§1031 Exchange Intermediary

I was recently asked to write a short article for a local publication about the basics of Section 1031 exchanges. Over the time I've been here at activerain, my blog topics have covered a wide range of exchange-related topics, including the basics. However, it has been a long time since I've addressed that basic information. Writing the article caused me to realize that was the case, so this is an attempt to remedy that situation. With that in mind, here is the first of three blog entries having to do with the four basic hurdles for the standard 1031 exchange:

What if there were a way for a real estate investor or business owner to sell assets and reinvest the profits with absolutely no income tax liability whatsoever? A Section 1031 Exchange allows an investor or business owner to do just that. Believe it or not, this option has existed within the US tax code for well over 80 years,

Why exchange? There are many benefits, but the overriding one is the tax savings that allow more of your equity to be used in the new property, Example: You sell investment property and realize net proceeds of $100,000. Without an exchange, $30,000 of your proceeds could easily go to taxes, leaving only $70,000 for reinvestment. By employing an exchange, the entire $100,000 can be reinvested with no tax liability. Before you enter into an exchange, it is highly recommended that you consult with your tax or financial advisor to ensure that a 1031 exchange is right for you.

Between 1984 and 1991, many of the modern-day rules and regulations were written into the code. Let's examine the rules that apply to the common exchange.

#1 - The properties must quality. In IRS terms, they must be "like-kind." The easiest way to determine whether two pieces of real estate are like kind is to ask these two questions:

"Did I hold the property I am selling as an investment or use it in my business?" and "Do I intend to hold the property I will buy as an investment or use it in my business?" If you can answer, "Yes," to both of those questions, the properties qualify and they are like-kind. Yes, raw land can be exchanged for an apartment building. Rental houses can be exchanged for farmland. The possibilities are endless!

(Article continued in Part 2.)

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Please see the next two blogs for additional information on Section 1031 basics.

Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Ken Tharp, President

800-805-1031 toll free

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges - The Basics (Article #1) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

In an article in the Des Moines Sunday Register, author Dan Piller investigates the value of farmland in Iowa based upon the results of a number of recent farm auctions. The conclusion? Farmland values are not rising at the rate they have over the past few years. Probably not a huge revelation to those of us who keep track of things, nor a huge surprise to those of you who don't. The current macro-economic conditions in this country and the world affect farm prices just as they touch virtually every other aspect of our lives.

However, the good news is that while prices may not be increasing at the breakneck speed they once did, they are not necessarily falling, either. The article quotes prominent Iowa State University economist and all-around farmland guru Michael Duffy as follows: "What we're probably seeing now is a plateauing, rather than a fallback in land prices. When people say prices are down, it probably is reliatve to what they expected two or three months ago" Another prominent farmland figure, Randy Hertz of Hertz Farm Management, puts it this way: "We're not seeing a pullback in land prices by any means, but the growth in land prices may have slowed." 

While land owners feel the uncertainty that nearly all Americans feel right now, most are not concerned about a collapse such as the one that occurred in the 1980's. Land values rose at a hyper rate back then, too, but those purchases were oftenmade with bank loans. In a similar fashion to what is now occurring in the mortgage meltdown, farmers got upside-down on their farms when values dropped and were unable to generate the cash to make the payments. In today's farm economy, land owners are either purchasing new land with cash or with limited leverage, offering them a much greater probability of weathering future storms.

I welcome your comments on land values. Please let me know what you are thinking or wondering.

Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Ken Tharp, President

800-805-1031 toll free

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Farmland prices leveling off? * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

As Thanksgiving approaches, it's an interesting time in our country and the world. (Have you heard the saying, "May you live in interesting times?" I had always thought of that saying as a blessing, but it appears that it may have first started as a curse, at least if you can believe the Wikipedia entry: Wiki it.) At any rate, counting our blessings is never more common than at this time of the year. And even in this turbulent time, with our stock market imploding and taxpayer money flying around like confetti, it's still important to take stock of ourselves and give thanks. We still live in what I and the vast majority of its citizens consider to be the finest country in the world. We're not without our faults, but by and large we do things right.

Individuals in this country have the greatest opportunity for success that exists anywhere in the world. Regardless of what you think of his politics, it is a remarkable, almost unbelievable story that Barack Obama will be our next President. Where else in the world could someone with his background be democratically elected to the highest office in his country? (Please don't read that last sentence as anything but a compliment; I'm one of those who will not agree with most of his policies, but I recognize that he has accomplished a tremendous feat by being elected.)

Before I get too political, and at the risk of getting a little too syrupy, let me just say what I intended to say in this blog: we are a blessed people, and even in this downturn we must stand aside and recognize that. No one knows how bad things will get or if we're near or past the low point, but regardless of when things turn around we all have many things about which to be thankful. Please remember that and remember especially to hold your family close and tell them that you love them.

