Thursday, November 30, 2006

Indentification Requirements for 1031 Exchanges

Tax-deferred exchange transactions are extremely powerful income tax planning strategies when used effectively. They do have certain restrictive requirements that must be complied with.

For example, there are very specific identification requirements to comply with when identifying like-kind replacement properties for a 1031 tax-deferred like-kind exchange transaction.

This is only a formal identification process and the prospective like-kind replacement properties being considered for acquisition do not need to be under contract.

You can learn all about the identification requirements on our web page.

Tuesday, November 28, 2006

1031 Exeter eNewsletter

We have rolled out our new eNewsletter titled 1031 Exeter. This new monthly eNewsletter will cover 4 to 6 topics directly related to 1031 exchange issues each month. It will also provide a listing of upcoming tax-deferred exchange seminars and workshops.

You can subscribe at:

Monday, November 27, 2006

1031 Exchange Seminars and Workshops

I am constantly receiving emails requesting tax-deferred exchange educational programs, so I thought I would post a link to our 1031 exchange seminar and workshop webpage at:

This webpage is updated virtually each and everyday with like-kind exchange seminars, classes and workshops all over the country. You can also email me for a custom program for your specific organization.

Sunday, November 26, 2006

When To Consider a Reverse 1031 Tax-Deferred Exchange

The real estate market, including residential and multi-family investment properties, has changed considerably over the last nine months. Relinquished properties are staying on the market much longer than they used to.

Planning and coordinating 1031 tax-deferred exchange transactions has become more challenging when the like-kind replacement property has already been identified and under contract.

We are seeing more reverse 1031 exchange transactions in today's challenging real estate market because investors are finding it necessary to acquire the like-kind replacement property before they can sell their relinquished property or risk losing the investment opportunity.

Reverse tax-deferred exchanges can be a great solution for this situation. Investors can acquire and close on the like-kind replacement property and still have 180 calendar days to complete the sale of their relinquished property and thereby preserving their tax-deferred exchange treatment.

You can learn more about reverse 1031 exchanges at:

Saturday, November 25, 2006

Assistance In Completing Form 8824 in a Reverse 1031 Exchange

The first thing you need to do is throw out the term reverse 1031 exchange. It is really not a true reverse 1031 exchange. A true reverse 1031 exchange would mean that the taxpayer would acquire and receive title to like-kind replacement property and then subsequently would sell and convey title to the relinquished property. This does not exist.

Revenue Procedure 2000-37

What we do have is Revenue Procedure 2000-37 that allows taxpayers to structure a tax-deferred exchange by acquiring their like-kind replacement property first by using a parking arrangement. The best way to visualize a "reverse 1031 exchange" is to look at it in two component parts.

Parking Arrangement

The first component is a parking arrangement where the taxpayer arranges for the Exchange Accommodation Titleholder ("EAT") to acquire title to one of the taxpayer's properties.

Simultaneous 1031 Exchange

The second component is a simultaneous or concurrent 1031 exchange, which is either completed in the beginning (exchange first) of the whole process or at the end (exchange last) of the whole process.

Exchange Last

The exchange last structure is the preferred structure whereby the EAT acquires and parks title to the like-kind replacement property. The like-kind replacement property is ultimately conveyed to the taxpayer simultaneously when the relinquished property is sold and conveyed to the buyers.

Exchange First

The exchange first structure is where the simultaneous 1031 exchange occurs first or upfront so that the taxpayer acquires and receives title to the like-kind replacement property and simultaneously conveys title to the relinquished property to the EAT.

You may want to refer to an article entitled Introduction to Safe-Harbor Reverse 1031 Exchanges Pursuant to Revenue Procedure 2000-37 for more complete details regarding reverse 1031 exchange strategies.

IRS Form 8824 Reporting

Therefore, since we have a simultaneous 1031 exchange, the dates to be used on Form 8824 would be the dates corresponding to the simultaneous exchange. In an exchange last, the date the taxpayer conveys the relinquished property to the buyer and the EAT conveys the like-kind replacement property to the taxpayer would be used. In an exchange first, the date the taxpayer conveys the relinquished property to the EAT and the Seller conveys title to the like-kind replacement property to the taxpayer would be used.

