THE 1031 EXCHANGE BLOG™
Welcome to The 1031 Exchange Blog. This 1031 Exchange Blog is brought to you by The 1031 Exchange Institute to help educate and inform real estate investors and their advisors so that they can make better informed real estate investment decisions. The 1031 Exchange Blog will cover all things related to 1031 exchanges, including delayed, reverse and improvement 1031 exchanges. You are more than welcome to post a comment on any of the articles or ask follow-up questions, but please no solicitations or SPAM posts.
Defer Taxes on Sale of Business
Tuesday, December 2, 2008 at 10:16PM Defer Capital Gain Taxes
We talk a lot about deferring capital gain taxes generated from the sale of real property, whether it be residential or commercial property, and we often defer the payment of the capital gain taxes and depreciation recapture taxes on the sale of real estate through a 1031 tax deferred exchange.
However, the 1031 tax deferred exchange requires that you sell investment real estate and acquire like kind replacement real estate. What do youdo when you do not wish to acquire any replacement property but you still want to defer the payment of your capital gain taxes over a period of time?
This is a common problem. You may not want to acquire like kind replacement property or you may not be able to acquire like kind replacement property in order to defer the payment of your capital gain taxes under Section 1031.
You probably do not want to get hit with your capital gain taxes all at once in the year you sell your real estate, business interest or company, either. That would be quite a lump sum of taxes that would be due in one year.
Sale of Business Interest
It often involves the sale of the investors business or company that they have owned and run for many years. They are now interested in disposing of the business and are faced with a huge capital gain tax resulting from the sale of the business.
I am working with a client right now that is selling a gas station or service station. He wants to get entirely out of the business. He does not want to reinvest in real estate and does not want to acquire another business of any kind, so deferring the payment of his capital gain taxes on the sale of the gas station using a 1031 exchange will not work for him.
Tax Deferred Solutions
There are any number of tax deferred solutions that might work for this client. He or she should consider a variety of income tax strategies, including:
- Selling and paying the taxes or cashing out
- Selling and carrying back the note (seller financing)
- Selling and completing a tax deferred exchange under Section 1031
- Selling through a Deferred Sales Trust
- Contributing the property into a Charitable Trust
- And more sophisticated options
Cashing out is not terribly attractive since you incur 100% of your capital gain taxes in the year in which you sell your business. The seller carry back or seller financing option is risky because the buyer could default and you run the risk of having to take your business back. The 1031 tax deferred exchange does not work well with the sale of a business because the like kind property rules for personal property are very restrictive. The Charitable Trust options are permanent and therefor not really appealing. The one remaining option that does seem to be appropriate is the Deferred Sales Trust.
Deferred Sales TrustTM
This is where the Deferred Sales Trust might be useful and can really shine. It allows you to sell your business interest and defer the payment of your capital gain taxes over a period of time that you negotiate up front with the trustee of the Deferred Sales Trust. The Deferred Sales Trust should be reviewed with your tax and legal advisor before structuring or implementing.
U.S. Entered Recession in December 2007
Monday, December 1, 2008 at 10:09AM
The United States officially entered a recession in December 2007, according to the official recession watchers at the National Bureau of Economic Research. The National Bureau of Economic Research's economists met on Friday and declared the end of the expansion that began in November 2001, lasting 73 months.
New Hampshire Does Not Recognize Single Member LLCs for 1031 Exchange Purposes
Saturday, November 29, 2008 at 05:38PM It has come to our attention that the State of New Hampshire does not recognize single member limited liability companies for 1031 exchange treatment. They treat each single member limited liability company or LLC as a separate and distinct entity for state tax purposes. This can significantly complicate the 1031 exchange process when an investor wants to sell real estate out of one single member LLC and acquire real estate in a new single member LLC.
New Hampshire Issues Declaratory Ruling 7707
New Hampshire takes the position under New Hampshire Declaratory Ruling 7707 that if (1) an exchanger sells property held in a single-member limited liability company or other entity, which is disregarded for federal tax purposes (a “DRE”), and (2) acquires property in a different DRE, then the exchange fails for New Hampshire state income tax purposes.
Disregarded Entities Treated as Separate Entities
All DREs, including single-member limited liability companies, disregarded limited partnerships, and grantor trusts doing business in New Hampshire with gross income in excess of $50,000 are required to report and pay business profits tax. Because the business profits tax is assessed on an entity by entity basis, New Hampshire asserts that in order to enjoy Section 1031 deferral, the same entity that sold the relinquished property must subsequently purchase the replacement property.
Not Disregarded Entities for State of New Hampshire
So, the bottom line is that disregarded entities are not disregarded for State of New Hampshire purposes.
Forum Discussing Failure of LandAmerica 1031 Exchange Services
Thursday, November 27, 2008 at 09:41AM There are many 1031 exchange clients that have lots of questions and no answers regarding the recent failure of LandAmerica 1031 Exchange Services. A visitor has posted his thoughts and questions on our 1031 Exchange Discussion Board or Forum.
It occurred to us that this would be a good forum for you to exchange thoughts and ideas regarding the failure of LandAmerica 1031 Exchange Services, so we've opened the Discussion Board to all who would like to participate.
Choosing a SAFE Qualified Intermediary
Tuesday, November 25, 2008 at 06:39PM The current financial crisis has led to the voluntary closing of a number of 1031 exchange Qualified Intermediaries. I always hate to see anyone go out of business, especially when it is something like a financial crisis that is completely out of their control.
1031 Exchange Qualified Intermediary Failures
However, there have also been 1031 exchange Qualified Intermediaries that have failed because of their business or investment practices, which ultimately left them under capitalized and/or illiquid. The perfect example is yesterday's collapse of LandAmerica 1031 Exchange Services, LLC. They invested their clients' 1031 exchange proceeds in Auction Rate Securities that subsequently became completely illiquid with the collapse of the Auction Rate Securities market.
Evaluating and Selecting Your Qualified Intermediary
I thought that this would be a really good time to revisit the important due diligence process when you are evaluating prospective 1031 exchange Qualified Intermediaries for your own 1031 tax deferred exchange transaction. You might want to briefly start by reading the press release that I issued yesterday regarding the failure of LandAmerica 1031 Exchange Services.
Bigger Is NOT Better
I have been in the 1031 exchange industry for 24 years now and I have managed large, medium and small Qualified Intermediary firms, and I can say without a doubt that bigger is not better. The Qualified Intermediary's business practices are what matters, as we have seen with the collapse of LandAmerica 1031 Exchange Services.
Common Sense Matters
Consumers have to bring common sense into the decision making process here. They have to ask themselves if what they are being told or how the transaction is structured makes sense. I would recommend reviewing two articles that I wrote that are related in terms of stability, profitability and longevity of a Qualified Intermediary:
The Bottomline is: Do Not Be Afraid to Ask Questions. And, do not use the firm if you are not comfortable with them. Rely upon your gut feelings and instincts; they are often right on the money.