Happy Thanksgiving, everyone

Ken Tharp, President

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Thanksgiving Time * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

What if you own property outside of the United States and you want to utilize Section 1031 for a tax-deferred exchange of that property? Is that okay?

The short answer is, "It depends." It depends upon where your property is located and where the property you wish to acquire is located. Essentially it comes down to "US property for US property" and "foreign property for foreign property." The reason for this is that the code does not consider non-US property to be like-kind to US property. The Virgin Islands and Guam, though, are US territories and can be exchanged for all other US properties.

So if you're tired of that flat overlooking Paris's Parc Monceau, go ahead and exchange it for that beachfront place in Belize.

Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Exchanging Foreign Property * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

A Private Letter Ruling issued by the IRS relating to a taxpayer's intention to acquire development rights as his replacement property in a 1031 exchange is an interesting situation. In this case, the taxpayer sold a property as his relinquished property in the exchange and gave up his fee interest in that property. As his replacement property, he desired to purchase unused development rights to use on property he already owned in order to do more with the property than was allowed prior to the purchase of those rights. (See Private Letter Ruling 200805012.)

"Development rights" are one of the "bundle of rights" that one typically possesses with the ownership of real property. The "bundle of rights" include such rights as the right to possess, use, modify, develop, lease, or sell the land. Many of us are aware of mineral rights, which constitute one of the items in the bundle. If mineral rights are separated from the remaining items in the bundle, the owner is prohibited from doing such things as drilling for oil or mining the land. The right to develop is another of the rights within the bundle. If a property owner sells the development rights to his property, the remaining rights remain as before. Development rights can be sold to the owner of another parcel who wishes to develop his property and is unable to do so without those rights.

There are a couple of prerequisites to qualify. First, development rights must be considered real property by the state. And second, those rights must be perpetual, or at least if they are not explicitly granted in perpetuity, there must be no expiration date for the development rights so that they are effectively perpetual.

Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Development Rights are Like-Kind to Real Property * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Do you plan to convert an investment property into your personal residence? The Housing Assistance Tax Act of 2008 that President Bush signed into law on July 30, 2008 carries a provision that affects the practice of excluding gain when you sell a property that was once used for another purpose, such as a rental property, and then converted into your personal residence. The effect of the new law is a restriction on the amount of gain you can exclude through Section 121, the personal residence exclusion section of our tax code.

Section 121 of the Internal Revenue Code allows a gain of up to $250,000 ($500,000 if you are married and file jointly) with no tax obligation when you sell a house used as a primary residence for two of the previous five years. You don't even need to occupy the property for two consecutive years during the five year period; just two years out of the five in any form.

As of January 1, 2009, the new law reduces the amount of gain that you can exclude if you have used the property for any purpose other than as a primary residence. The reduction is applied on a pro rata basis by determining the percentage of years the property is not used as a primary residence purposes to the total years the property is owned by the taxpayer.

Sometimes examples help clarify things. Here's one: a married couple acquires a house that they use as a rental in 2009. The couple rents the house for four years, and then moves into it and uses it as their primary residence for the next two years. The couple sells the property at the end of year 6 with a gain of $300,000. Applying the old law, the couple would be eligible for the full $500,000 exclusion and would owe no tax. The new law requires the application of the proration described in the paragraph above. Two-sixths (two out of six years) of the gain, or $100,000 would be eligible to be excluded.

Exceptions to New Law:

A couple of interesting exceptions to this new restriction exist. First, periods in which the property is not used as a primary residence that occur prior to January 1, 2009 do not reduce the excludable gain. Using the example provided above, if the three year rental period occurs prior to January 1, 2009, the exclusion would not be reduced and the couple would be able to exclude gain on the sale up to the full $500,000.

A second interesting exception is if you convert property that you first used as your primary residence into investment property, it will not be affected by this new law. By way of example, consider this scenario: you own and live in a house for eight years, at which time you move out and rent the house for two years before selling it. Since your investment use of the property took place after your use as a primary residence, all of the gain accumulated over your 10 year ownership of the property can be excluded up to the $250,000/$500,000 limits.

There are also some limited exceptions for taxpayers who serve on "qualified official extended duty" or are temporarily absent due to changes of employment, health conditions or other unforeseen circumstances. Individuals in those situations should have their tax advisors review the new law to determine whether the exceptions could be of benefit to them.

Combining Exclusion with 1031 Exchange

One thing that did not change is the requirement to own property for at least five years if you acquire it in a 1031 exchange and subsequently convert it to your primary residence before it is eligible for the Section 121 exclusion.

If you convert your primary residence to an investment property and subsequently sell the property, you should be eligible to combine your Section 121 exclusion with a Section 1031 tax deferral for the gain that is not excludable under Section 121.

Hopefully this did not make your head spin too much. It is clear that some complicated situations could arise out of the application of this new law. Advance planning through consultation with your tax advisor is a must. The inclusion of a knowledgeable exchange expert in the planning process would be equally beneficial.

Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Converting Investment Property to Personal Residence? New Limits on Gain Exclusion! * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

A recent survey of farmland real estate brokers shows that the price of Iowa’s best farmland rose by an average of 6.6 percent from March 2008 through August 2008, cooling slightly versus the previous six month period. This survey was conducted by the Iowa Farm and Land Chapter 2 Realtors Land Institute, as it has been done every March and September since 1978. The RLI is composed of real estate brokers who specialize in farm and land sales, farm management, and appraisals. The results were cited in an article in the Sunday Des Moines Register on September 17, 2008.

Troy Louwagie, the survey chairman as well as a real estate coordinator at Hertz Farm Management in Mount Vernon, had this to say about the results of the survey: “You’re seeing less demand for land for housing and commercial developments in the cities and a return to the more normal profile of 80 percent of buyers being existing farmers.” This compares to the same period last year during which approximately 60 percent of buyers being existing farmers.

For those who follow commodity markets, it is obvious that commodity prices have been a big contributing factor to the rising land values. While a plunge in commodity prices could precipitate a corresponding plunge in land values, Randy Hertz of Hertz Farm Management says, “Fortunately, farms today are in a much stronger balance-sheet position than they were 25 years ago” when land values declined by 70 percent. And at this point, there is nothing to indicate that a plunge in commodity prices is imminent or even anywhere on the horizon.

For the survey, the state is divided into nine districts. Only one of those districts had per-acre averages for high-qualify cropland of less than $5,000 in this survey, compared to four districts with an average lower than $5,000 in the survey over the same period a year ago. The averages in two of the districts exceeded $6,000 per acre.

Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Iowa Land Price Survey Shows 6.6% Rise in Six Months * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

About a month ago, the US Department of Agriculture published its annual report on the value of agricultural land in the United States. As you might expect, values were up nearly everywhere, but especially in the Midwest.

High prices on commodities such as corn, soybeans and wheat drove prices higher in the Northern Plains region, which encompasses states such as Kansas, the Dakotas, and Nebraska. Average farmland values increased 15.5 percent in that region, the highest increase on a percentage basis in the country.

On a per-acre basis, the most expensive farmland in the US was in Massachusetts - $12,200 per acre on average. Whew! Rhode Island and Connecticut were close behind. On the opposite end of the spectrum, an acre of farmland in New Mexico can be yours for an average of only $630.

According to the report, wheat increased 77 percent during 2007 on the Chicago Board of Trade. Soybeans soared 78 percent and corn rose 17 percent. These jumps are the primary reason for the increased values in farmland.

All of this took place and continues to take place in the face of stagnant or declining values in the broader real estate market. It is an interesting time, to say the least.

Please feel free to ask us any questions on this topic as well as any other exchange-related topics.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Quick Update on National Farmland Prices *

The primary objective of most Section 1031 exchanges is to move an investment from one property to another without incurring a tax liability. In other words, take your money out of this property and put it into that property and pay no capital gain tax. By following the rules and regulations of Section 1031 properly, an investor can accomplish that without having a capital gain tax bill.

Occasionally someone we work with will ask a question similar to this: “How about if I refinance my property and pull cash out, then do an exchange into another property? Borrowed cash is tax-free, right?” The answer is yes, most of the time. However, if an investor refinances close to the date of a sale and then proceeds into an exchange, the IRS would likely consider the refinance proceeds as cash taken out of the exchange (therefore being taxable) unless there was some fairly clear-cut business reason for the refinance outside of simply wanting tax-free cash.

The same goes for a refinance shortly after the purchase of the replacement property. Absent a definable purpose for the refinance, the IRS would quite possibly consider the refinance proceeds as boot, and again, expect taxes to be paid on that cash.

The essence of the matter is that the property owner should be able to substantiate an economic or business purpose for the refinance separate from merely getting around Section 1031 rules to pull out cash. The more time between the refinance and the sale (in the case of a relinquished property) or the purchase and a refinance (in the case of a replacement property), the better.

As always, it is critical to discuss matters such as this with one’s tax advisor for specific advice for your circumstances and plans. Please feel free to ask us any questions on this topic as well as any other exchange-related topics.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * What about Refinancing Before or After an Exchange? *

If you are in the western Iowa/eastern Nebraska area, please consider attending the West Central Iowa Board of Realtors meeting at 6:00 PM on Monday, September 8, 2008 at the Harlan, Iowa Golf and Country Club. The board has asked me to speak on the basics of Section 1031 exchanges. You have my promise that it won’t go on too long and I’ll cover the essentials in a no-nonsense, plain English manner. Non-members are welcome and they pay the same price as the members!

If you are interested, please get in touch with me in order to make a reservation and be sure that there’s a place for you. I hope to see you there!

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * West Central Iowa Board of Realtors Meeting *