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When an Exchange Straddles Two Tax Years

Exchange Update

When an Exchange Straddles Two Tax Years

As we begin another new year, many Exchangors will find themselves with an exchange that straddles two tax years. That situation usually leads to one of two questions:

  1. My exchange was a success, but what year do I use to report the transaction?
  2. My exchange failed. I got my money back, but when do I report the gain?

The first question is easy. The exchange is reported on IRS form 8824, for the tax year in which the relinquished property was transferred. So, for an exchange that began in 2021 and concludes in 2022, the transaction is reported on the taxpayer’s 2021 tax return. If there are unused exchange funds, or “boot”, the receipt of such funds can be reported on the 2022 tax return, using IRS form 6252.

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Safely Refinance A 1031 Property

Exchange Update

Refinancing Before or After an Exchange

Seasoned 1031 exchangors know that if they receive cash in an exchange, rather than investing it in the replacement property, the transaction will be partially taxable. It’s not surprising, therefore, that many real estate investors plan to refinance the relinquished property immediately before an exchange, or the replacement property immediately after an exchange, in order to get cash out of the property without being taxed.

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Holding Period Requirements in a 1031 Exchange – Not Just a Matter of Time, Intent is Key

Exchange Update

Property must be “held” for investment or business use (a “qualified purpose”) in a 1031 tax-deferred exchange. This requirement applies to property being sold to start an exchange, as well as property acquired as replacement in an exchange. The length of a holding period is often cited by exchanging taxpayers to satisfy the qualified use requirement, but time is just one factor that the IRS and courts will consider in determining the taxpayer’s intent. Though the Internal Revenue Code and Treasury Regulations are silent on this issue, a careful analysis of IRS rulings and case law yields some principles that can be stated with certainty.

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Vesting and 1031 Exchanges: “Same Taxpayer” Rule

Exchange Update

In order to qualify for tax deferral treatment under Internal Revenue Code § 1031, the taxpayer that sells relinquished property in an exchange must also purchase the replacement property. For example, if Alex Smith sells relinquished property as an individual, Alex Smith must also acquire the replacement property. While a simple concept in theory, investors often overlook this important detail. A variety of circumstances can arise under which vesting of the replacement property must differ from the relinquished property’s original vesting. In some cases, there are certain exceptions to the general rule that can be utilized to meet the “Same Taxpayer” requirement, as outlined here:

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The nation’s hottest housing market? Surprise — it’s Fresno

Couple on Patio

After five years of planning and months of construction delays, first-time developer Vincent Ricchiuti was ready to open his luxury apartment complex. Then came the pandemic.

“We thought it was the worst time you could imagine,” Ricchiuti said about the grand opening in spring 2020.

Turns out he didn’t need to worry. His project, The Row, was opening in the nation’s hottest housing market: Fresno.

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Like-Kind Requirements For 1031 Exchanges

Exchange Update

Internal Revenue Code Section 1031 applies only to “property held for productive use in a trade or business or for investment”. It allows for the deferral of capital gain tax if such property is exchanged solely for property of “like-kind”. Contrary to what many people believe, “like-kind” does not mean that an investor must, for example, exchange land for land, or a duplex for a duplex.

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Using Reverse Exchanges as a Tool in a Changing Market

Exchange Update

Many investors are aware of their ability to use a reverse 1031 exchange when they are faced with having to close on their replacement property before they are able to close on their sale property; however, reverse exchanges can also be used proactively when tight inventory creates purchasing challenges.

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Extensions Announced for 1031 Deadlines

Exchange Update

Notice 2020-23 (which updates Notice 2020-18, “Additional Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic”), released on April 9, 2020, provides Taxpayers who are currently engaged in a 1031 exchange some relief from the 45-Day Identification and 180-Day Exchange Period deadlines.

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Fresno County Approves Lease of Former Clovis Costco Building

Clovis Costco

An empty Clovis retail building is going from a Costco to Child Welfare Services.

The Fresno County Board of Supervisors has approved an agreement to lease 380 W. Ashlan Ave., the former home of the Clovis Costco that closed in July 2019 after 29 years in operation.

The county’s rent on the building would start at $186,691 per month for the first year — more than $2.24 million for the entire year. That rate would increase annually to $352,858 a month — more than $4.23 million for the full 12 months in the final year of the 19-year lease agreement.

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