- For former Section 1031 of the 2012 National Defense Authorization Act (US), see Unlimited Detention: Section 1021
Under Section 1031 of the United States Internal Revenue Code (26 USCÃ, Ã,§Ã, 1031), a taxpayer may defer recognition of the associated federal income and tax liability on the exchange of property types certain. In 1979, the treatment was extended by the courts to include unison sales and real estate purchases, a process sometimes called the Starker exchange.
Prior to 2018, various properties covered by the provisions of the suspension of Section 1031. Withholding Tax and Jobs Act of 2017 revoked Section 1031 for all property types except real property.
Video Internal Revenue Code section 1031
Summary
To be eligible for Section 1031 of the Internal Revenue Code , the property exchanged must be held for productive use in trade or business, or for investment. Prior to 2018, stocks, bonds and other properties were explicitly excluded by Section 1031 of the Internal Revenue Code , even though the property surveyed is not excluded. Currently, only real property is included in Section 1031. Interchangeable properties should be "good", i , of the same nature or character, even if they differ in quality or grade. Private properties of similar classes are properties like-well under pre-2018 conditions. Private property used primarily in the United States and private property used primarily elsewhere is not a good property.
The real nature is generally of a kind, regardless of whether the property is upgraded or unsupported. However, real property in the United States and real property outside the United States will not be a good property. Generally, "a kind" in terms of real estate, means any property classified real estate in any of the 50 US or Washington, D.C., states and, in some cases, the US Virgin Islands.
Taxpayers who own real estate as inventory, or who buy real estate for resale, are considered "dealers". This property is not eligible for the treatment of Section 1031. However, if the taxpayer is a dealer and also an investor, he may use Section 1031 on the eligible property. Personal use properties will not be eligible for Section 1031.
Taxpayers may wonder whether items such as the equipment used on the property are included in the sale of lump-sum properties, and whether recognition of the associated benefits may be suspended. Under the Regulation of Treasury §1.1031 (k) -1 (c) (5) (i), the property transferred together with a larger value item that does not exceed 15% of fair market value of a larger property is not necessary to be identified in the 45 day identification period, but still need to be exchanged for similar properties to delay the acquisition.
Cash to match a transaction can not be suspended under Code Section 1031 because cash is not the same. This cash is called "boot" and the profits, as far as cash receipts are, are taxed at a normal rate of capital gain.
If the liability assumed by the buyer exceeds the seller (taxpayer), the realized benefit from the seller will be recognized. However, if the seller assumes a greater obligation than the buyer, the realized loss can not offset the realized and recognized profits from receiving a boot such as cash or other personal items considered boot.
Initially, 1031 cases are required for the transfer of ownership simultaneously. But after the decision at Starker v. United States , the contract to exchange property in the future is practically the same as a simultaneous transfer. This case finds the concept of exchange Starker . In this case, it was decided in 1979 that the rule for the pending 1031 election was derived. To select a 1031 recognition, the taxpayer must identify the property for exchange prior to closing, identify the replacement property within 45 days of closing, and obtain the replacement property within 180 days of closing. Qualified Intermediaries must also be used to facilitate transactions, withholding all profits from the sale, and then withdrawing money at closing, or sometimes for expenses related to acquiring new properties.
Maps Internal Revenue Code section 1031
Section 1031 Exchange Like-Type
Section 1031 (a) of the Internal Revenue Code (26 USC Ã,§Ã, 1031) states the recognition rules for realized gains (or losses) arising as a result of the exchange of similar property held for productive use in trade or business or for investment. It states that no realized gains or losses will be recognized at the time of exchange.
It also states that the property to be exchanged must be identified within 45 days, and received within 180 days.
1031 (b) states when a similar property and boot are acceptable. Gain is recognized as far as boot is received.
1031 (c) covers a case similar to that of 1031 (b), except when the transaction results in a loss. Losses are not recognized at the time of the transaction, but must be brought forward in a higher base form on the received property.
