Have you ever thought about trying a Section 1031 as a DIY (Do It Yourself) project? If so, you might want to think again. Read on.
A couple in Arizona tried to do it themselves and paid a steep price as a result. They sold a piece of Arizona property for $76,000, took $10,000 of that as earnest money, and the balance was placed i
n an escrow account with a title company. The couple made any number of mistakes as they planned their DIY exchange. Among them, they neglected to state their intentions to enter into an exchange prior to their sale; their account with the title company did not expressly limit their right to receive, pledge, borrow, or otherwiseobtain the benefits of the cash held in the escrow account; and so on.
The Tax Court wasn't terribly fond of the plan of this Arizona couple. Their tax basis in the property was quite low ($8,500), so there was a rather large gain that the couple sought to defer taxes on, but the Tax Court wouldn't play along. Justifiably so. The IRS makes the process of a 1031 exchange relatively clear, and anyone who employs a reputible, experienced qualified intermediary firm to handle the exchange should find it fairly easy to end up with an easily substantiated exchange. When a taxpayer attempts to do things outside of the safe harbors that the Internal Revenue Code sets out, the result is predictable -- failure.
In this case, the couple was required to recognize the gain of the sale of their Arizona property, resulting in tax of $14,475 plus penalty of $2,895 -- a total of $17,370 in an apparent attempt to avoid a fee from a reputible QI company. Ouch.
Don't make that mistake. Seek out an established intermediary with client references; one who belongs to and supports the association for the exchange industry, the Federation of Exchange Accommodators.
Image: nuttakit / FreeDigitalPhotos.net
(If you're into these sorts of things, here's the citation for the info on this case direct from the IRS.)
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Please consider IOWA EQUITY EXCHANGE as your trusted 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
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 © 2011 By Ken Tharp, All Rights Reserved. * DIY 1031 - Not So Fast * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
David had sold the farm that he had owned for many, many years and realized a capital gain of $800,000. With that money, he entered into a Section 1031 tax-deferred exchange with us and went out to find his new property. His intention was to find an apartment building that would provide a nice income.
What he found was a property that he could purchase for $650,000, which left him with $150,000 on which he would owe taxes to both the federal government and the state in which he lived. At that point, he considered trying to find another property such as a duplex or a nice single family home. After discussing the situation with us, we jointly reached a different conclusion. The property he had agreed to purchase for $650,000 could benefit from new windows, new siding, and a new roof, which would use up the remaining $150,000 in David's exchange account.
In order to include the improvements in the exchange, we set up an Exchange Accommodation Titleholder ("EAT") to hold title to the new property during the course of the improvements. An EAT is an LLC that exists for the sole purpose of holding title to such a property so that the closing that would transfer title to the exchanger (David, in this case) can be delayed. Once the improvements were completed, a closing to transfer title of the new property from the EAT to David was accomplished and David had successfully used all of his exchange funds in the new property.
The timing requirements of an exchange state that the entire exchange must be completed within 180 days. This requirement applies to an improvement exchange as well. The 180 days allowed starts from the date that the relinquished property closes, so in some cases this can create some complications. However, with proper advance planning, morphing your exchange into an improvement exchange can salvage the complete tax deferral that might otherwise not be available.
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Please consider IOWA EQUITY EXCHANGE as your trusted 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
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 © 2010 By Ken Tharp, All Rights Reserved. * An Exchange that Morphed into an Improvement Exchange * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
Mary and Michael had an unusual situation. They had a firm contract to sell their farm that was set to close on September 17 (we'll call this transaction "S17"), but they were also under contract to buy a farm with that closing set for July 26 ("J26"). A pretty clear-cut reverse exchange situation, but there was a wrinkle.
The price of S17, the farm they were selling, was $1.6 million, and the agreement on J26, the one they were buying, was only $700,000. They fully intended to purchase additional property to use up the remainder of the $1.6
million they would receive from their sale, but they hadn't found any strong prospects yet. What we discussed, and what Mary and Michael ultimately decided to do, was to structure a reverse exchange for the closing of J26. Then, when S17 closed, we would use $700,000 of the proceeds to wrap up the reverse portion of their exchange. The remaining $900,000 would go into an exchange account for a new forward (or standard) exchange.
