Tag Archives: tenancy-in-common

California Proposes to Eliminate 1031 Exchange Tax Benefits

In the midst of the worst real estate market in decades, bureaucrats in California have decided to make life in the Golden State even harder for real estate investors and professionals.

The California Legislative Analyst’s Office (CLAO) has recommended that property located outside California no longer receive the deferral of capital gains taxes offered by Section 1031.

California currently follows federal law regarding 1031 exchanges, permiting investors to exchange business or investment property for property of a like kind without paying state capital gains that might have accrued on the first property.

Under the new proposal, California would eliminate the tax exclusion for capital gains on like–kind exchanges involving out–of–state commercial property.

The reason CLAO gives for their proposal is that once the in-state asset is swapped for an out-of-state asset, the state losses all the gain since the owners will not report it.

The CLAO estimates that the state could gain revenue of approximately $25 million in 2008-2009 and $50 million in 2009-2010.

So, drowning under mountains of debt and overspending, California decides to go after its faltering real estate industry to help make up the shortfall.

CLAO’s argument in favor of eliminating deferral of state capital gains taxes for 1031 exchanges is specious at best. 

The Tenant-in-Common Association (TICA) has opposed the CLAO proposal.

We look forward to TICA mustering the facts and figures to blow it out of the water. 

If you would like more information or have questions or comments, you should contact Greg Ellis of TICA at gellis@ticassoc.org or 317.663.4176.

So far, no legislator has gone on the record in favor of the CLAO proposal.  We think it should stay that way.

Now is not the time to place greater burdens on the California real estate market.

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com

 

1031 Exchange Q and A: Unbuilt Property, Incidental Property, and IRS Deadlines

Bill owns a car wash in Chicago, Illinois. He wants to use Section 1031 to exchange his car wash for a tenancy-in-common interest in a shopping mall in Tuscan, Arizona, that will be built next year.

Can he exchange the real property involved in his car wash for real property that is not yet built?

What about the equipment and machinery used in the car wash?

Allso, Bill knows that under Section 1031, he has 180 days from the transfer of his car wash to identify replacement property and complete the exchange. He expects to transfer the car wash in late November, so he figures he has until late April to complete the exchange.

What would you advise Bill?

Bill can exchange his property for replacement property that is not yet built, so long as the replacement property is completed prior to the expiration of the 180 days.

The equipment and machinery used in the car wash (referred to as “incidental property” in Section 1031 exchanges) can be part of the exchange, so long as it meets the requirement that it is typically transferred with the real property of a car wash in standard commercial transactions and the total market value of the incidental property does not exceed 15% of the market value of the real property involved in the exchange.

Bill needs to be very careful if he transfers his relinquished property anytime after October 18.

Remember that the actual deadline for completing an exchange is the earlier of either 180 days from the date you transfer the relinquished property – or the date, including extensions, that your tax return is due for the year in which you transfer the relinquished property. Exchangers must report their exchanges on the tax return for the year in which the exchange begins.

Thus, if you relinquish property after October 18, you actually have less than 180 days to complete the exchange, unless you file for an extension.

If Bill transfers his car wash in late November, he should expect to file for an extension on his tax returns, unless he is absolutely certain that he can complete the exchange before April 15.

For more information on this topic, and for everything you need to know about 1031 exchanges, see our book 1031 Exchanges Made Simple, available at Amazon.com.

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com

1031 Exchange Q and A: TICs and Stocks

Helaine and Geoff own and manage a 43 unit rental apartment complex in New Haven, Connecticut, that they bought nine years ago for $2,300,000 and which is now worth $5,100,000.

As landlords and rental property managers, Helaine and Geoff have seen it all: vacancies, delinquencies, evictions, nuisance lawsuits, constant tenant demands for repairs, and the rising cost of keeping the property in good condition.

They would like to get out of the landlord and property management business and take advantage of the appreciation in the value of their property.

Geoff’s friend Harold points out to him that by exchanging his rental property for other property in a Section 1031 exchange he could save about $42,000 in capital gains taxes that he would otherwise have to pay to the government in a sale.

Geoff is now excited about using Section 1031. He wants to exchange the apartment complex for shares in a new high-tech company started by a group of Yale professors who have discovered an inexpensive way to make personal computers more than five times faster.

Helaine is also interested in doing a Section 1031 exchange. Her best friends, Betty and Steffie, are real estate agents. Both of them suggest that Helaine and Geoff exchange their apartment complex for tenancy-in-common interests in a mall and an office building.

Helaine tells them she isn’t interested in a tenancy-in-common. In fact, Helaine says, she is absolutely through with property management headaches, and is willing to exchange the apartment complex for just about anything except rental property of any kind.

Can Helaine and Geoff do a Section 1031 exchange with their apartment complex and save $42,000?

What about Geoff’s inclination to exchange the apartment complex for stock in a new high-tech company?

Does the advice of Betty and Steffie to do a Section 1031 exchange of the apartment complex for several tenancy-in-common interests make sense?

What about Helaine’s objection to a tenancy-in-common ownership interest in a mall or office building as just another property management headache?

Geoff and Helaine can exchange their apartment complex under Section 1031, since it is property that has been held for productive use in a trade or business or for investment.

However, Geoff’s plan to exchange the apartment complex for stock in a new high-tech company will not work for a Section 1031 exchange.

Section 1031 applies only to “the exchange of property. . . for property.” To qualify for the tax benefits of an exchange under Section 1031, what is being exchanged must be ownership of tangible property (such as land, buildings,mineral deposits, or uncut timber), not a security (such as stocks and bonds), services, or a lease or rental interest.

Geoff’s proposed investment in a new high-tech company is not an ownership interest in tangible property, and so would not qualify as replacement property under Section 1031.

Helaine should reconsider her objection to a tenancy-in-common ownership interest in a mall or office building as just another property management headache.

In contrast to other forms of real property ownership, TICs allow individual investors to own a percentage of a significantly larger and/or more expensive property, and take advantage of a greater potential for appreciation, than they could as sole owners.

TICs also allow you to use a Section 1031 exchange to diversify your real estate investments, since you can exchange a single relinquished property for TIC ownership interests in several different properties.

As Helaine’s friends Betty and Steffie pointed out, she can exchange her multi-unit rental property for TIC interests in an office building and a shopping mall.

TICs also allow individual investors to own a percentage of rental property, such as multi-family apartment complexes, office buildings, and triple net leased shopping malls without the headaches and hassles of individual property management.

TICs are most often managed by professional management companies, who take over the headaches and hassles of direct property management (collecting rent, avoiding vacancies, negotiating leases, demands for repairs and other tenant complaints, dealing with delinquencies, evictions, zoning issues, and the threat of nuisance lawsuits).

TIC ownership therefore offers the real estate investor the same kind of “arm chair” investing as stocks, bonds, trusts, and other securities, while still allowing for the indefinite deferral of capital gains taxes and recapture of depreciation.

Far from being the rental property management nightmare that Helaine fears, TIC ownership might be exactly the kind of hassle-free real property investment that Helaine is looking for.

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com