1031 Exchange Update
Here is a brief update regarding 1031 exchange activity from Stewart’s 1031 exchange qualified intermediary, Asset Preservation, Inc. (API):
1031 Exchanges are up Significantly: The increase in prices and rents for both commercial and residential investors has led to a huge increase in 1031 exchange activity with many more investors choosing to set up a 1031 exchange prior to closing to obtain tax deferral. By all indications, 1031 activity is up 15-20% more from last year.
The 3.8% Net Investment Tax Remains in the Tax Code: The failure of Congress to agree on healthcare reform means that the 3.8% net investment income tax (NIIT) that affects many investors in higher tax brackets remains. This added tax is another factor driving the surge in 1031 exchange activity.
1031 Exchanges Continue to be at Risk with Tax Reform: Congress continues to look at repealing or limiting 1031 exchanges as a “pay-for” to accomplish tax reform. Visit 1031taxreform.com for the latest updates and to share your concern about how eliminating exchanges could negatively affect investors and the real estate market.
Reverse Exchanges up Considerably: In many markets, the lack of inventory creates a problem for investors facing the 45/180 day time deadlines. As investors find off-market and other desirable replacement properties that need to close quickly, they are turning in increasing numbers to reverse exchanges where they can close on the purchase before closing on the sale of their investment property.
Tax Relief for Storm Victims
Relief for Victims of Hurricane Irma
- IRS is providing a variety of tax relief for those affected by Hurricane Irma. For the latest updates, check the Hurricane Irma page.
Relief for Victims of Hurricane Harvey
- IRS is providing a variety of tax relief for those affected by Hurricane Harvey. Check the Hurricane Harvey page for the latest updates.
Requirements for Postponement of 1031 Exchange Time Periods
If the taxpayer is considered an “affected taxpayer,” then additional guidance concerning their 1031 exchange is provided in Revenue Procedure 2007-56. Section 17 of Revenue Procedure 2007-56 provides postponement provisions specific to 1031 exchange deadlines that apply in the case of Presidentially-declared disasters. Section 17 extends the 45- and 180-day periods in forward and reverse exchanges that fall on or after the date of a Presidentially-declared disaster by the later of 120 days or the date specified in the relevant IRS News Release, but not beyond the due date for filing the tax return for the year of the transfer.
To qualify for an extension of the IRC Section 1031 deadlines, the relinquished property must have been transferred on or before the Presidentially-declared disaster, and the taxpayer is an “affected taxpayer” or has difficulty meeting the 45-day identification period or 180-day exchange deadline. For these purposes, “difficulty” generally includes, but is not limited to, the following:
- The relinquished property or the replacement property is located in a covered disaster area;
- The principal place of business of any party to the transaction (for example, a qualified intermediary, exchange accommodation titleholder, transferee, settlement attorney, lender, financial institution, or a title insurance company) is located in the covered disaster area;
- Any party to the transaction (or an employee of such a party who is involved in the section 1031 transaction) is killed, injured, or missing as a result of the Presidentially-declared disaster;
- A document prepared in connection with the exchange (for example, the agreement between the transferor and the qualified intermediary or the deed to the relinquished property or replacement property) or a relevant land record is destroyed, damaged, or lost as a result of the Presidentially-declared disaster;
- A lender decides not to fund either permanently or temporarily a real estate closing due to the Presidentially declared disaster or refuses to fund a loan to the taxpayer because flood, disaster, or other hazard insurance is not available due to the Presidentially-declared disaster; or
- A title insurance company is not able to provide the required title insurance policy necessary to settle or close a real estate transaction due to the Presidentially-declared disaster.
Every taxpayer should be directed to their tax advisor to determine whether they are eligible for the relief and to obtain additional information with respect to their particular circumstances.
For more information on all disaster areas, visit the IRS: Tax Relief in Disaster Situations.
Parking the Relinquished Property (Reverse ‘Exchange First’ Format)
Asset Preservation has an experienced team in our Commercial Division with many years of expertise and experience handling technical “Parking Arrangements” including reverse exchanges. When a 1031 exchange requires the purchase of a replacement property before the sale of the relinquished property, a reverse exchange is the solution. The IRS released Revenue Procedure 2000-37 which provides a “safe harbor” for taxpayers to perform a reverse exchange.
Click on these links to learn more about Reverse Exchanges and Parking the Relinquished Property. For questions about reverse exchanges, email API’s Reverse Department at firstname.lastname@example.org.
