Tulsa Commercial Real Estate Experts - 306 Questions About the 1031 Exchange Program

Tulsa Commercial Real Estate Experts - 306 Questions About the 1031 Exchange Program

by U.S. SBA Entrepreneur of the Year & Cofounder of Fears & Clark Tulsa Commercial Real Estate Group - Clay Clark

May I actually purchase a replacement property that has not been constructed yet?

This question is a great question and one that we get asked alot as the Tulsa commercial real estate experts in our area. And here is the answer. You cannot use the profits from the sale of your property in a 1031 qualifying exchange for the purchase of a property with the intent of living in it as your primary resident. This is would be nice though. This property cannot be used a primary residence if it is to qualify for this program. However, if you hold the replacement property a long period of time to establish the requisite intent for a 1031 Exchange, then you may move into the property and thus change the nature of the use of the property. Does this make sense to me? No, however here are the details.

After you move into a property, you may take the Section 121 exemption for personal residences. Under this relatively new law, to obtain the 121 exemption, the property must not have been the subject of a 1031 exchange in the previous 60 months (5 years from the purchase a replacement property).

What in the heck is a TIC?

A TIC is a not a blood-sucking creature although to some people it might be. A TIC is a type of tenancy-in-common that is made available as a replacement property investment to 1031 exchangers to make their lives much easier. TIC's have people that support them that sponsor the acquisition of property and then apply for the financial backing on the property. The financial backing is known as financing.

The kinds of properties that are generally used for this type of deal are those incredible triple-net properties with A-rated tenants, like a Starbucks. I love Starbucks. I pay too much for Starbucks, but the quality is so good that it really does not matter much to me. TICs are often times sold as securities and then sometimes they are sold as real estate. As a security, they can be sold by a human who is known as a securities broker-dealer. This guy or girl (but usually a guy) is an investor that is given special and super incredible disclosures and protections under the law. Some TIC companies soley rely on the legal opinions that TIC's are real estate and are in fact not securities at all. Sometimes securities TIC's are sold by the broker-dealers of securities and not directly by the humanoid known as the Sponsor. When this happens, it is unusual. TIC's are usually known as the possible replacement property by the investor that has managed a property (the relinquished property), but is looking for a a less active management in their new replacement property.
A friend of mine is considering doing a 1031 Exchange before later moving into a Replacement Property to be his future Personal Residence is that possible?

You cannot purchase the property known as the replacement property with the initial intent of moving into this property for your personal residence. Thus, you must document your intent. However, in the rare circumstance that you hold the replacement property for sufficient amount of time that is required under the law, you are allowed to change your mind later. However, at the end of the day only you will know as to whether you were being honest with the government in regards to your intent.

After moving into a property, a tax-paying human may consider to the option of taking the Section 121 exemption for personal residences. Under this newly enacted law, to be able to take advantage of the 121 exemption, the property must not have been the subject and the Replacement Property of a 1031 Exchange during the past 5 years. Does this make sense to you? If not, don't worry about. Because as with making any financial decision (other than deciding whether to buy a snow cone or not), we would highly recommend that you would consult a financial advisor and tax professional before moving ahead.
When can the purchase of a vacation home qualify as an "investment" under the Section 1031 for the purposes of tax deferrment?
Here is the scoop my reader friend. As long as the taxpayer does not use the purchased property for substantial personal use, then a vacation home can qualify under this incredible law. However, how are we to know that "substantial use" is? I think it might be a good idea to call the government and to wait on hold for at least 30 minutes to get the answers that you need. There are a few guidelines that we can all go by however. Here are just a few to consider. A vacation home will not qualify if the taxpayer personally uses the vacation home the greater of 14 days or 10% of the days during a year that the unit is rented.

What Type of Real Estate can actually be exchanged while still qualifying for the 1031 Exchange Program?

That is a great question, and thus we are going to attempt to answer it here. Real Estate that has been or will be held for the purpose of producing an income (rental), investment or used in a trade or business will actually qualify for the 1031 tax deferral. As a general rule and as a great rule of thumb, any type of real estate may be traded for another type of real estate and this gets me excited about being an American. Just to clarify for those of you out there that might need some more clarification (mainly anyone), that means rental homes, commercial office buildings, farmland, raw acreage, hotels, commercial retail buildings, commercial office / wharehouse buildings, leases for more than 30 years may all be exchanged for another type of real estate. I think the Founding Fathers of our country would be excited to know how complicated government laws have become.

What is a Qualified Intermediary, Why do I need one, and have I ever dated her?

Those fun people at the Internal Revenue Service will disallow the 1031 tax deferral and recharacterize is as a taxable event which will results in capital gains being owed should the tax payer receive the proceeds of the sale at any point. Essentially you cannot touch your own money for this type of exchange to work. If you are going to use the 1031 Exchange program, somebody else has to handle your money. The Treasury Regulations which were setup by the geniuses who make up our government allow for a middle man (Qualified Intermediary) to act as an accommodator and fondler of our money. This super trust-worthy human receives the proceeds and then disburses the proceeds on the subsequent transaction (Replacement Property). The human who is known as the Qualified Intermediary must be an independent entity who is not the Exchanger or related to the Exchanger. You can't use your Uncle Eddie to do this transaction for you. And if you are dating your potential Qualified Intermediary, then you might be in trouble. I don't know. But, I would hate to advise you incorrectly. Before dating a Qualified Intermediary you might want to consult your financial advisor.

How long do I have make a decision and to close on the Replacement Property?

The exchange period that is currently laid out by the government gives you 180 days to make a purchase of your Replacement Property. You actually have up until midnight of the 180th day and the actual due date (for any of you true procrastinators out there).

How long must I hold a property in order to complete the 1031 Exchange legally?

That is a great question my reader friend. And here is the scoop. The code and the regulations do explain with great detail that you must hold the Relinquished and the Replacement Properties for a given period of time. The key factor to keep in mind is "intent" however. The Internal Revenue Service (those fun people), have ruled consistently that property, which has been recently purchased before the exchange, was purchased for the the purpose of getting rid of the property and therefore was not held for productive use in a trade or business. And because nobody knows less about running a business than the IRS, we just have to go with it. What is awesome about this whole question is that we can all agree that the longer you own a property the more likely you are to qualify for the exchange. However, the government is fairly ambiguous about the specific amount of time in which you must have owned a property. Nice.

In one ruling of note, the IRS stated that property held for 2 or more years would qualify for the minimum holding amount of time needed to qualify for the 1031 Exchange Program. However, just to keep it interesting that is a case law outlining a plan for a shorter time period. The best thing that I can tell you is this. The longer that you hold a property before and after the exchange the less likely you are to have the IRS on you like they were with the Isley Brothers. I hope this brings some clarity to your mind.

For more information about the 1031 exchange program, purchasing Tulsa commercial real estate, Tulsa commercial real estate, Tulsa commercial office buildings, Tulsa office buildings, Tulsa real estate, Tulsa office space, Tulsa commercial space available and Tulsa commercial investment properties please feel free to contact our expert team of commercial real estate professionals today at 918-481-2080. Or you can visit us online at www.FearsClark.com.
by U.S. SBA Entrepreneur of the Year & Cofounder of Fears & Clark Tulsa Commercial Real Estate Group - Clay Clark