Is my tax based on my equity or my taxable gain?
Tax is calculated upon the taxable gain. Gain and Equity are two separate and distinct items. To determine your gain, identify your original purchase price, deduct any depreciation, which has been previously reported, then add the value of any improvements, which have been made to the property.
The resulting figure will reflect your cost or tax basis. Your gain is then calculated by subtracting the cost basis from the net sales price.
Is there a simple rule for structuring an exchange where all the taxable gain will be deferred?
Yes, if you:
1) Purchase a replacement property which is equal to or greater in value than the net selling price of your relinquished (exchange) property, and
2) Move all equity from one property to the other and replace your debt; the gain should be totally deferred.
What are the rules regarding the exchange of like-kind properties?
May I exchange a vacant parcel of land for an improved property or a rental house for a multiple unit building?
Yes, like-kind refers more to the type of investment than to the type of property. Think in terms of investment real estate for investment real estate, business assets for business assets, etc.
Is it possible to complete a simultaneous exchange without an intermediary or an exchange agreement?
While it may be possible it may not be wise. With the Safe Harbor addition of qualified intermediaries in the Treasury Regulations and the recent adoption of good funds laws in several states, it is very difficult to close a simultaneous exchange without the benefit of either an intermediary or exchange agreement. Since two closing entities cannot hold the same exchange funds on the same day, serious constructive receipt and other legal issues arise for the Exchanger attempting such a simultaneous transaction. It is the view of most tax professionals that an exchange completed without an intermediary or an exchange agreement will not qualify for deferred gain treatment. And if already completed, the transaction would not pass an IRS examination due to constructive receipt and structural exchange discrepancies. The investment in a qualified intermediary is insignificant in comparison to the tax risk associated with attempting an exchange, which could be easily disqualified.
May I exchange my equity in an investment property and use the proceeds to complete an improvement on a vacant lot I currently own?
Although the attempt to move equity from one investment property to another is a key element of tax deferred exchanging, you may not exchange into property you already own.
If I am an owner of investment property in conjunction with others, may I exchange only my partial interest in the property?
Yes. Partial interests qualify for exchanging within the scope of Section 1031. However, if your interest is not in the property but actually an interest in the partnership which owns the property, your exchange would not qualify. This is because partnership interests are excepted from Section 1031. But don't be confused! If the entire partnership desired to stay together and exchange their property for a replacement, that would qualify.
Are reverse exchanges considered legal?
Yes, although they can sometime become complex and always require appropriate planning.
This is why you want to only utilize the services of an experienced facilitator for a reverse exchange.
However, IPX 1031 routinely handles all sorts of reverse exchange planning and execution. We also work closely with the most experienced tax attorneys in the country.
Why are the identification rules so time restrictive? Is there any flexibility within them?
The current identification rules represent a compromise which was proposed by the IRS and adopted in 1984. Prior to that time there were no time related guidelines. The current forty-five day provision was created to eliminate questions about the time period for identification and there is absolutely no flexibility written into the rule and no extensions are available.
In a delayed exchange, is there any limit to property value when identifying by using the two hundred percent rule?
Yes. Although you may identify any three properties of any value under the three property rule, when using the two hundred percent rule there is a restriction. It is when identifying four or more properties, the total aggregate value of the properties identified must not exceed more than two hundred percent of the value of the relinquished property.
An additional exception exists for those whose identification does not qualify under the three property or two hundred percent rules. The ninety-five percent exception allows the identification of any number of properties, provided the total aggregate value of the properties acquired total at least ninety-five percent of the properties identified.
Should identifications be made to the intermediary or an attorney, escrow, closer or title company?
Identifications may be made to any party listed above. However, many times the escrow holder or closer is not equipped to receive your identification if they have not yet opened a transaction file. Therefore it is easier and safer to identify through the intermediary or facilitator provided the identification is postmarked or received within the forty-five day identification period.
How long must I wait before I can convert an investment property into my personal residence?
A few years ago the Internal Revenue Service proposed a one year holding period before investment property could be converted, sold or transferred. Congress never adopted this proposal so therefore no definitive holding period exists currently. However, this should not be interpreted as an unwritten approval to convert investment property at any time. Most tax practitioners advise their clients to hold property for two years before converting it into a personal residence.
Remember, intent is very important. It should be your intention at the time of acquisition to hold the property for its productive use in a trade or business or for its investment potential.
What if my property was involuntarily converted by a disaster or I was required to sell due to a governmental or Eminent Domain action?
Involuntary conversion is addressed within Section 1033 of the Internal Revenue Code. If your property is converted involuntarily, the time frame for reinvestment is extended to twenty-four months from the end of the tax year in which the property was converted. You may also apply for a twelve month reinvestment extension.