There has been a large increase in the number of tax-free exchanges during 2013. At our recent annual meeting of the Federation of Exchange Accommodators in Denver all the members reported a large increase in exchanges, especially compared to the years after the real estate bust. Many states have created laws for monitoring Qualified Intermediaries. Several states have also enacted clawback laws. These require that replacement properties purchased out-of-state, that avoid state tax are required to report, so that an eventual sale will be required to pay the state tax.
There’ve also been some recent rulings of interest to real estate investors. A California investor sold a rental property in San Francisco for $572,000. He acquired a house in Eureka for $340,000. He traded down and therefore had taxable boot. Contrary to long-standing traditions he moved his son into the house. The son had rehab experience and began to work on the house. The owner accepted services in lieu of rent. After considerable rehab the son started paying $1200 per month in rent. They moved out in 2008.
The IRS ruled that the exchange was invalid because the house was acquired for personal purposes. The taxpayer argued that it was held for productive use in a trade or business or for investment. He claimed that the son paid fair market rent. The court ruled that the house was bought for investment and the exchange was valid. “William P Adams v Commissioner, T. C. Memo 2013 – 7”
In another case the taxpayer sold a home and a restaurant to one person. They valued the home at $$750,000 and took the code section 121 exclusion of $500,000. The restaurant was valued at $895,000. They moved into the home four days after the purchase. The buyer of the residence sold it for $310,000 a few months later. The IRS argued that the allocation for the residence was overstated and that there replacement home did not qualify as replacement property. The taxpayers argued that their plan for the home was to start a B&B.
The court ruled that use of the property as a personal residence a mere four days after the closing created a clear presumption of nonbusiness intent. The court allowed the allocation of value to the restaurant and the home to stand because it was part of the contract and it afforded a presumption of business reality.
The 1031 exchange is an important tool for investors to expand their investments, change the type of properties, change the location, change the debt structure, defer federal and state taxes and enjoy other benefits. Our website http://www.1031taxfreesale.com/ has basic rules and information for investors to
To your success,
Year-end Tax Strategies
Today’s e-mail brought a message from our 1031 industry organization, The Federation Of Exchange Accommodators. Mind Numbing “On November 21 the Senate Finance Committee (SFC) dropped their tax reform bombshell. Within in their report, Staff Discussion Draft: Cost Recovery and Accounting, the like-kind exchange rules are repealed. Since this is a staff discussion draft, we still have a long way to go — —- “Also included in the draft discussion paper is the extension of real property depreciation to 43 years and depreciation recapture at the owner’s ordinary tax rate.”
If this process continues, 1031 tax-free exchanges will end January 1, 2014. Some compromises may be made to personal property exchanges and different rules for real estate exchanges. Watch this space for developing news.
IRA Contributions. Don’t forget to make your contributions, $5500 for 2013 and an additional $1000 if you were born in 1963 or earlier. They can make a huge difference in your retirement years, especially if you are using the Check Book Control Trust. Investors should be doubling their IRA each year.
Gifts. Gifts by check must be deposited in 2013. Gifting beneficial interest of land trusts or personal property trusts should be acknowledged by the trustee by the end of the year. It takes a simple assignment of beneficial interest for a percentage that represents $14,000, or whatever other limits exist.
Tax Rates. Some tax rates will go up as result of temporary cuts expiring at the end of 2013, like Social Security and Medicare. The top rate on capital gains rises to 20% for high income earners, $400,000 for singles and $450,000 for couples. The AMT is up for 2013, $80,800 for couples and $51,900 for singles.
Breaks for Business. Up to $500,000 of business assets can be expensed. There are good prices on computers, monitors, backup memory, printers, and other tech items. You can stock up on supplies and printer cartridges. The 50% bonus depreciation is also available for items placed in use in 2013.
Investment Real Estate. Real estate still has a favored treatment. Depreciation is a benefit that may be paid for much later. The 27 1/2 year schedule for residential real estate provides about $3600 per year on a $100,000 depreciable basis. That protects $300 of income per month coming tax-free. This may be recaptured many years late. Many investors exchange real estate tax-free for their lifetime. When they die, their heirs receive the property at a stepped-up basis and the tax never gets paid.
Holding real estate, personal property, and IRAs in trusts provides privacy, safety, speed and flexibility in transactions. Buying, selling, financing, partnering and management is all done as personal property. All transactions can be done privately without witnesses and notaries and courthouse recording. There is a 2 1/2 day seminar in Jackson Mississippi, January 23-25, 2014 covering trusts, options, IRAs and exchanges. Details at: www.jackshearealestate.com
Happy New Year!
Attorney and author Mark Warda will be conducting the class along with Jack Shea, investor and author. They will be discussing their experience and every type of real estate transaction. Mark Warda is the author of the book “Land Trusts in Florida” and is trustee for 1400+ trusts. He is also a member of the Florida bar trust committee.
Jack Shea is an investor who has used trusts in every real estate and note transaction for over 30 years. Mark and Jack are both from Chicago where the land trust law started in the 1890s. It is not new or difficult and can be used in all 50 states.
Personal Property Trusts are relatively newer and can be used in many ways with LLCs, Corporations and Land Trusts to improve the privacy, safety and operational flexibility of real estate and note investments.
Attendees will be shown how to complete deeds and trusts and how to operate them properly. The legal and tax aspects are covered in detail. CE credit of eight hours is available to realtors, attorneys, and CPAs.