Friday, November 24, 2006

5 Yr Holding Requirement on Sale of Primary Residence when Rental Property Acquired through a 1031 Exchange is Converted into a Primary Residence

President George W. Bush Signs H.R. 4520

The President signed H.R. 4520 into law on October 22, 2004. H.R. 4520 contains provisions that affect transactions where an Investor/Exchangor has combined a 1031 exchange pursuant to
Section 1031 of the Internal Revenue Code with a 121 tax-free exclusion pursuant to Section 121 of the Internal Revenue Code.

New 5 Year Holding Requirement

The provisions contained within H.R. 4520 created a five (5) year holding requirement for an Investor (Taxpayer) who wants to exclude capital gains from his taxable income pursuant to a 121 tax-free exclusion from the disposition (sale) of his primary residence that was originally acquired as rental or investment property as part of a prior tax-deferred exchange transaction.

Do Not Confuse With Regular 1031 Exchange

Investors should take notice that this applies only to properties that were originally acquired as part of a tax-deferred exchange and then converted to their primary residence. It does not apply to properties that were NOT acquired through a previous 1031 exchange or to properties that have always been the Investors primary residence.

You can learn more at:

Wednesday, November 22, 2006

Happy Thanksgiving

Happy Thanksgiving! I have lots to be thankful for this year, and I hope you do to.

Tuesday, November 21, 2006

The End of the Private Annuity Trust

Private Annuity Trusts or PATs have been discussed for years. Do they qualify? Will they hold up under audit? We were not sure what the IRS's position would be, until now.

The IRS has effectively eliminated the Private Annuity Trust as an option going forward. They issued temporary regulations on October 17, 2006 addressing what they considered to be abuses or inappropriate uses of the PAT.

You can review a complete newsrelease and the actual temporary regulations at:

Monday, November 20, 2006

1031 Exchange Deadlines: 45 Days and 180 Days

A successful 1031 exchange transaction requires Investors to comply with certain deadlines pursuant to Section 1031 of the Internal Revenue Code, which have been further clarified within Section 1.1031 of the Department of the Treasury Regulations.

The tax-deferred exchange deadlines consist of the 45 calendar day identification period and the 180 calendar day (or less) exchange period. These deadlines can not be extended under any circumstances, unless the President of the United States declares a natural disaster area that affects the properties or parties involved with the tax-deferred like-kind exchange transaction.

45 Calendar Day Identification Deadline

Investors completing a 1031 exchange must identify their potential replacement property(ies) to their Qualified Intermediary (Accommodator) no later than midnight of the 45th calendar day following the close of the relinquished property sale transaction. For example, if the sale of the Investor's relinquished property closed on October 31 the first day of the 45 calendar day identification period would be November 1 and the 45th calendar day deadline would be December 15th.

This deadline is exactly 45 calendar days, so if the 45th calendar day lands on a Saturday, Sunday or legal holiday, the deadline is NOT extended to the next business day as it is in other parts of the income tax code and regulations.

Investors should plan ahead once they have decided to complete a 1031 exchange transaction. The 45 calendar day identification period will arrive very quickly. Investors may wish to approach and negotiate with the buyer of their relinquished property for an extention of time to close the transaction in order to provide more time to locate and identify suitable like-kind replacement properties.

The identification should be made formally in writing to the Qualified Intermediary by facsimile, United States Mail or overnight courer such as FedEx, UPS or DHL.

Exeter 1031 Exchange Services, LLC maintains a bank of facsimile machines so that clients can submit their like-kind replacement property identification forms 24 hours a day, 365 days a year, via facsimile. Refer to our web page on Identification Requirements for Like-Kind Replacement Properties for more complete information on the identifcation process.

Investors can change their mind by formally revoking their identification of their like-kind replacement properties and subsequently submit a new identification form at anytime during their 45 calendar day identification period, but may not change their mind after this time frame has passed. Revoking and submitting a new identification form does not change or reset the original 45 calendar day identification deadline.

The act of altering, changing, amending, or back-dating a replacement property identification form in order to save a 1031 exchange transaction is classifeid as Federal tax fraud, and you should avoid any Qualified Intermediary that engages in, or permits or suggests any such practice.