One of the interesting things about combining a reverse and a forward exchange is that there are separate timing deadlines for the two exchanges. In this case, on September 17, the forward exchange started with a deadline to identify potential replacement properties 45 days later and a deadline to conclude the exchange 180 days after September 17. Mary and Michael used all of the time from when they first completed their exchange documents with us in early July to 45 days past September 17 to locate and put under contract three outstanding rental homes in Arizona, all of which closed well within the 180 day deadline. In this sort of combination reverse/forward exchange, if the deadlines were stretched to their limits it is possible to have as much as 360 days to complete an exchange!
The key to this or any other 1031 exchange transaction is proper advance planning. We offer consultation at no cost whatsoever, so please take advantage of that should you wish to investigate the pros and cons of any sort of Section 1031 exchange situation.
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Please consider IOWA EQUITY EXCHANGE as your trusted 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
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 © 2010 By Ken Tharp, All Rights Reserved. * Case Study Corner - Year-End Exchanges * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
Look out ahead, folks! Regardless of what you think of the health care "reform" that passed the House of Representatives yesterday (and I guess the quotes make it clear what I think of it), it will have a huge impact on those of us who call ourselves investors.
Within the thousands of pages of legislation, there is a small provision with a significant effect. It is a 3.8% "Medicare payroll tax" on capital gains and other investments. This increases the capital gain rate from its present 15% to 18.8%. **Please see 4/8/10 update at bottom.** Bad, but perhaps tolerable, you may think. However, in addition to this 3.8% surcharge, at the end of 2010 the capital gain rate is set to increase from 15% to 20% due to the expiration of the Bush tax cuts. Combined with the 3.8% Medicare boost, that results in a new capital gain tax rate starting January 1, 2011 of 23.8%! **Please see 4/8/10 update at bottom.** If you do the math, you'll see that this represents a almost a 60% increase in the capital gain rate versus the present 15%!
Today I have to tell you that if you were ever thinking of selling your investment real estate without using a 1031 exchange, now might be the time to do it. I don't believe that you will be able to avoid the 3.8% surcharge; that will likely go into effect as soon as President Obama signs the bill, which appears to be scheduled in the next day or two. **Please see 4/8/10 update at bottom.** But you can avoid the 5% increase that happens at the end of 2010 if you close prior to December 31, 2010. Of course, you can avoid paying all of those taxes today by utiliziing a Section 1031 exchange.
If you have questions, please feel free to get in touch. This is a fluid situation, so I won't claim to have all of the answers, but I'll do my best to find out for you.
**4/8/10 - I've been trying to get definitive word on when the 3.8% increase goes into effect without any luck until today. I broke down and read the bill itself for the information. (Not the entire 3,000 pages, mind you; just the pertinent section.) The increase takes effect on 1/1/2013, so it is not quite as onerous as I originally suspected. Some solice, I guess.
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Please consider IOWA EQUITY EXCHANGE as your trusted 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
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 © 2010 By Ken Tharp, All Rights Reserved. * Capital Gain Tax Increases Coming * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
This is the first in a planned series of case studies, where we take a look at specific exchange issues relative to a specific client. No real names, no real locations, no real property descriptions, but some good general knowledge. Hope you enjoy this new feature.
Joe called in the late fall of 2008. He was considering an exchange involving property he owned in Iowa. His concern was that he might not be able to find the specific type of replacement property he wanted. He was willing to take the hit from capital gain taxes if he couldn't find the right property, but of course he didn't really have a choice on that! We talked to him about the possibility of beginning an exchange and what would happen if he did not find a property he was happy with. Joe was in an enviable position, but could we convince him of that?
Because the closing on the sale of his relinquished property was scheduled for Dec. 1, his 45-day Identification Period would not end until the middle of January, 2009. His 180-day Exchange Period extended well into 2010 as well, of course. Therefore, if he began an exchange, he would have no access to his proceeds until sometime in 2009. What we explained to Joe was that those facts placed him in the position of controlling whether he reported his capital gain (assumed his exchange failed) during 2008 or 2009. As long as he made a diligent effort to complete his exchange, failure to complete it would allow him to choose to report the sale as an installment sale, with the proceeds not received until sometime in 2009. Alternately, and at his sole discretion, he could choose to report the gain in 2008 if it was to his benefit. If you recall, during the presidential campaign there was discussion of possibly raising the capital gain rate, and there was also discussion of possibly lowering the rate. With such uncertainty, the option of reporting in either 2008 or 2009 gave Joe the ability to conceivably wait clear until October 15, 2009 (assuming automatic filing extensions were done) to see whether the new congress and the new administration made any changes to the capital gain rate. We thought this was a brilliant strategy!
