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. 

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Tax Mitigation Playbook

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1031 Exchange Articles:

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Kevin Taylor

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.

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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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Kevin Taylor

Using an Improvement Exchange

Imagine being able to sell your appreciated property with all of its gains intact, reinvesting in a new property, and having a budget for improvements, all while enjoying the capital growth of that new property immediately. Guess what? There is an exchange method for that! Here is the Issue Under the IRS rules, once you take ownership of a property, any additional expenditures used to make improvements to the property cannot count towards the value of the replacement property in the exchange. An example of this problem: say that you’re selling building A for $1m and buying building B for $800k. But Building B requires $200k in desired improvements. In a traditional exchange this is a nonstarter; because real estate exchanges have to involve disposing of and acquiring “like-kind” real estate. And unfortunately, the additional labor and materials are not considered “like-kind” for the purposes of the acquisition and cannot be part of the exchange. So the $200k in required improvements cannot be part of the transaction. However… If an InSight client prefers a situation where they need to relinquish property and desires to renovate the next property, there is a path to eliminating the tax loss of the investment AND getting your renovations done. Enter the Improvement Exchange An essential, but overlooked part of the IRS code, can help InSight clients keep their expectations of avoiding a tax loss while making desired improvements a reality. This accommodation can be used to develop the right exchange strategy for the transaction that the business or person requires. If you need to contract out for repairs or improvements, make strategic accommodations for a renter, or change the opportunity completely – this method creates the space to achieve those changes to the property. Under the IRS code in Revenue Procedure 2000-37, an independent third party may take title to the replacement property in the taxpayer’s stead and make the desired improvements on the taxpayer’s behalf. Using an Exchange Accommodation Titleholder (or EAT) In a traditional exchange, the exchange company acts as a qualified intermediary or QI. This means they act as a third-party agent that is both an arms reach from the taxpayer and they help to coordinate the timeline and reporting requirements to make the exchange IRS compliant. If the taxpayer requires improvements the conditions can change.  The exchange company can become an Exchange Accommodation Titleholder or EAT and modifications can be made before the Taxpayer takes ownership – making the desired improvements to the property before taking possession. The EAT takes title to the new property and parks, or holds, that title until the earliest of the following: 180 days from when the relinquished property is sold The improvements are completed 180 days from when the replacement property was parked by the EAT The InSight client can enter into a property improvement exchange with an EAT and direct the QI to send funds periodically to the EAT. Making the desired improvements based on the eventual owner’s instructions. Effectively making the building improvements now part of the acquired property after the close of property A and before taking possession of Property B. Seemingly limitless contractors, consultants, and designers can be paid out by the EAT during this phase, and the owner walks into Building B on day one of ownership with the work done, ready for business and with the changes they envision. In the End The client’s old properties cost basis is rolled into the new property, no taxes are paid on the sale of property A – and property B has received the required improvements to enable it to serve the investor better going forward.

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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. 

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