Real estate investors are purchasing properties at steep discounts by utilizing techniques such as short sales, courthouse step sales, and purchasing bank owned properties (REO). While these approaches can often provide excellent buying opportunities, buyers who are engaged in 1031 tax deferred exchanges must pay extra attention to the details of their particular acquisition, as each of the aforementioned approaches can present difficulties in completing a successful 1031 exchange.

The important point to realize is that each of the aforementioned approaches have unique issues which must be understood and addressed early on. Some of the problems include:

1) Problems meeting the 180-day exchange period deadline due to the inability to control the closing of the purchase. This is a common problem, particularly with short sales. Prudent exchangers will minimize this risk by taking full advantage of the 45-day identification rules. In short, you are on the seller’s time schedule, not on yours.

2) These transactions often have rigid structures. As such, you may have difficulty complying with 1031-specific requirements, including contract assignability and deeding flexibility. Often, sellers in these situations are not willing to respect the need for slight modification to their “procedure” to effectuate a technically valid 1031 exchange.

3) In the case of courthouse step purchases, advanced planning is necessary, as cashier’s checks must accompany the winning bid at the time of the purchase. You will not know what the final winning bid figure will be, therefore it is prudent to have multiple cashier’s checks in appropriate increments ready. Of course, all cashier’s checks must be immediately returned to API if you are not the winning bidder.

Many of the aforementioned problems can be overcome with advanced planning and creative structuring. In many cases, the use of an Exchange Accommodation Titleholder (EAT) can allow for creative techniques such as using exchange proceeds for capital improvements after the replacement property has been acquired, and acquiring multiple properties before or after the relinquished property has been closed.

For the full article on Distressed Property Acquisitions in 1031 Exchanges, read more…

1031 Basics: IRS Form 8824 Like-Kind Exchanges

1031 Exchange Basics

The tax filing date for many taxpayers is just around the corner. The Internal Revenue Service Form 8824, Like-Kind Exchanges, must be completed and filed with the IRS every time a taxpayer performs a 1031 exchange. The IRS Form 8824 contains three sections related to a 1031 exchange:

  • Part 1, Information on the Like-Kind Exchange;
  • Part II, Related Party Exchange Information; and
  • Part III, Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received.

To access Form 8824 and other related tax forms that may be needed, download now…

Court Rules Real Estate Investment Strategy Not Eligible for Patent Protection

The issue in the Fort Properties Inc. v. American Master Lease LLC case was whether a method related to a real estate investment technique for replacement property acquired in certain 1031 exchanges was eligible for patent protection. The method involved aggregating real property, encumbering it with a Master Agreement, and then issuing ownership shares to multiple tenant-in-common (TIC) investors with deedshares. American Master Lease LLC described its investment strategy in a patent application, and Fort Properties claimed that American Master Lease’s strategy was unpatentable. The U.S. Circuit Court of Appeals for the Federal District ruled this investment strategy was not patentable. Read more…

Capital Gains Taxes Going Way Up in 2013

58 Percent Increase in Capital Gain Taxes is Coming

The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extended the Bush era tax cuts until the end of 2012. Beginning January 1, 2013, if no further action is taken by Congress, the capital gains tax rate will revert from the current 15 percent rate back to the former 20 percent that was in effect prior to 2003. In addition, the national health care reform legislation that became law March 2010, imposes a new 3.8 percent tax on certain investment imcome. Read more…
custom 1031 exchange materials

IRS Guidance on the Economic Substance Doctrine

Do Not File Your 2011 Income Tax Return Until Your Exchange Has Been Fully Completed

If you are currently in a 1031 exchange that began in 2011, the time in which you must complete the acquisition of your replacement property ends at midnight on the earlier of the 180th day after the date you transferred the relinquished property, OR the due date (including extensions) for your income tax return for the taxable year in which the transfer of the relinquished property occurs. U.S. Treasury Regulations section 1.1031(k)-1(b)(2)).

This means that if the 180th day following the closing of your first transfer of relinquished property falls after the due date for your 2011 tax return (generally, for individuals, April 17, 2012) and you have not completed the acquisition of your replacement property, you must file an Application for Extension of Time with the IRS to extend the filing date to the 180th day. If you do not file for an extension, your time period will end on your tax return due date.

April 15th is Only Weeks Away: Read a Few Quips About Taxation

The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing. – Jean Baptiste Colbert

America is a land of taxation that was founded to avoid taxation. – Laurence J. Peter

What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin. – Mark Twain

Single-Family Rentals: It’s Time to Get Back In

Warren Buffet, often referred to as “the Oracle of Omaha”, recently stated on a CNBC Squak Box Interview “…if I had a way of buying a couple hundred thousand single-family homes…I would load up on them and…take mortgages out at very, very low rates…it’s a leveraged way of owning a very cheap asset now and I think that’s probably as attractive an investment as you can make now.” To learn more about why institutional investors and others are acquiring single family rentals, read more…