Alas, Joe elected not to pursue an exchange and was therefore subject to reporting in 2008. It all turned out fine for Joe since the capital gain rate did not change, but it still points out the value of the strategy. The situation arises every year in the late fall, though, so keep it in mind for future years.
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Please consider IOWA EQUITY EXCHANGE as your trusted 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
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 © 2010 By Ken Tharp, All Rights Reserved. * Case Study Corner - Year-End Exchanges * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
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Iowa Equity Exchange is a nationwide, trusted provider of Qualified Intermediary services for all types of Section 1031 tax-deferred exchanges. Free consultation about potential exchange transactions.
IOWA EQUITY EXCHANGE meets the needs of investors and business owners who desire to defer capital gain taxes on real estate transactions involving property held for investment or used in a business. We provide Qualified Intermediary services for tax-deferred exchanges throughout the United States. All exchange structures are supported and available through Iowa Equity Exchange: delayed exchanges, reverse exchanges, improvement/construction exchanges, business asset exchanges, and parking exchanges.
Ken Tharp established Iowa Equity Exchange to serve investors of all levels of expertise and experience. He has been a real estate investor himself since 1979. During the past thirty-plus years, Ken has been involved in virtually all areas of real estate – including sales, new construction, property management, and extensive renovations. After personal experience in a number of §1031 tax-deferred exchanges, it became a passion to expose this invaluable process to as many others as possible—thus was born Iowa Equity Exchange.
At Iowa Equity Exchange, our commitment is to provide investors, business owners, and real estate professionals with the highest level of expertise. Security is available for every dollar of your funds while they are held in trust. We pledge to maintain the integrity of every exchange.
A “Qualified Intermediary” has the very specific role of guiding the investor through a §1031 exchange. We inform the exchanger of exchange requirements, produce the necessary exchange documents, provide the critical time monitoring procedures required, and manage the investor’s funds while in our possession. We are not engaged in the practice of law or accounting; we urge all clients to discuss the matter of exchanging with their trusted advisers. We will be happy to join in those discussions if desired by the parties.
If you are interested in learning more about Section 1031 tax-deferred exchanges, there is a lot of information on our web site, www.iowaequityexchange.com.
IOWA EQUITY EXCHANGE. INTEGRITY. PRECISION. SECURITY.
Our Mission Statement: Iowa Equity Exchange exists to provide Qualified Intermediary services, but to do so with the utmost of integrity in our actions, precision in our documentation, and security for our clients’ funds.
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Iowa Equity Exchange Is a proud member of the Federation of Exchange Accommodators, the only trade association dedicated to the representation of professionals who conduct like-kind exchanges under Section 1031 of the Internal Revenue Code.
Members of the Federation of Exchange Accommodators must read and agree to abide by a rigorous Code of Ethics that can be found at the association's web site, www.1031.org.
In addition to the FEA, Ken Tharp is a member of the Iowa Commercial Real Estate Association, the Two Rivers Real Estate Investors Association, the Associated General Contractors of Iowa, the Iowa Land Improvement Contractors Association, the Omaha Real Estate Investors Association, and the Quad Cities Rental Property Association. Ken speaks frequently to real estate investor associations, real estate company meetings, various Boards of REALTORS®, CPA groups, and a variety of other organizations.
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Testimonials
"It is a pleasure to work with you on these 1031s. You make things SO easy!"
President of title company, 1/28/11 "
You did a wonderful job! Everything was done correctly and you were very informative."
Jeff P., Everly, IA 1/18/11
"This was our first experience with a 1031. We did not fully know what to expect. You walked us through it well."
Name withheld upon request,1/3/11
"Since this entire process was Greek to me, I truly appreciate your explanations, your friendliness, and your expertise. As a person of German ancestry, your perfectly organized synopsis of the exchange was noted with pleasure!"
Susan J., Red Oak, IA 12/31/10
"Ken, thank you so much for your very professional work in handling our 1031 exchange. Your expertise certainly took the stress out of the whole transaction. Your instructions were always very clear, concise, and timely. I would recommend your company to anyone."
Roger A., Morrill, KS, 8/4/10
"You did a great job and made the transaction go very smoothly and efficiently. Thanks for your help and will definitely use you again if needed."
Debbie W., REALTOR®, Atlantic IA, 4/7/10
"This whole process was a completely new venture for my wife and me. Your services were recommended to me by our tax preparer. This transaction exposed you to two attorneys who knew of the process, but not your office. They were both favorably impressed and said they would use your services again. It was a job well done."