Failure to identify like-kind replacement property(ies) within the 45 calendar day window will result in a failed tax-deferred like-kind exchange transaction, and the subject transaction must be recharacterized as a taxable sale rather than a tax-deferred like-kind exchange.

180 Calendar Day Exchange Period

Investors must complete their 1031 exchange, which includes the receipt of title to all of their like-kind replacement properties, no later than the earlier of:

(1) midnight of the 180th calendar day following the close of the relinquished property sale transaction, or

(2) the due date of the Federal income tax return for the tax year in which the relinquished property was sold, including any extensions of time to file.

You do not need to be concerned about part two above unless the first relinquished property transaction sold and closed within the 1031 exchange transaction closed on or after October 17th and on or before December 31st of any given tax year, which would mean that the 180th calendar day would land after April 15.

Investors that have tax-deferred exchanges closing on or after October 17th and on or before December 31th of any given income tax year will have fewer than 180 calendar days to complete their tax-deferred like-kind exchange transaction, unless they file for an extension of time to file their federal and, as necessary, state income tax returns.

Once the extensions of time have been filed, Investors must complete their tax-deferred like-kind exchange transaction within the 180 calendar days before they actually file their Federal and, if applicable, state income tax returns. Investors will never have more than 180 calendar days to complete their tax-deferred like-kind exchange transaction.

Wednesday, November 15, 2006

Section 1031 Tax-Deferred Exchange Reference Manual

If you are reading this post, you have probably discovered by now that lots of conflicting information, or even incorrect information, exists about tax-deferred like-kind exchange transactions.

The problem is that the income tax laws and regulations have left many questions unanswered. 1031 exchange experts and advisors have to interpret rulings and apply the educated guess techniques in order to develop commonly accepted practices. The gray areas will remain, though, until the Internal Revenue Service or the courts issue rulings with definitive answers. Until that time, we are left to our own devices.

I have written a Section 1031 Tax-Deferred Exchange Reference Manual that will help guide you through the tax-deferred exchange world, including the grays areas. You can download it at no cost at:

Tuesday, November 14, 2006

The Role of the Qualified Intermediary (Accommodator)

The Qualified Intermediary, often referred to as Accommodator or QI in the real estate industry, is a central and critical component to a tax-deferred exchange transaction.

The QI essentially serves in three very important roles in the 1031 exchange process. It drafts the legal documents in order to property structure the like-kind exchange, holds the 1031 exchange funds during the transaction, and ensures the taxpayer is in compliance with all income tax codes, regulations, rulings and pronouncements.

You can learn more details information at:

Monday, November 13, 2006

Concise Overview of 1031 Tax Deferred Exchanges

There is a lot of information on the Internet regarding tax-deferred exchanges and it can be very confusing to sift through all of the details to determine what is correct versus what is not so correct.

This post is designed to give you a very quick, concise overview of the 1031 exchange. It is only a brief summary to assist Investors in understanding the very basic 1031 exchange requirements. You can read an Introduction to Section 1031 Tax Deferred Like-Kind Exchanges for a more complete and indepth explanation.

The first thing to look at is whether the 1031 exchange is right for you. It may not always the right or best solution depending on your specific circumstances. Investors should consider whether other tax deferral or tax exclusion strategies might be more appropriate and should always consult with their legal, tax and financial advisors before entering into any real estate transaction, especially a 1031 tax deferred exchange.

1031 Exchange Requirement

The sale and the purchase transactions must be structured properly in order to qualify for tax-deferred treatment under Section 1031 of the Internal Revenue Code. The Qualified Intermediary often referred to in the real estate industry as the 1031 Exchange Accommodator or the 1031 Exchange Facilitator will complete the necessary legal documents to ensure that you are in compliance will all laws, regulations and rulings.

It is critical that the Qualified Intermediary be be assigned into the Purchase and Sale Agreement or Contract and the Escrow Instructions, if any, prior to the close of the sale and purchase transactions. If either transaction closes without the Qualified Intermediary involved the transaction will not qualify for 1031 exchange treatment.