1031 (d) defines the basic calculations for properties acquired during similar exchanges. It states that the basis of the new property is equal to the given property base, minus the money received by the taxpayer, plus any profit (or deduction of any loss) recognized on the transaction. If the transaction falls below 1031 (b) or (c), the base must be allocated between the received property (other than money) and for allocation purposes, to be assigned to the other property, an amount equivalent to Fair Market Value on the exchange date.
1031 (e) stipulates that livestock of different sexes are not eligible for similar exchanges.
1031 (h) (1) provides that real property outside the United States and real property located in the United States is not good.
The sale of the property that is released and the acquisition of the replacement property should not be done simultaneously. Non-simultaneous exchanges are sometimes called Starker Tax Deferrals , named for winning investors against Internal Revenue Service (IRS).
For non-simultaneous exchanges, the taxpayer must use the Qualified Intermediary, follow the IRS guidelines, and use the proceeds to purchase eligible, equivalent, investment or business properties. The replacement property must be "identified" within 45 days after the sale of the old property and the acquisition of the replacement property must be completed within 180 days of the sale of the old property.
In 2018, Section 1031 may only be used in connection with the sale of real property. Prior to the change of the 2018 tax law, the exchange of private property may be eligible under Section 1031. The exchange of shares of shares of companies in various companies is not eligible. Also ineligible are exchanges of partnership interests in various partnerships and exchange of livestock of different sexes. However, in 2002 the IRS decision (see tenants in general 1031 exchanges), the Tenant in Common (TIC) exchange is allowed. For the exchange of real property under Article 1031, any property deemed "real property" under the law of the country in which the property is situated shall be deemed "the same" as long as the old property is held by the owner for investment, or for active use in trade or business, or for income production.
To get the full benefit, the replacement property must be equal or greater value, and all proceeds from the released property must be used to obtain a replacement property. The taxpayer can not accept the proceeds from the sale of the old property; this will disqualify the exchange for the share of the proceeds received by the taxpayer. For this reason, exchanges (especially non-simultaneous changes) are usually structured so that the taxpayer's interest in the disposed property is given to a Qualified Intermediary prior to the close of the sale. In this way, the taxpayer does not have access or control over the funds when the sale of the old property is closed.
At the closing of the sale of the disposed property, the results are sent by the closing agent (usually the title company, escrow company or lawyer closing) to the Qualified Broker, who holds the funds until such time as the transaction for the acquisition of the replacement property is ready to close. Then the proceeds from the sale of the disposed property are submitted by the Qualified Intermediary to purchase the replacement property. After the acquisition of the surrogate property is closed, Qualifying Broker sends the property to the taxpayer, all without the taxpayer once having a "constructive receipt" of the fund.
The prevailing idea behind the 1031 exchange is that since the taxpayer simply exchanges one property for another property (ies) of "kind" nothing is accepted by the taxpayer who can be used to pay taxes. In addition, the taxpayer has a continuous investment by replacing the old property. All profits are still locked in the exchanged property so that no "recognized" gain or loss is claimed or claimed for income tax purposes.
Boot
Although not used in the Internal Revenue Code, the term "boot" is commonly used in discussing the tax implications of a 1031 exchange. Boot is an old English term meaning "something given in addition." "Boot received" is money or fair market value of "other property" received by the taxpayer in exchange. Money includes all cash equivalents, debts, liabilities or mortgages from taxpayers assumed by other parties, or liabilities exchanged for property by taxpayers imposed. "Other property" is an unlikable property, such as a personal property, a promissory note from a buyer, a promise to do work on property, business, etc.
There are many ways for a taxpayer to receive a "boot", even by accident. It is important for a taxpayer to understand what can result in a boot if a taxable income should be avoided.
The most common boot sources include the following:
- The boot cached from the exchange. This is usually in the form of "net cash receipts", or the difference between the cash received from the sale of the disposed property and the cash paid to acquire the replacement property (ies). Net cash receipts can occur when a taxpayer is a "Downward Trade" on the exchange (that is, the sale price of the substitute property (less than that of the released).
- Boot debt reduction that occurs when a taxpayer's debt on a substitute property is less than the debt on the property that is released. As with the cash boot, boot debt reduction can occur when a taxpayer "trades down" on the exchange. Debt reduction can be offset by the cash used to purchase a replacement property.