Name withheld upon request, 3/26/10
"Iowa Equity Exchange has an excellent working knowledge of the 1031 Exchange process. What separates them from other intermediaries with whom I spoke is the full-service support they provide. From the first phone conversation prior to engaging his services to the follow-up over a month after the Exchange was complete, Ken always provided support that went far beyond simply executing the 1031 paperwork. When you have the opportunity to work with Ken on your exchange, you will realize that the high quality of advice and support that he provides is the same whether you are a customer or a member of his own family. Thank you for all of your assistance...I sincerely appreciate all of your personal advice and suggestions that went beyond the actual 1031 Exchange. I look forward to the next opportunity to work with you."
Paul and Rachael B., Kearney, NE, 3/22/10
“Very organized, neat and professional. You were just a phone call away for all our questions and concerns about the 1031 process. All phone calls were returned and questions answered. We…would recommend you to others.”
Burl V., Pacific Junction, IA 3/17/10
“Pleasure to work with! Great communication. Very simple transaction.”
Amy & Rod N., Griswold, IA 3/2/10
“Iowa Equity Exchange was very thorough and did an excellent job with follow-up.”
Jim N., Knoxville, IA 2/9/10
“Very good job. I will recommend you.”
Dr. Ed R., Des Moines, IA 11/3/09
“Wish all professionals were as organized and efficient as you.”
Niles and Vickie J., Chandler, AZ 8/14/09
“I am so glad I decided to work with you on these exchanges. I just want to let you know that everyone who has been involved and in contact with you has expressed excessively how nice you are to explain everything to them as the process progresses and how patient you have been with all of us who are ignorant of this business. You have made this so easy for everyone involved. Thank you from the depth of my heart. With all of my hysteria about the whole sale transaction, you have been the one smooth factor I could count on.”
Lora J., North Liberty, IA 8/6/09
“Ken’s manner over the phone was most helpful and each detail was covered and explained. Ken really was a super help. Thanks so much!”
Lorna S., Montgomery, AL 5/26/09
“I can’t think of a thing you could have done better. I always felt confident that I was working with a true professional. Thanks!”
Ronald N., Athens, WI 4/10/09
“Very smooth transaction. No problems. No surprises.”
Stephen D., Johnston, IA 3/28/09
"Very professional, knowledgeable and helpful. Would definitely use your services again or recommend you to someone else."
Pam E., Emmetsburg, IA, 3/10/09
Excellent service, I would highly recommend for a 1031 exchange."
David E., West Des Moines, IA, 2/4/09
“Thanks for your prompt attention to all of our paperwork and your very clear instructions. This could have been complex and cumbersome, but you made it smooth and easy.”
Jean I., Olympia, WA 1/22/09
“Excellent work, I didn’t have to worry once. Ken made a very smooth transaction out of this and I’m very grateful. Will do business again with Iowa Equity Exchange.”
Frank S., Pleasant Hill, IA 12/5/08
“We work with Ken directly as our sole source for 1031 exchanges involving our clients. Ken's ability to give direction on where our clients need to head financially with property exchanges is an asset that we are very proud to offer at LandAndGame.com. The opportunity to work with Ken has been a real blessing for our business and will allow to us increase the bottom line for our clients investments across the board. In short, if you're an active investor in farm ground, hunting land with income, or duplexes and apartments, your time spent with Ken will pay dividends exponentially in your property portfolio."
Rod White, owner, LandandGame.com
“I first worked with Ken in 2007 after meeting him online. As a real estate agent and auctioneer serving my clients needs well is important to me. Ken spent hours on the phone with me taking the mystery out of 1031 equity exchanges and putting them in EASY to understand terms. I refer ALL of my 1031 exchange clients to Ken because he has taken EXCELLENT care of every client I have ever sent him. He is in my opinion the best in the business. He makes it so easy!”
Jason Smith, Land Specialist and Auctioneer, Loess Hills Land
"I contacted three 1031 exchange companies before selecting Iowa Equity Exchange for my 1031 exchange. Ken Tharp of Iowa Equity Exchange seemed to be the most knowledgeable person and was willing to answer all of the questions that I had about 1031 exchanges. The 1031 exchange went smoothly following the guidance provided by Ken Tharp.
Max P, Stanton, Iowa, 6/8/08
“As a banker, I found your service to be very helpful.”
Paula Sears
“Being a new [real estate] agent, I’ve not dealt with 1031 exchanges yet. I found your presentation to be both informative and easy to understand.”
Rachelle Bryan
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