Reinvesting or Replacing Values

Investors must acquire one or more like-kind replacement properties that are equal to or greater in net purchase value than the net sales value of the relinquished property, must reinvestment all of the net cash proceeds from the sale of the relinquished property, and must replace the same amount of debt that was paid off on the sale of the relinquished property with equal debt on the like-kind replacement property. The Investor can always put more cash into the purchase of his like-kind replacement properties, but can not pull any cash out of the transaction without incurring depreciation recapture and/or capital gain income taxes.

Qualified Use Requirement

The relinquished property and the like-kind replacement properties must have been held as rental, investment or business use property. The critical issue is that the Investor must have held or has the intent to hold the properties for investment purposes.

Like Kind Property Requirement

There is a lot of misinformation regarding like-kind property. It is not true that if you sell a condo you must acquire a condo, etc. As long as you meet the qualified use requirement discussed above any kind of real estate held for investment is like kind to any other kind of real estate that is also held for investment.

You can exchange out of or into any of the following asset types: single family, multi-family, commercial office, retail shopping, industrial, vacant land, oil and gas interests, mineral rights, and tenant-in-common investments.

Multiple Assets and Fractional Interests

The 1031 exchange allows Investors to easily reposition, diversify or consolidate their investment real estate portfolios. They can sell one relinquished property and diversify their portfolio by acquiring multiple like-kind replacement properties, or they can sell multiple relinquished properties and consolidate their portfolio by acquiring fewer like-kind replacement properties. You can also sell or purchase fractional (partial) interests in property.

1031 Exchange Structures

The most common 1031 tax deferred exchange is a forward, or delayed, 1031 exchange where the Investor sells his relinquished property first and then acquire his like-kind replacement property within the prescribed 1031 exchange deadlines.

A reverse 1031 exchange allows the Investor to acquire his like-kind replacement property first and then subsequently dispose of his relinquished property within the prescribed 1031 exchange deadlines.

An improvement (build-to-suit or construction) tax-deferred exchange allows the Investor to use his 1031 exchange funds to acquire like-kind replacement property and to use excess 1031 exchange funds to construct or improve the like-kind replacement property.

1031 Exchange Deadlines

There are very specific 1031 exchange deadlines that must be followed in a forward 1031 tax deferred exchange. The Investor has 45 calendar days from the close of the relinquished property transaction to identify potential like-kind replacement properties being considered for purchase and an additional 135 calendar days — for a total of 180 calendar days — to complete the 1031 tax deferred exchange by acquiring some or all of the identified like-kind replacement properties.

1031 Exchange Identification Requirements

Investors must identify their potential like-kind replacement properties to their Qualified Intermediary within the 1031 exchange time limits discussed above. The identification must comply with one (1) of the like-kind replacement property identification rules outlined below:

Three (3) Property Identification Rule

The three (3) property identification rule is the most common and is used in most 1031 tax deferred exchange transactions. This rule allows the Investor to identify up to but not more than three (3) potential like-kind replacement properties. It is highly advisable for the Investor to identify three (3) properties even if the intent is to only acquire one. If the Investor is looking to diversify his investment real estate portfolio and needs to identify more than three potential like-kind replacement properties one of the following two rules should be considered.

200% of Fair Market Value Identification Rule

The 200% of fair market value rule allows the Investor to identify more than three (3) potential like-kind replacement properties as long as the total fair market value of all the potential like-kind replacement properties identified does not exceed 200% of the sales price of the relinquished property(ies).

95% Exception to Identification Rules

The 95% exception to the identification rules allows an Investor to identify as many like-kind replacement properties as they wish provided they actually acquire and close on 95% of the fair market value actually identified.


Sunday, November 12, 2006

History of Section 1031 of the Internal Revenue Code

Tax-Deferred Exchanges date back to 1921 and have a somewhat choppy development into the current like-kind exchange structures that we employ today pursuant to Section 1031 of the Internal Revenue Code.

This post is for those history buffs that contact me almost monthly for a more historical perspective regarding 1031 exchanges. You can learn more at:

Saturday, November 11, 2006

Summary of Tax Deferral and Tax Exclusion Strategies

There has been a significant amount of attention paid to 1031 exchange strategies over the last five years and for good reason, but the 1031 exchange is not always the best solution or structure for an Investor.

It is extremely important for an Investor to spend time with their financial advisor and their tax advisor to review the various options that are available to them before they proceed with any one specific strategy.