Class is at the Westshore Ramada Inn in Tampa. Special room rate (TBA) available for attendees.
Details and register at: jackshearealestate.com or call 727-581-7000
If you missed Jack's Presentation, Please Check it out here.
April 28th-30th, 2016 Las Vegas, NV
www.papersource.com to register, enter code jackshea for $50.00 discount.
“Secrets of Lease Option Profits” by Jack Shea and Mark Warda has been published by Galt Press. The book features Virtual Option strategies, which are sometimes more or less than they appear. A complete system for purchasing with an option which could deliver ownership benefits, including depreciation is described. A procedure for a tenant lease/option is presented that does not deliver a property right, requiring foreclosure to remove a tenant. This product is available at www.jackshearealestate.com
Press Release: Jack Shea is a Certified Exchange Specialist as designated by the
Federation of Exchange Accommodators. This CES designation is awarded to those
members meeting the education, experience and examination requirements set
forth by the FEA and was issued Sept 30, 2004.
Press Release: Daniel Imbior was recently notified that he has been
designated as a Certified Exchange Specialist by the Federation of Exchange
Accommodators. This CES designation is awarded to those members meeting the
education, experience and examination requirements set forth by the FEA and
was issued October 12, 2006.
VACATION HOMES: DO THEY REALLY QUALIFY?
Can a Vacation Home be ‘Held for Investment’ – the Authorities?
Property will not be eligible for non-recognition treatment unless it is held
by the taxpayer for either productive use in a trade or business or for
investment. Trade or business includes rental property. A vacation home can
be rented part of the year, or held simply for personal use by the taxpayer,
but can it be ‘held for investment’ by the taxpayer within the meaning of IRC § 1031?
A. Regulations. Neither IRC § 1031 nor the Regulations define “held for
investment,” although the Regulations provide that unproductive real estate
held by a non-dealer for future use or future appreciation is held for
investment, Reg §1.1031(a)-1(b).
B. Ltr Rul 8103117: The “Maintenance Ruling’:
“This property was intermittently rented and used for [taxpayer’s] personal
benefit. During the past 6 or 7 years, the house has not been rented and
[taxpayer has] occupied it approximately 10 days per year for maintenance
“The stated purpose … was to provide for personal enjoyment of the community
and also to make a sound real estate investment in a growing community.
C. Dewey v. Comm’r. The Tax Court has held that a two-week timeshare
received by taxpayer as replacement property in an exchange was not used in a
trade or business or for investment purposes when used for vacation purposes
by the taxpayer and family. TC Memo 1993-645, 66 TCM 1899.
D. Other Authorities based on “Held for Investment’. Some taxpayers take the
position that the vacation home is held for investment and therefore is
eligible under IRC § 1031. Vacation homes may qualify as investment property
if personal use is minimal, or the home is also rented. A property is
apparently not “held for investment” within the meaning of IRC § 1031 if
losses from a sale or exchange of the property cannot be deducted.
CALIFORNIA QI LAW ENACTED INTO LAW
October 2, 2008
The Governor of California signed SB 1007 into law and a copy of the new law
is attached. We believe that this
represents a victory for the FEA and the QI industry. Many FEA members worked
hard to get the law into a form
that would accomplish the goal of providing consumer protection to exchangers
without unduly burdening the QI
The provisions of the new law will be effective for all exchanges after
January 1, 2009. Therefore, you should
review the requirements to be sure that your company is in compliance if you
do business in California.
What does the law provide? The California law does not provide for
registration or licensing, but does provide for
insurance and investment standards for exchange facilitators.
45 and 180 Day Extensions for California Counties
The IRS has issued an extension Notice for the following California counties
for the wildfires from November 13, 2008:
Los Angeles, Orange, Riverside and Santa Barbara [Note that the IRS may add
additional counties later as FEMA adds
counties. If you are near the affected area, you should check the disaster
announcement website for updates. The FEA
will not issue announcements if more counties are added.]
Both of the following criteria must be met to get the extension under Revenue
Procedure 2007-56, section 17:
(1) The taxpayer is located in one of these counties or is otherwise an
affected taxpayer as defined in the Notice, regardless of
where the relinquished property or replacement property is located, or
otherwise has difficulty meeting the exchange deadlines
under the conditions in Revenue Procedure 2007-56, section 17; AND
(2) The relinquished property was transferred (or the parked property was
acquired by the EAT in a reverse exchange under
Revenue Procedure 2000-37) on or before November 13, 2008.
IF the taxpayer meets these criteria, THEN any 45 day or 180 day deadline that
falls on or after the above date, is extended
to the later of February 11, 2009, or 120 days from such deadline.
Please see Revenue Procedure 2007-56, Section 17, and the notice below for
The exchange of properties for other properties directly between taxpayers was a standard procedure before the 1985 tax law exchange which provided for deferred exchanges. It is still possible to swap properties with another taxpayer. The values must be equal and if there is any boot or cash involved to balance the equities it makes it very difficult to accomplish in exchange in this fashion. Some people do it; others use a qualified intermediary and gain the “safe harbor” provided in the tax code, which greatly diminishes the chance of audit.
To Your Success,
Mini Seminar Re: 1031
Call or e-mail to request Mini Seminar, available for:
Keys Capital, Inc.
1722 S. Missouri Ave.
Clearwater, FL. 33756
Fax – 727-581-7865