Webinars: 1031 Exchange Issues in 2017
Join our one-hour 1031 exchange webinar for tax and legal advisors (CPE credit available) on Thursday, November 5th at 11:00 a.m. EST. This webinar tackles issues such as reverse and improvement exchanges, related party issues and how to avoid common pitfalls. You will receive a summary of current developments regarding possible tax reform and the implications on 1031 exchanges. Webinar Details.
Like-Kind Exchanges Fuel the Economy and Job Growth
Section 1031 is in danger largely because it is misunderstood. Since tax reform probably needs to be “revenue neutral” (resulting in no changes to the total amount of money the government receives in taxes), tax writers will need to find offsets to help “pay for” lower tax rates. Thus, provisions like 1031, which may seem to be an unwarranted tax loophole to those unfamiliar with it, are threatened. In reality, if this provision is limited or removed, the impact would be counterproductive to the GOP goal of tax reform—less growth, fewer jobs, and, ultimately, less tax revenue for the federal government. Read More
There Are More Renters Than Any Time Since 1965
More people are renting than at any other point in the past 50 years.
In 2016, 36.6 percent of household heads rented their home, close to the 1965 number of 37 percent, according to a new report by the Pew Research Center based on data from the Census Bureau. Each month the Census Bureau surveys a nationally representative sample of households.
The total number of U.S. households grew by 7.6 million over the past decade, Pew reported. However, the number of households headed by owners remained relatively flat, while households headed by renters grew by nearly 10 percent during the same time period. Read More
Residential Buy Versus Rent by State
One of the largest decisions anyone makes is whether to purchase or rent a home. The answer is not always straight forward. Many factors are required to reach a financial solution: home price, rent, income tax rate, interest rate, property tax, duration of rent or ownership, other tax deductions that can be itemized, insurance, homeowner or condominium association costs and maintenance fees. Even then the bold assumption must be made regarding the availability and alternative investment opportunities of the down payment.
Good news is that GoBankingRates, for the second year in a row, has condensed this decision to just a few variables and completed all of the calculations allowing a quick economic decision. They utilized estimated typical rents by state as per Zillow – including single and non-single family properties. The methodology was simple and straight forward: compare rents from homes on the Zillow site to the monthly mortgage payment based on the median list price of homes assuming a 20 percent down loan using a 30-year fixed-rate loan.
Their finding for all 50 states and the District of Columbia are included in the following table. In most of the states buying was superior over renting for a total of 34 states. Renting was the preferred solution in 11 of the states and it was coin toss in six.
Landlords Are Sinking Cash Into Rust Belt Rentals
The combination of low prices and optimism about the local economy has made the Motor City popular with property investors at a time when the for-sale market barely functions for buyers who want to live in their houses. Eighty-eight percent of the homes sold in Detroit last year were purchased by investors… Read More
Best Markets to Buy a Vacation Home Without Breaking the Bank in 2017
As 44 million Americans return from their 4th of July vacations, no doubt many wish they owned a vacation home where they had just visited. Others are actively contemplating the purchase of a vacation home this year. Vacation homebuyers made-up one-out-of-every eight home purchases in 2016 according to the National Association of Realtors® (NAR). Read More
1031 Exchange & Primary Residence
The tax code provides a number of provisions that provide benefits to taxpayers who own real property. IRC Section 1031 allows for tax deferral on the sale of a property used in a trade or business or held for investment when exchanged for like-kind replacement property to be used in a trade or business or held for investment. Section 1031 only provides for tax deferral as the original basis is carried over into the replacement property and capital gain taxes are owed when the replacement property is later sold and cash is received. Section 121 allows for tax exclusion on the sale of a principal residence when the taxpayer lives in the property as their residence for two out of the past five years. Taxpayers meeting these requirements can exclude up to $250,000 of gain if filing as a single taxpayer and $500,000 of gain if married and filing jointly. Section 121 provides for tax exclusion up to these $250,000/$500,000 threshold amounts while §1031 provides only tax deferral but with no limit on the amount of deferral. Read More
Apartment Vacancy Rates Remain in Low Single Digits in Gateway Markets
The strongest four markets in the country—New York, San Francisco, Los Angeles and Boston—seem almost impervious to shifts in new supply. Read More
The Answer Is 9
When I was in college many moons ago I remember reading an article about a Harvard professor who taught his MBA students real estate capital markets. The professor, Bob Ellis, would always start his class by asking his students the question, “How many of you would like to make a lot of money selling properties you have been leasing?”
Of course that was the attention grabbing question and when the room became silent Ellis replied, “The answer to the final exam will be “nine ”. Read More