The various strategic options may include 1031 exchanges (investment properties), 1033 exchanges (involuntary conversions from condemnation by government or a natural disaster), 721 exchanges (exchange into a Real Estate Investment Trust or REIT also referred to as an upREIT or 1031/721 exchange), 453 installment sale, and 121 exclusions (tax-free exclusion on sale of primary residence).

You can review the various structures in more detail at:

Friday, November 10, 2006

Advanced Build-to-Suit 1031 Exchange Strategies: Building On Property Already Owned by Investor

In an advanced build-to-suit 1031 exchange transaction, also known as an improvement or construction tax-deferred exchange, an Investor may be able to use part of his equity to construct improvements on property previously purchased by him.

Investors must acquire a new interest in real estate as their like-kind replacement property in order to qualify for tax-deferred exchange treatment. How do you acquire a real property interest that you already own and that already exists when you must acquire a new real property interest that you do not already own in order to qualify for tax-deferred exchange treatment?

The over-simplified answer is that you must create a new, separate real property interest that did not previously exist that the Investor can acquire as part of his tax-deferred exchange.

This is accomplished by leasing the real property under a 30 plus year lease to an Exchange Accommodation Titleholder ("EAT") controlled by the 1031 Exchange Qualified Intermediary. The 30 plus year lease to the EAT creates a new and separate real property interest that did not exist previously. Now the EAT can construct or improve the property, and the like-kind replacement property becomes the 30 plus year lease plus the improvements.

Learn more:

Thursday, November 09, 2006

180 Day 1031 Exchange Deadline When Exchange Straddles Two Tax Years

If you have ever gone through a 1031 exchange transaction before, you know that you have 180 calendar days to complete your 1031 exchange by acquiring (closing) all of your like-kind replacement property(ies) no later than the 180th calendar day from the date that your relinquished property sale closed.

However, the rule is actually the earlier of 180 calendar days OR the due date of the Investor's Federal income tax return, including extensions.

For example, if your relinquished property sold and closed on December 1 of any given tax year the 180th calendar day would fall after April 15, which is the due date for most individuals' Federal income tax returns. The Investor's deadline to complete his 1031 exchange would be April 15th.

There is an easy way around this little issue, and that is filing an extension of time to file the Federal and state income tax returns, then complete the 1031 exchange, and then file the actual income tax returns.

It's not a really big issue, unless you forget to file the extension, and then it can ruin your whole year! You can learn more about your 1031 exchange deadlines here:

Wednesday, November 08, 2006

Pennsylvania Does NOT Recognize 1031 Exchanges

Pennsylvania income tax law does not provide for or recognize 1031 tax-deferred exchange transactions. Section 1031 of the Internal Revenue Code is a federal income tax code. States do not have to follow federal income tax laws, including Section 1031, although most states do.

Pennsylvannia is one state that does not recognize the tax-deferred exchange under Section 1031. However, they do allow a taxpayer to defer income taxes, including gain from the sale of rental property, if the taxpayer uses an accounting methodology such as Generally Accepted Accounting Principles (GAAP) that allows the taxpayer to defer the income tax consequences.

The bottom line is that individual taxpayers use the cash basis and not GAAP or any other method that would qualify, so individuals do not qualify for 1031 exchange treatment under Pennsylvannia state income tax laws.

The taxpayer can still complete a 1031 exchange and defer their Federal income tax liability under Section 1031, but will have to recognize and pay Pennsylvannia's state income tax on the disposition of a rental property.

There are other tax provisions within Pennsylvannia, such as the Realty Transfer Tax (RTT) that cause issues and add to the costs of completing a reverse 1031 exchange.

You can read Pennsylvannia's most recent letter ruling regarding this issue on our website at:

Tuesday, November 07, 2006

Year-End Tax Planning for Failed 1031 Exchange Transactions

It seems like it was just January 2006. Where did 2006 go? We have less than two months to go before we celebrate the new year, so it is now time to discuss year-end tax planning for 1031 exchange transactions that fail.

What happens when a 1031 exchange starts toward the latter part of 2006, but fails because the investor could not find and identify suitable like-kind replacement property or was not able to actually acquire the property identified?

Failed tax-deferred exchanges become taxable. The question is in which year is the depreciation recapture and capital gain recognized and taxable? The answer depends on when the investor has the legal right to access the tax-deferred exchange funds.