- Sales results are used to pay for unqualified spending. For example, a service charge at closing that is not a closing cost. If the proceeds from the sale are used to serve the non-transaction costs at closing, the results are the same as if the taxpayer has received cash from the exchange, and then uses the cash to pay these fees. Taxpayers are encouraged to bring cash to the closing of their property sales to pay for the following: non-transaction costs ie rent prorata, utility storage fees, tenant deposits transferred to buyers, and other costs not related to closure.
- Excessive borrowing to get a replacement property. Borrowing more money than necessary to cover a replacement property will not result in taxpayers receiving tax-exempt money from closing. Funds from the loan will be the first to apply to the purchase. If additional exchange funds create a surplus at closing, all unused exchange funds will be returned to the Qualified Intermediary, presumably to be used to acquire more replacement properties. Borrowing costs (origination fees and other costs related to the acquisition of a loan) in respect of substitute property should be brought to the close of the taxpayer's personal funds. Taxpayers usually take the position that the cost of borrowing is being paid out of the loan proceeds. However, the IRS may take the position that these costs are paid by exchange funds. This position is usually the position of the financing institution as well. Unfortunately, at this time there is no guide from the IRS on this issue which is very helpful.
- Unfavorable property received from the exchange, other than real property.
Section 1031 & amp; Second House
There is and has been much confusion surrounding the use of Section 1031 and the second house. Although most taxpayers purchase a second home in the hope of appreciation, the Services have determined that the property purchased for personal use is NOT an investment property, and therefore not eligible for the treatment of Section 1031.
Until 2008 many people swapped in from their second homes because there was not much clue as to what was done and not a property owned for investment. Finally, in the IRS Revenue Procedure 2008-16 has clearly defined what is acceptable. This import procedure creates a safe port for taxpayers who want to use Section 1031 with properties that follow a simple set of rules:
For a minimum of two years before, and after the exchange:
- Property must be rented for at least 2 weeks for non-relatives.
- You can rent out to relatives if it is their primary residence with fair market rent value.
- The property should only be used privately for 2 weeks or 10% of the time it is rented.
- You can retain the property for an unlimited amount of time, but documentation should be retained for this activity.
- The property should be placed on Schedule E of your tax return and reported as income property.
Deadline
The §1031 exchange starts at the very beginning of the following:
- the date of the deed of note, or
- ownership date transferred to buyer,
and ends at the beginning of the following:
- 180 days after start, or
- the due date of the Exchanger tax refund, including the extension, for the tax year in which the disposed property is transferred.
The identification period is the first 45 days of the exchange period. The maximum exchange period is 180 days. If the Exchanger has several properties that are released, the deadline starts on the transfer date of the first property. This deadline can not be extended for any reason, except for the disastrous declaration declared by the President.
Deadlines that fall on a weekend or holiday holiday do not permit an extension. For example, if your tax return due on April 15, but the date falls on Saturday, your tax maturity date is forwarded to the first business day after April 15 or Monday, April 17. However, if the deadline falls on a Sunday, the terms for exchange must be met no later than the last business day before the due date date, ie the previous Friday.
Identified replacement properties destroyed by fire, flood, storm, etc. After the end of the 45 day Identification Period does not provide an Exchanger to identify new properties. However, the exchange may be terminated by this event during which (a) is determined in writing (such as contingency in the sales contract); (b) is beyond the control of an exchanger or any party in exchange; and (c) is the only or last property that an exchanger is entitled to purchase under the rules of exchange.
Incorrectly identifying condominium A, when condominium B is intended, does not allow identification changes after the 45 day Identification Period is over. Failure to comply with this deadline may cause the exchange to fail.
The IRS rules control the length of time that replacement properties must be held before they can be sold or used to enter the new tax deferred exchange. In a highly appreciative marketplace, people can take the opportunity to sell their personal residences (where there is no capital gain is because under $ 250,000 for one person or $ 500,000 for a married couple - see Taxulayer Relief Act of 1997) and move to a former rental property for a certain period of time to turn it into their new residence. With recent legislation, however, the capital gains tax on such transactions are no longer completely avoided. The taxpayer will now owe at a reduced amount of capital gains tax on the conversion of property from lease to a private residence after the final disposition of the property occurs.
