The 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in places like Los Angeles or San Diego, California with hot real estate markets. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges.
In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. (To read more about 1031 exchange process and rules, visit our 1031 explained page) In places like Los Angeles or San Diego, California attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?
Luckily, the 1031 exchange rules provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange s and Improvement Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange s.
Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “reverse 1031 exchange”.
The reverse exchange technique essentially consists of an exchange facilitator holding or “parking” title to the new property on behalf of the taxpayer to avoid the taxpayer having simultaneous ownership of two properties. Immediately after the sale of the old property (but no later than 180 days) the exchange company affiliate transfers the new property to the taxpayer. This 'technically' creates the proper sequence.
For example, an investor holding a single-family rental property in Los Angeles, California is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Anaheim. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Los Angeles property and has 180 days to close on the sale to defer their gain into the newly purchased Anaheim property.
Build-to-Suit or Improvement The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange
Build-to-Suit, also known as Construction-to-Suit or Improvement Exchange refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.
In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.
For example, an investor owns an apartment rental in SanDiego, Californiaand wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an improvement exchange of real estate whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the apartment rental.
As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our offices by calling (800) 237-1031 or emailing info@accruit.com for more information.
As a real estate investment expert deeply immersed in tax-deferred exchange strategies, my knowledge spans the intricate nuances of 1031 exchanges, including Reverse 1031 Exchanges and Improvement 1031 Exchanges. I possess practical experience and a comprehensive understanding of the Internal Revenue Code Section 1031, which governs these exchanges, and I can shed light on their implementation in scenarios such as those outlined in the article.
The 1031 exchange rules are a provision in the Internal Revenue Code that enable real estate investors to defer capital gains taxes by reinvesting proceeds from the sale of investment properties into similar properties. In markets like Los Angeles or San Diego, where real estate moves swiftly, these rules offer alternatives to traditional exchanges, namely Reverse 1031 Exchanges and Improvement 1031 Exchanges.
A Reverse 1031 Exchange occurs when an investor acquires a replacement property before selling the relinquished property. This involves a facilitator temporarily holding or "parking" the title to the new property until the sale of the old property is completed, typically within 180 days. This strategy is beneficial when supply is limited, and investors need to secure a replacement property in a competitive market.
On the other hand, an Improvement 1031 Exchange, also known as a Build-to-Suit or Construction-to-Suit Exchange, allows investors to use a portion of the sale proceeds to enhance the replacement property. This could involve building on raw land or making significant improvements to existing properties, such as upgrading HVAC systems, roofs, or windows. The value of both the land and the improvements counts towards the exchange if executed correctly.
In an Improvement Exchange, an exchange facilitator holds the replacement property while the necessary improvements are undertaken. After completion, within the 180-day window or earlier, the entire improved property is transferred to the investor to finalize the exchange.
For instance, consider an investor in Los Angeles wanting to sell a property but worried about finding a suitable replacement in Anaheim. Utilizing a Reverse 1031 Exchange, they secure a replacement property before selling the old one, allowing them to defer taxes and continue earning rental income.
Similarly, an investor in San Diego seeking to invest in single-family rentals can opt for an Improvement 1031 Exchange. They sell an apartment rental, use the proceeds to purchase a multifamily complex, and invest additional funds to renovate the property, all within the exchange guidelines.
These sophisticated exchange tools empower real estate investors to defer taxes and expand their portfolios even in competitive markets. Accruit, a company well-versed in executing these exchanges, provides assistance to investors navigating these strategies. For further information, you can contact them at (800) 237-1031 or via email at info@accruit.com.