If the 45 calendar day identification period and/or the 180 calendar day exchange period end in the following income tax year and the Tax Deferred Exchange Agreement contain the appropriate language, the depreciation recapture would be recognized and taxable in the year of sale and the capital gain would be recognized and taxable in the following year when the investor has the legal right to access the funds.

Learn more at:

Monday, November 06, 2006

Exercise Your RIGHT to VOTE

Don't forget to VOTE on Tuesday. It's our right, but we can lose it if we ignore it. You need to get your voice and opinion heard.

Inside Business Radio Talk Show

The Inside Business Radio Talk Show hosted by Bob Ryan, CFP, with Sagemark Consulting, Inc., can be heard live every Tuesday and Thursday mornings on Talk Radio AM 1000 KCEO.

A wide variety of business executives and/or owners, investors and legal, tax and financial advisors are interviewed. Real estate is the focus on the first Tuesday of each month and include guest experts in the areas of commercial real estate, residential real estate, mortgage lending, 1031 exchanges, and tenant-in-common investment properties.

Inside Business Radio Talk Show can be heard through out most of Northern San Diego County and parts of Southern Orange County. You can also listen live via the Internet. For more complete details visit the following link:

Sunday, November 05, 2006

1031 Exchange Fees, Costs and Charges

When comparing 1031 exchange fees and costs charged by Qualified Intermediaries (Accommodators), Investors need to fully analyze and consider factors such as:

  • Set-up and/or administrative fees
  • Per property or settlement charges
  • Interest income paid to the Investor
  • Interest income retained by the Qualified Intermediary
  • Transactional or service fees

It is easy for a Qualified Intermediary to structure its fees and costs to appear to be less expensive than its institutional competitors, but when you factor in all of the above fees, costs and charges to the calculation, especially the amount of interest retained by the Qualified Intermediary, you will able to compare each fee schedule side-by-side to determine which is the best value.

Investors should also analyze the financial strength, insurance, bonding and stability of the 1031 exchange company as well. Do not look solely to the fees and costs.

For more information on what to look for and how to choose a SAFE Qualified Intermediary, read our web page entitled How to Choose a SAFE Qualified Intermediary (Accommodator).

Saturday, November 04, 2006

Do I Need to Use a Cooperation Clause in my Purchase and Sale Agreement?

Investors have been told for years that certain language must be included in their purchase and sale agreement and any other settlement/closing instructions such as escrow instructions regarding their intent to complete a 1031 exchange transaction, but does the investor really need to do so?

The answer from a 1031 exchange compliance perspective is no. As long as the investor follows all of the required steps to complete a 1031 exchange the lack of any specific language such as a "cooperation clause" regarding his intent to complete a tax-deferred exchange will not affect or disqualify the exchange.

I typically recommend including cooperation clause language so that the like-kind exchange is disclosed to the other parties involved in the transaction and the other parties agree to cooperate with the Investor's 1031 exchange.

You can see sample cooperation clause language here:

Friday, November 03, 2006

The Financial Advisors Radio Talk Show

The Financial Advisors Radio Talk Show hosted by Aubrey Morrow, CFP, and president of Financial Designs, Ltd. can be heard live every Saturday morning on News Radio AM 600 KOGO.

Financial planning issues are discussed, and listeners are invited to call in live and ask specific financial planning questions. Real estate is the focus on the first and second saturdays of each month, and include guest experts in the areas of commercial real estate, residential real estate, mortgage lending, 1031 exchanges and taxes.

News Radio AM 600 KOGO can be heard through out most of Southern California. You can also listen live via the Internet. For more complete details visit the following link:

1031 Exchanging Vacation Properties

The issue of selling a vacation property, or even a second home for that matter, and 1031 exchanging it for rental (investment) property is one that I receive questions on all the time.

The fundamental issue is whether the property is truly held as rental (investment) property or whether it is just a vacation property or second home. It is not an easy question to answer because in most cases the answer is a blend of the two scenarios; it's part vacation and part "investment."

You need to gather all of the facts involved in your specific situation and sit down with a 1031 exchange expert to determine whether your fact pattern may qualify for 1031 exchange treatment.

