Understanding Reverse 1031 Exchanges - Do you qualify? (Updated July 2017)

How To Do a Reverse 1031 Exchange
A brief overview of the process of a reverse 1031 exchange

  1. You have a property you want to sell. This is Property A.
  2. Before you sell Property A, you find a new property you want, Property B. The IRS says that the taxpayer may not own both properties at the same time, if they want to do a 1031 exchange.
  3. An qualified intermediary, like 1031x, purchases and holds Property B until you sell the Property A.
  4. Once Property A is sold (within 180 days), Property B is transferred to you and the capital gains are deferred.
 
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Related Party Transactions In A 1031 Exchange

Related parties and related entities are described in Internal Revenue Code (IRC) Section 267(b) and 707(b)(1). Those laws can be summarized as: “Related parties” include individuals who are lineal ancestors or descendants, brothers and sisters and spouses. Related business entities include corporations, partnerships, and LLCs in which the taxpayer (or a related individual) holds a fifty percent or greater interest. Parties also include an estate in which you are a beneficiary or a trust of which you are a beneficiary. Aunts, uncles, cousins, nephews and relations by marriage (except spouses) are not considered. Planning opportunities exist.  For example a son in law can purchase replacement property from his in laws without running afoul of the rules. 
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Cash From Your Property - A 1031 Loan Lets You Access Equity

Freeing up money before you sell your relinquished property can be a real benefit! Taxpayers reason that after making substantial cash contributions to their investment property certainly they should at least be able to take their cash contributions back out on a tax deferred basis. Cash contributions include: down payment, monthly reduction of principal balance on mortgages, and capital improvements to the investment real property. Nevertheless, the Internal Revenue Service Regulations are clear: Exchange proceeds received by the taxpayer during an exchange will be taxed. 
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Related Parties and Section 1031

Many taxpayers wish to sell a less desirable property and purchase a more suitable property from a related party, and achieve tax deferral under section 1031.  The short answer is that it cannot be done. There are extensive tax rules about related party transactions, but the main point is that the IRS looks at related parties as the same taxpayer.  When a taxpayer sells the relinquished party to an unrelated person and buys the replacement property from a related party the IRS does not consider this as an exchange.  After the entire related party seller ends up with cash.  
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1031 Exchange Options

Real estate investors are always trying to improve their situation. As life moves on the definition of “improvement” also changes. With IRC section 1031 investors can drastically change the shape of their real estate investment without current tax liability. 
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Top 10 Ways to Legally Avoid Taxes

Number 10: Given the choice, using a 1031 exchange is preferable to the other tax strategy of dying to avoid Capital Gains Tax. (And all estate taxes this year, by the way!)  
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When the Clock Starts Ticking

There lots of rules to follow when you are trying to complete a 1031 exchange. The 45 day ID rule and 180 purchase rules can be the most difficult to deal with. 
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Single Member LLCs as Tenants in Common

Limited Liability Companies are young creatures recently created by State statutes. By contrast the law of tenants in common is centuries old, much of it dating back to English law. In a May/ December romance these are wed into what is often the best structure for holding multiple owner investment real property. 
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Real estate tax tips for exchanges

Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized. 
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Community property and tenants in common

Dear Steve,
As you have advised, my wife and I will be holding title as two single member LLC's as tenants in common. My lender does not require a TIC agreement. Does the IRS require a TIC agreement? Is there anything else that I need to do to insure that the IRS will allow my 1031 exchange considering that my wife and I held title as community property in California and will now be holding title as tenants in common in Colorado? 
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