Flipping Exchanged Property?

Flipping Properties

Before we start into that subject, let’s cover a basic rule. Tax deferred exchanges are for Investment Properties. The legal definition of investment properties is “Real estate held for productive use in a trade or business or for investment.” What does that mean in laymen’s terms?

Let me make a confession to you. Although I work very closely with a team of attorneys, I myself am not an attorney or accountant, so I personally have to do that conversion for myself. Hopefully that also means that that I can be more clearly understood.

I have found it easier to explain investment property as property that you create income on (like a rental), operate a business on (like commercial property), or hold for appreciation (like raw land). An investment property cannot be your personal residence or second home.

From that, it almost sounds like flipping properties would be no problem. But, the IRS doesn’t feel that way.

Inventory

Usually when talking about real estate, “inventory” means how many homes are available to purchase; but when talking about taxes, you are talking about the purchase of something with the intent to resell. Think about a grocery store. It purchases inventory at wholesale prices to re-sell at retail prices, which is taxed as income. The IRS determines that real estate purchased with the “intent to sell for a profit” is taxed as income. So unless property is purchased with the intent to create income or hold for appreciation, it is considered to be inventory, and when sold, and is taxed as income, not investment.

Intent

How do you prove your intent? You have to prove it with fact patterns. There is also no official “holding period”, but that can contribute to a fact pattern that would prove your intent. So, if you want to go over any specific scenarios that you believe would show a fact pattern that would prove your intent was to purchase and sell investment properties, give me a call and we can walk through them. There are certainly plenty of situations that would work in an exchange if it is planned in advance. Time heals most wounds, as long as you don’t wait too long before to talk about them.

Let’s Talk about Your Situation

These are all examples of why you should come in and talk with attorneys well before entertaining the listing or accepting of an offer on the property.

Today's blog courtesy of Kevin Hummel, CEG®

Certified Exchange Specialist®

Tax Deferred Exchange Practice Group

McFerran Law, P.S.

Happy Investing!

Tax Deferred Exchange Tips

Build To Suit

What happens when you cannot find a replacement property that is worth the same price of what you sold in a 1031 exchange? One option is to make improvements to the property being purchased. You can literally build the property to suit your needs or the needs of a potential tenant.

Essentially, you can use exchange funds to pay for the improvements made to the property that can be accomplished before the 180^th day of the exchange. It is almost that simple if you are only dealing with a sale that is free and clear. The only factors that can complicate this have to do with debt and lending issues.

The Process?

In simple terms, the Qualified Intermediary (QI) steps into title during the initial purchase, acts as a general contractor to facilitate the payment of improvements, repairs, and even some personal property that is added property. Then, as soon as the work is completed, or we reach the 180^thday, that improved property is conveyed to the exchanger to complete the purchase leg of the exchange.

What Improvements Can Count?

Virtually any capital improvements can count towards the value being added to the property. The QI cannot directly pay the exchanger for labor and the value of improvements is simply their cost. As mentioned earlier, personal property can be included, as long as its value does not exceed 15% of the total value of the finished property. An extreme example was the purchase of a fork lift for use in a warehouse being improved in an exchange, or a lawn mower purchased for a rental.

What If the Improvements Are Not Completed?

The property does not need to be habitable to qualify; it simply needs to be attached. A lumber package sitting in the driveway is only personal property until it is attached to the land. There is no inspection required; you only need proof that the money was spent. Guidelines and case examples use the “snap shot rule”. In other words, if you were to take a photo on the last day of the exchange, whatever is visibly completed can be counted.

Use of an LLC

Very often forming an LLC for the process of an Improvement Exchange is an effective way to package the improvements and tie them to the property. Any agreements made with any contractors during the process would remain in effect, and the final transfer of the improved property are smoothly conveyed by a simply Assignment of LLC Interest. 

 Happy Investing!

Today's blog is courtesy of Kevin Hummel, McFerran & Burns, PS.

Introduction to 1031 Exchange

This article was forwarded to us by Sherrie Sommerseth with Chicago Title, and reprinted here with permission:

As we roll into the summer, it’s refreshing to see continuing economic improvement mirroring the growth of income property sales and 1031 Exchanges. However, the excitement of an increased property sale value can be quickly diminished with unexpected taxes. Many real estate investors are surprised to learn that taxes on their profits are substantially higher this year. When investment real estate is sold in 2013, some taxpayers could pay up to 20% capital gains tax, a 3.8% healthcare tax, depreciation recapture tax and varying state imposed taxes. Added together, these taxes can total anywhere between 30-40%, making 1031 Exchanges an invaluable wealth preservation tool. 

Tax deferral is the hot topic in the real estate community and a 1031 Exchange still allows taxpayers to defer all of these taxes by simply rolling their profits into another property or properties. While the concept of a 1031 Exchange is straightforward, some investors and advisors may not have participated in a transaction for many years and may need to be updated on how to properly execute a 1031 Exchange.

Know your options and make informed decisions for your next 1031 Exchange transaction. Register today for IPX’s two complimentary webinars!

A 1031 Exchange Introduction and Refresher Webinar

This webinar will be held on June 12th and will provide a comprehensive foundation of 1031 Exchange information. Learn the basic rules and regulations and how to apply these to your transaction for maximum benefits.

Click here to register for the June 12th webinar

Advanced 1031 Exchange Issues Webinar

This webinar will be held on June 19th and will discuss the most recent changes in tax deferred exchanges and will cover topics such as reverse exchanges, build-to-suit exchanges, using seller financing in a 1031 transaction, and related party issues.

Click here to register for the June 19th webinar

Happy Investing!