1031 Exchange Hub
1031 Exchange Managers should be responsive, transparent, quick and know how the exchange affects your Financial Plan.
Our approach to 1031 Exchanges:
Being able to right-size your properties to fit your business and personal investment expectation without tax loss is a key hurdle to maintaining your wealth. We aim to preserve our client’s wealth in their real estate holdings by helping them upsize, downsize or pivot their real estate portfolio in the most tax-efficient way possible.
Having a Financial Planner that can assist, not only with determining the right asset but also can detail the long-term distribution and tax mitigation strategy to keep more of your investment returns intact.
Exchanges preserve investment returns:
Capital gain tax is an inherent risk to real estate returns. We try to keep those returns a part of the total portfolio for clients by either rolling the gains into the next building or project, changing the building/income type to meet the needs in the client’s InSight-Full® plan, or structuring alternatives for clients looking to wind down real estate holdings in a more tax-efficient way while still preserving access to income.
It’s your money and your tax risk, we just try to help you keep it productive and untaxed.
Recent Successes:
Resources for InSight 1031 clients:
Exchange Manager Fees
1031 Calculator
Tax Mitigation Playbook
Infographics and Explainers
All InSight 1031 Articles
Usefull Links
Key Reading for 1031 Beginners:
1031 Exchange Articles:
Section 1031 Exchange and Your Primary Residence: How They Can Work Together
When it comes to a 1031 exchange, your primary residence is generally excluded. According to the rules of Section 1031 of the Internal Revenue Code (IRC), property used for personal purposes, like a primary residence, doesn’t qualify for tax deferral. The law only applies to properties that are “held for productive use in a trade or business or for investment.” However, there are situations where your primary residence is part of a property with business or investment land, and in these cases, a Mixed-Use 1031 Exchange may apply. Mixed-use property and a 1031 Exchange A mixed-use exchange happens when the property being sold includes both a primary residence and land or structures used for business or investment purposes. Part of the property may qualify for a 1031 exchange in these scenarios, while the residential portion could be eligible for Section 121 benefits (more on that in a minute). Examples of mixed-use properties include: A home office where a business rents space in your house. A farm or ranch where you work the land as a business but live on the property. A duplex where you live in one unit and rent out the other. A single-family home with an accessory dwelling unit (ADU) that you rent out while living in the main home. As long as part of the property is used for business or investment, it could potentially qualify for a mixed-use 1031 exchange. The IRS Code: Section 1031 and Section 121 Here’s the breakdown: Section 1031 allows you to defer capital gains taxes on properties used for business or investment when you exchange them for similar properties. Meanwhile, Section 121 allows homeowners to exclude up to $250,000 ($500,000 for joint filers) of capital gains on the sale of their primary residence if they’ve lived there for at least two of the last five years. So how do you take advantage of both sections? It’s all about identifying your “principal residence”—which is typically your primary home (not your vacation home). Your primary residence can also include parts of a property that are used for business or investment. Key Questions About Combining Sections 1031 and 121 How is the Section 121 exclusion calculated? The calculation of the exclusion for your primary residence involves determining the original purchase price of your home, the cost of improvements, and the value of the residential portion of the property being sold. You can determine the value with a market analysis from a realtor or an appraisal. For joint filers, the exclusion can be up to $500,000, while single filers get a $250,000 exclusion. A common issue arises when a property has both a personal residence and a 1031-eligible business portion, and no value is explicitly allocated between the two. A current market analysis or other valuation methods can help. Consider factors like the per-acre value of the residential part compared to the larger investment property and the home’s insurance value. How is the homesite defined? When valuing the residential portion of a mixed-use property, it’s helpful to think of the land and features that contribute to your enjoyment of the home—this could include gardens, septic systems, small pastures, and more. Using aerial photos is often a smart way to determine the homesite’s boundaries and help make the valuation more precise. A Hypothetical Example Let’s walk through a simple example: Total sale price: $2,500,000 Residential portion: $800,000 Basis in the primary residence: $300,000 Section 1031 portion: $1,700,000 In this case, the primary residence portion is valued at $800,000, so the taxpayer could exclude the gain on that amount (up to $500,000 for joint filers, $250,000 for singles). Applying the 121 Exclusion to Debt Payoff One of the benefits of using the Section 121 exclusion is that you don’t have to reinvest the sale proceeds in another property. If there’s debt associated with the property, the Section 121 exclusion can help cover the debt payoff. In our example above, if the taxpayer owes $500,000 in debt, they can apply the 121 exclusion to cover that, meaning they don’t need to replace the debt with new debt in the 1031 exchange portion of the transaction. How is the 121 Exclusion Documented? The key to documenting the allocation of proceeds is ensuring there’s a clear separation between the 1031 exchange portion and the personal residence exclusion. The settlement statement from the sale will have line items showing both: one for “cash to exchanger (personal residence)” and another for “exchange proceeds to seller” (handled by the qualified intermediary). When Doesn’t Section 121 Apply? Section 121 won’t work if the property is part of a business held by a corporation or partnership—since these entities can’t own a primary residence. However, if you’re an individual or a disregarded entity like a single-member LLC or sole proprietorship, you can use the exclusion. It’s also possible to distribute the personal residence out of a business entity before the sale, but you’ll need to plan ahead—this needs to happen at least two years before the sale. Final Thoughts The Section 121 exclusion can give you a significant tax break by putting cash in your pocket without the need to reinvest. For mixed-use properties, taxpayers can use the Section 121 exclusion for the residential portion of the sale, while using Section 1031 for the business or investment portion. Keep in mind, though, that when participating in a 1031 exchange, your intent must be to hold the replacement property for productive use or investment in the long term. It’s crucial to consult with a tax or legal advisor when structuring a 1031 exchange or when considering any changes to your investment property.
