfolios with alternative assets. Alternative assets include investment real estate. All income and sale of IRA assets are tax-free and grow inside the retirement account. Let Midland show you how to quickly set up a self-directed IRA today. Get started investing in some of the properties available only in Southwest Florida. Some of the other options available to invest in a self-directed IRA include private equity, hard money lending, capital markets, LLCs, precious metals, and more. Contact Midland Trust for more information regarding self-directed IRA investments.

The secret is out that all Collier County is setting new records for real estate growth. You cannot go a day without reading about new records set in Estero, Bonita Springs, or Golden Gate. The word is out, and people are coming. The last year’s events have changed people’s thoughts on where they want to live. And Southwest Florida is on the top of the list.

Contact our Naples 1031 exchange team today. Call us at 239-333-1031 to get your exchange started. Happy Investing!

Florida 1031 Exchanges to Defer Capital Gains Tax

florida 1031 exchanges

Real estate investors use Florida 1031 exchanges as a tax-deferral strategy. When selling investment or business-use properties, investors save in taxes.

Section 1031 of the Internal Revenue Code allows investors to defer all applicable taxes in property exchanges. Section 1031 allows for the exchange of business-use or investment property. If the replacement property is of equal or greater value, the investor defers all taxes. The IRS allows this tax-deferral as long as investors follow the 1031 exchange rules.

One of the 1031 rules specifies the requirement of a Qualified Intermediary (QI). A QI must accommodate the 1031 exchange. Midland 1031 has served as a 1031 exchange QI nationwide for more than 25 years. We have facilitated 1000s of 1031 exchanges throughout Florida. These exchanges have taken place throughout Florida in Fort Myers, Miami, Tampa, and the Panhandle. We have two Certified Exchange Specialists® (CES®) on staff. Our exchange specialists assist Florida real estate investors with their 1031 exchange.

There are many types of 1031 exchanges in Florida. Available exchanges include delayed, simultaneous, reverse, and specialty. Here is a partial list of 1031 Exchange Properties:

  • Rental Property
  • Single Family Investment Homes
  • Duplex/Triplex Investments
  • Condominiums
  • Investment Vacation Properties
  • Commercial buildings and warehouses
  • Land
  • Aircraft Exchanges
  • Farm Land
  • And much more!

We make it a point to manage every 1031 exchange carefully. Exchange proceeds from the relinquished property sale are deposited into a non-commingled account. The FDIC insures this account up to the current limit of $250,000. Qualified Escrows are available for transactions with proceeds above $250,000.00.

Contact us today and sign up for our “Guide to Florida 1031 Exchanges”. Midland also does self-directed IRAs that allow you to buy investment property tax-free! Learn more about using your retirement funds to purchase investment real estate.