To be eligible for this exchange, certain rules must be followed:
- Both the property is released and the replacement property must be owned either for investment or for productive use in trade or business. Private residences can not be redeemed.
- Assets should be fond of . The real property should be exchanged for real property, although the broad definition of real estate applies and covers land, commercial property, and residential property. Private properties must be redeemed for private property. (There are some complicated rules surrounding it - for example, the opposite sex is not considered a similar property for the purpose of exchange 1031, and properties outside the United States are not considered "similar" to properties in the United States. li>
- Sales proceeds should be reinvested in similar assets within 180 days of the sale. Restrictions imposed on the number of properties that can be identified as Potential Replacement Properties. More than one potential replacement property can be identified as long as you meet any of these rules:
- Rule of Three Properties - Up to three properties regardless of their market value. All identified properties need not be purchased to satisfy the exchange; only the amount required to meet the value requirements.
- Rule 200% - A number of properties as long as the fair aggregate market value of all substitute properties does not exceed 200% of aggregate aggregate Market Value (FMV) of all property that is released on the date of initial transfer. All identified properties need not be purchased to satisfy the exchange; only the amount required to meet the value requirements.
- Rule 95% - A number of surrogate properties if the fair market value of the property actually received at the end of the exchange period is at least 95% of the total FMV of all potential replacement properties identified. In other words, 95% (or all) of the identified property must be purchased or the entire exchange is invalid. An exception to the 95% rule is that if you close on property within the 45 day period it is still eligible for exchange.
Difficulty involved in meeting the limit
Often, the most difficult component of a 1031 exchange is to identify a replacement property within the first 45 days after the sale of the property being released. The IRS is strict in not allowing extensions.
The 1031 exchange is similar to traditional IRA or 401 (k) retirement plans. When a person sells assets in a deferred tax-deferred plan, the capital gains which would otherwise be deferred were withheld until the holder started to withdraw his pension. The same principle applies to deferred tax exchanges or real estate investments. As long as the money continues to be reinvested in other real estate, capital gains tax can be suspended. Unlike the previously mentioned pension accounts, rental income on real estate investments will continue to be taxed when net income is realized.
An alternative to a 1031 exchange for someone who wants to defer capital gains tax, but who does not want to continue holding property is a structured sale. This method offers many benefits to buyers and sellers and is considered an excellent possibility for those who want to retire or get out of the real estate or business market. However, the capital gains tax will be assessed because the payment is received by the seller, unlike the 1031 exchange, in which the capital gains tax can be deferred indefinitely to the individual in exchange.
How is the 1031 exchange reached
The following sequence represents a sequence of steps in a typical 1031 exchange:
Step 1. Maintain the services of a licensed federal registered agency (EA), or state licensed tax adviser or Certified Public Accountant (CPA).
Step 2. Sell property, including the Cooperation Clause in the sales agreement. "The buyer realizes that the seller's intention is to complete the 1031 Exchange through this transaction and hereby agrees to cooperate with the seller to achieve the same, without any additional fees or obligations to the buyer." Make sure your escrow/closing agent contacts the Qualified Intermediary to order exchange documents.
Step 3. Enter the 1031 exchange agreement with the Qualified Intermediary, where the Qualified Intermediary is referred to as the principle in the sale of the disposed property and subsequent purchases of the surrogate property. The Exchange 1031 Agreement must meet the requirements of the federal tax law, particularly with regard to the proceeds of sale. Along with the basic agreement document, an amendment of a signed escrow document stating the name of a Qualified Intermediate as a seller. Normally deeds are prepared to record from taxpayers to true buyers. This is called direct deeding. The replacement property does not need to be identified at this time.
Step 4. The escrow that is released closes, and the closing statement reflects that the Qualified Intermediary is the seller, and the result goes to the Qualified Intermediary. The funds should be placed in separate and fully separate money market accounts to ensure liquidity and security. The closing date of escrow property that is released is Zero Day from exchange, and that's when exchange hours start beating. The written identification of the replacement property address must be sent within 45 days, and the identifed reimbursement property must be obtained by the taxpayer within 180 days.