What Constitutes “Like-Kind” in a 1031 Exchange?
The requirement for tax-deferred exchanges of property has always stated that the Replacement Property acquired must be of a “like-kind” to the property sold, known as the Relinquished Property. This principle has been in effect since the addition of IRC Section 1031 to the tax code in 1921. The basis for this requirement is the “continuity of investment” doctrine, which states that if a taxpayer continues their investment from one property to another similar property without receiving any cash profit from the sale, no tax should be triggered. However, it is important to note that this tax liability is only deferred, not eliminated. Given the significance of this requirement in tax-deferred exchanges, it is essential to understand what exactly “like-kind” means. Fortunately, in the context of real property, the analysis is straightforward. For 1031 exchange purposes, all real property is generally considered “like-kind” to each other, irrespective of the asset class or specific property type. Contrary to common misconceptions, a taxpayer selling an apartment building does not need to acquire another apartment building as a replacement property. Instead, they can choose any other type of real estate, such as raw land, an office building, an interest in a Delaware Statutory Trust (DST), etc., as long as it meets the criteria of being considered real property under applicable rules, intended for business or investment use, and properly identified within the 45-day identification period. It’s worth noting that personal property exchanges are no longer eligible for tax deferral under Section 1031 since the Tax Cuts and Jobs Act amendment in 2018. This leads us to the question: what qualifies as “real property” for Section 1031 purposes? Examples of real estate interests that are considered like-kind include single or multi-family rental properties, office buildings, apartment buildings, shopping centers, warehouses, industrial property, farm and ranch land, vacant land held for appreciation, cooperative apartments (Co-ops), Delaware Statutory Trusts (DSTs), hotels and motels, cell tower and billboard easements, conservation easements, lessee’s interest in a 30-year lease, warehouses, interests in a Contract for Deed, land trusts, growing crops, mineral, oil, and gas rights, water and timber rights, wind farms, and solar arrays. In December 2020, the IRS issued new regulations that provide further clarification on the definition of real property in the Code of Federal Regulations. These regulations specify certain types of “inherently permanent structures” and “structural components” that qualify as real estate and are eligible for exchange treatment. Examples of inherently permanent structures include in-ground swimming pools, roads, bridges, tunnels, paved parking areas, special foundations, stationary wharves and docks, fences, outdoor advertising displays, outdoor lighting facilities, railroad tracks and signals, telephone poles, power generation, and transmission facilities, permanently installed telecommunications cables, microwave transmission towers, oil and gas pipelines, offshore platforms, grain storage bins, and silos. Structural components likely to qualify as real property include walls, partitions, doors, wiring, plumbing systems, central air conditioning and heating systems, pipes and ducts, elevators and escalators, floors, ceilings, permanent coverings, insulation, chimneys, fire suppression systems, fire escapes, security systems, humidity control systems, and similar property. It’s important to note that foreign real estate is not considered like-kind to U.S. real estate, according to Section 1031(h) of the Tax Code. However, U.S. taxpayers can exchange foreign property for foreign property, which is considered like-kind and eligible for Section 1031 exchange treatment, with some limited exceptions. In addition to meeting the like-kind requirements, the potential replacement property must be formally identified within 45 days of selling the relinquished property, and the identified property must be acquired within 180 days of the sale. Property received by a taxpayer that was not identified or received within these timeframes is not considered like-kind. In the past, there was a misconception that the like-kind requirement meant trading into the same type of property that was sold. However, the true intention behind the like-kind requirement has always been to maintain the continuity of investment. While Section 1031 exchanges previously applied to personal property, intangible property, and real estate, the amendment in 2018 restricted exchanges to only real estate. Nevertheless, the determination of what constitutes like-kind real estate has remained unchanged—all types of real estate are considered like-kind to each other.
Can manufactured homes can be considered like-kind property for tax purposes under IRC Section 1031
Q: I was wondering if manufactured homes can be considered like-kind property for tax purposes under IRC Section 1031. A: It turns out that the classification of manufactured homes depends on whether they are classified as real property or personal property. If a manufactured home is permanently affixed to land that the homeowner owns, it can be classified as real property. Just like traditional site-built homes, these manufactured homes are tangible structures that are permanently attached to the land. They have an APN number assigned by the county tax assessor for identification and record keeping. If you receive an annual property tax bill from the county, it confirms that your home is considered real estate and can be used for a 1031 exchange. On the other hand, if a manufactured home is considered personal property, it means that it is often installed on a temporary foundation on leased land. In this case, the homeowner has the option to move the home to another location. This classification is similar to that of a vehicle, and the homeowner receives an annual registration renewal from the DMV. Since mobile homes classified as personal property are not considered real estate, they do not qualify for tax deferral treatment under IRC Section 1031. If you want to confirm whether your home is classified as real or personal property, it’s a good idea to reach out to a Title Insurance company. They can provide you with the necessary information about the classification of your property. Hope this helps you understand the distinction between manufactured homes classified as real property and personal property for tax purposes!
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Disclaimer:
InSight, Corp does not own InSight 1031. It is formed as a partnership with Accruit and they serve as the technology owner and exchange manager. InSight, Corp receives compensation directly from Accuit to provide the 1031 services to clients and it is not part of the InSight, Corp fee structure for advice and asset management. This is not part of the fiduciary advice InSight, Corp provides and clients are welcome to choose any 1031 Exchange Manager they want in coordination with the InSight-Full® plan and process.