You can learn more about this subject at which discusses the technical issues in much great detail.

Thursday, November 02, 2006

1031 Exchange Issues: Community Property States

Community Property Laws

In most states, ownership of property by married couples is governed by common law. That is, the ownership of the property depends on how it is "titled", or "vested", or held, by the investor or investors.

Community Property States

However, a few states have adopted special laws or statutes regarding property ownership by married couples. These special statutes, known as "community property" laws, change the common law rules that would otherwise govern.
In community property states, married persons are considered to own their property, assets, and income jointly. If married people decide to file separate tax returns, they must follow their state rules for community income. Generally, both spouses must combine their total income, and divide that income in half. Each spouse then reports half of the joint income on his or her income tax return.
The nine (9) states that currently have community property laws are:
  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin
(Note: Wisconsin is not really a true community property state, but its laws regarding property ownership by married couples bears a strong resemblance to the law of these states.)

Sole and Separate Property

In a community property state, a spouse's separate property generally includes:
All of the property the spouse owned before the marriage.

All of the property acquired by the spouse after the couple has legally separated.
Any property a spouse receives as a gift or inheritance during the marriage (as long as it is kept separate from the couple's community property).

Community Property

Community property includes the following items:

Any income that a spouse received from his or her job during the marriage. (A written agreement may be required to confirm that income is separate property.)
Any property a spouse acquires with his or her employment income.

Any property, though originally classified as separate property, that becomes community property under the state's laws. This occurs most often when one spouse makes a gift of his or her separate property, or allows the separate property to become co-mingled with community property.

These are only general rules, and investors should always consult with their legal and tax counsel before deciding how to hold or take title to your property.
Properly classifying property as separate or community property depends greatly on the kind of property involved and what state you are in. For example, ownership of business interests and pension benefits are sometimes difficult to characterize, especially when an interest in the property existed before the marriage occurred.

Common Law States

Life is somewhat simpler in common law states (ie. states other than the nine (9) community property states).

In most cases, the key to property ownership depends on whose name or names are on the title. If there is no title document, such as with a computer, household furnishings and many other items, then the person whose income or property was used to pay for it is the owner. If the married couple's joint income or joint funds was used, then the property is jointly owned.

Swap Until You Drop

Never Pay Income Taxes on the Sale of Investment Property

Buying and selling investment real estate can be incredibly rewarding and profitable for real estate agents and investors. However, to be truly successful in building a real estate portfolio, agents and investors must learn how to manage — or more importantly defer — the depreciation recapture and capital gain income tax liabilities from the sale of investment real property.

Federal and state depreciation recapture and/or capital gain income taxes can be as high as 35%, and even higher under certain circumstances. Payment of these taxes can dramatically diminish an investor’s equity and cash positions, which in turn impedes the investor’s ability to grow his net worth by acquiring larger properties that produce greater cash flow.

Increase Your Value to Your Clients

Real estate agents can significantly increase their value to their clients by assisting them in deferring 100% of their income tax liabilities by structuring their real estate transactions as 1031 tax-deferred exchanges. Investors will be able to exchange into larger properties with greater income potential because 100% of their equity remains invested instead of going toward the payment of income taxes.

Swap Until You Drop; Always Defer the Income Taxes

Agents and investors often ask when should they complete a 1031 exchange, and what’s the best way to take advantage of exchanging. The short answer is: always exchange; always defer the income taxes! The best way to use the 1031 exchange is to “Swap Until You Drop.” Always keep the equity invested by structuring 1031 exchanges. Never pay income taxes on the sale of investment property unless there is a very good reason for doing so.

By following the Swap Until You Drop strategy the investor will continue to exchange throughout his lifetime and will always defer the income tax liabilities each time he sells investment real estate by acquiring like-kind replacement property. The value of his real estate portfolio will grow exponentially faster when the income taxes are deferred, and consequently their net worth will also grow substantially greater than if they paid income taxes as they went along.

Step-up In Cost Basis

When the investor passes away his heirs will receive a step-up in cost basis equal to the fair market value of the property as of the date of his death, or his heirs can elect an alternate valuation date six months after the date of his death. The heirs could immediately sell the property without incurring any depreciation recapture and/or capital gain income tax liabilities.