Step 5. The taxpayer sends a written identification of the address or legal description of the replacement property to the Qualified Intermediary, on or before Day 45 of the exchange. Documents must be signed by everyone signing an exchange agreement. This may be faxed, handed over directly, or sent by post to the Qualified Intermediary, the seller of the replacement property or its agent, or to a completely unrelated attorney, preferably by certified mail, the requested receipt.
Step 6. The taxpayer enters into the agreement to purchase a replacement property, again including the Cooperation Clause. "The seller realizes that the buyer's intention is to complete 1031 exchanges through this transaction and hereby agrees to cooperate with the buyer to achieve the same, without any additional fees or obligations to the seller." The amendment is signed by naming Qualified Brokers as buyers, but again the revamping is from true sellers to taxpayers.
Step 7. When conditions are met and escrow is ready to close and certainly before the 180th day, under the Exchange 1031 agreement, Qualified Intermediaries forward exchange and gross proceeds to escrow, and closing statements reflect Qualified Brokers as buyers. The final count is sent by a Qualified Intermediary to the taxpayer, indicating the funds coming from one escrow, and out to the other, all without the receipt built by the taxpayer.
Step 8. The tax payer file forms 8824 with the IRS when taxes are filed, and any similar documents required by your state.
Reversal 1031
In most cases, the 1031 exchange results as described above, in which the property being released was first sold, then the replacement property was purchased. The IRS has also determined that the reverse order will also avoid capital gain tax, if certain conditions are met. This is called "reverse 1031" or "reverse starker". In a reverse 1031 exchange, the taxpayer first buys the surrogate property. The taxpayer has 45 days to identify the released property to be sold. Sale of the released property must be closed within 180 days of the purchase of the replacement property.
Taxpayer can not retrieve direct title from a replacement property when purchased. Instead, the title shall be held by a Qualified Intermediary through an inverse 1031 exchange process. Once the released property has been sold, the intermediary will transfer the substitute property to the taxpayer.
Alternative to exchange 1031
Structured sales annuities or "Ensure Installment Sales" is a capital gains tax-deferral tool that allows the seller to earn a profit that is not offered by the method of selling and terminating other capital gains. This is a hybrid of general installment sales and structured annuities, and this enables the seller to collect the flow of payments, increase equity, earn profit before taxes, and other benefits. This method is a tool for those who want to do a 1031 exchange but can not find the property within a period of time, and this allows the seller to have a backup plan. However, capital gains taxes due on the property will remain due after each repayment is made, causing the taxpayer to pay taxes.
Example exchanges 1031
An investor buys a mall (commercial property) for $ 200,000 (base cost). After six years, he could sell the property for $ 250,000. This will result in a profit of $ 50,000, in which the investor typically has to pay three types of taxes: federal capital gains tax, state capital gains tax and tax depreciation retraction based on the depreciation he has taken on property since the investor bought the property. If the investor invests the proceeds from selling $ 250,000 to another property or property (without touching the results and using the Qualified Intermediary), then he will not have to pay any taxes on the profits at that time.
A separate house owner on 3 hectares (12,000 m 2 ) is transferred by his employer to another country. Instead of selling a house, which is no longer his personal residence, he chooses to lease it for a certain period of time. After ten years, he decided that he wanted to sell it but, at the same time, he had an adult boy who was going to college in another state. He decides that he wants to buy an apartment building in a college town for sons and other students to hire while they are at school. His home has been priced from $ 200,000 to $ 300,000. Therefore, he arranged the exchange section 1031, and bought a new property, thus avoiding the capital gains tax at that time.
In the above-mentioned example, the investor needs to prove his investment intentions to the IRS by showing arm leases to other children and students. The investor must state the related earnings and deductions.
In addition to the sale of real estate, selling interest in real property can also qualify for a 1031 exchange. An example of this is the sale of a pleasure.
See also
- Real estate transfer tax
- Structured sales
- Monetized Sales Installment
- Believe the law of Delaware
References
External links
Source of the article : Wikipedia
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