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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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Madera Among Fastest-Growing Counties in Western U.S.

Construction Photo

MADERA COUNTY — According to the latest government data, Madera County is outpacing other similar-sized counties, both in California and around the western U.S., in terms of economic growth.

Recently published United States Bureau of Economic Analysis records show that for 2018, the latest year for which statistics have been compiled, Madera County saw the fastest growth in real GDP among the Far West Region’s “medium-sized” counties.

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Drop and Swap – Dissolution of Partnerships Prior to Exchanging

Exchange Update

When a partnership is selling property and some of the partners want to cash out and others want to reinvest, it can create complications with a 1031 exchange.  There are a couple of reasons for this.  First, under IRC § 1031(a)(2)(D), partnership interests are not exchangeable.  Second, the taxpayer that sold the relinquished property must acquire the replacement property. For example, if a partnership sells the relinquished property, that same partnership must buy the replacement property.  If individual partners buy the replacement property, it will not be a valid exchange.

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WE’RE BACK, BABY! FRESNO TOP AG COUNTY ONCE AGAIN

Navel Oranges Packing

For the first time since 2013, Fresno County is the top agricultural county in California and the U.S.

This news comes with the Tuesday morning release of the 2018 Tulare County crop and livestock report, which shows sales of agricultural goods produced there last year totaled more than $7.21 billion, a 2.5% increase from ag sales in 2017.

 

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