California Lifts Freeze on Income Tax Refunds

Refunds Previously Frozen
The California Franchise Tax Board previously placed a 30 day freeze on all income tax refunds with the possibility of the hold being extended if certain financial objectives were not reached.

Hold on Income Tax Refunds Lifted
The State of California lifted the hold on income tax refunds on March 6, 2009, and the California FTB is working with the California Controller's Office to issue income tax refunds to taxpayers as quickly as possible.

Check Your Refund Status
Taxpayers in California can check the progress of their income tax refund from the FTB on the California Franchise Tax Board's website at: http://www.ftb.ca.gov/online/refund/index.asp.

Learn How to Buy Real Estate on a Confidential Basis

This is a basic level discussion regarding the benefits and advantages of acquiring, owning, holding and disposing of California real estate or any personal property under a Title Holding Trust on a confidential basis.

Learn how to use the Title Holding Trust to protect your real estate holdings by keeping your name off the public record. The webinar will include the requirements, structures, processes, strategies, and compliance issues necessary to successfully establish and maintain a Title Holding Trust, which is often referred to as an Illinois Land Trust.

Date and Time
Tuesday, March 10, 2009
10:55 AM Login
11:00 AM — 12:00 Noon Webinar

Reservations Required — Limited to 20 Participants
Click here for more information.

How Do I Report a 1031 Exchange on My Tax Return?

You are probably aware that it is tax season again. It is during this time of the year that we receive quite a number of questions and inquiries regarding investors' 1031 tax deferred exchanges that were completed during the previous tax year.

Common 1031 Exchange Reporting Questions
Questions such as the following are very common:

• How do I report my 1031 tax deferred exchange on my income tax return?
• What IRS Forms do I use to report a 1031 exchange, including the tax deferral, boot, capital gain, etc.
• I did a partial 1031 tax deferred exchange and also have to report boot. What IRS Form do I use to report the boot?
• Is my Qualified Intermediary required to report the 1031 tax deferred exchange to the Internal Revenue Service on my behalf?
• I earned interest income on my 1031 exchange balance while it was held by the Qualfiied Intermediary. How do I report that interest to the IRS?

1031 Tax Deferred Exchange Forms and Documents Library
We have created a 1031 exchange forms and documents library and posted many of the Federal and some state income tax forms that you will need to report your real estate transactions, including your 1031 tax deferred exchange transactions.

Answers to Your Questions
The general answers to the questions listed above are as follows. However, it is very important that you have a professional tax advisor complete the forms on your behalf.

Reporting the 1031 Exchange
You can read about the reporting requirements for the sale, disposition or exchange of property in IRS Publication 544. 1031 tax deferred exchanges are reported on Internal Revenue Service Form 8824. IRS Form is generally updated each year, so make sure that you have the most recent version available.

Reporting Taxable Capital Gain from a 1031 Exchange
Boot will trigger depreciation recapture and capital gain income tax liabilities. These items are reported on Internal Revenue Service Form 4797.

Reporting Failed 1031 Exchanges
This issue can get a little tricky, so always have your tax advisor assist you. A failed 1031 exchange is reported in the year in which the investor had the right to his or her 1031 exchange proceeds. It might be taxable as an installment sale and taxed in the following year depending on the circumstances. IRS Form 6252 would be used under these circumstances.

How Long Do I Have to Hold 1031 Exchange Property?

This is a great question and one that is asked very frequently when investors are in the middle of a 1031 tax deferred exchange transaction. This question usually comes up in one of two situations when the investor wants to dispose of real estate and defer the payment of capital gain taxes through a 1031 tax deferred exchange transaction.

• The first is when the investor just acquired investment property and now wants to sell it and defer the payment of their capital gain taxes by structuring a 1031 tax deferred exchange.
• The second is when the investor has just acquired replacement property through a 1031 tax deferred exchange and wants to dispose of it already.

There are numerous versions and variations of these two examples, of course, but it clearly lays out the issue at hand. The issue is how long does an investor need to hold his or her investment property in order to qualify for the 1031 tax deferred exchange.

Once again, I must answer with It Depends!

Intent to Hold
There is no black and white answer here. The IRS and Treasury Department have never formally ruled on this issue.

The Treasury Regulations require that the investor have the intent to hold the property for investment. The investor would have to prove they had the intent to hold for investment should they ever get audited. A holding period of a few months would make it very difficult to prove that they had the intent to hold the property for investment, and property held for sale will not technically qualify for 1031 tax deferred exchange treatment.

Recommended Holding Period
It is for these reasons that most 1031 tax deferred exchange experts will recommend a holding period of at least 12 months and would prefer 24 months to ensure that you can demonstrate you had the intent to hold your 1031 exchange property long enough to qualify as investment property.

Can I Buy a Piece of a Property as Part of My 1031 Exchange?

This question can take many forms. The most common are as follows:

• I own property together with another party. I'm in the middle of a 1031 tax deferred exchange. Can I identify and buy the 50% of the property that is owned by the other party as part of my 1031 tax deferred exchange so that I now own 100% of the property?
• There is a small group of friends that want to buy property together. We would each end up owning about 20% of the property. Can I identify this 20% and buy it as part of my 1031 tax deferred exchange?
• I attended a seminar on buying/investing in tenant-in-common investment properties where I would buy a fractional interest in a large commercial property. Does this fractional interest qualify as replacement property for part of my 1031 tax deferred exchange transaction?

The answers is yes to all of these questions.

The requirement is that the investor who sold real estate through a 1031 tax deferred exchange must also acquire like-kind real estate as his or her replacement property in order to complete a successful 1031 exchange. The replacement property does not have to be 100%; a fractional interest will qualify with no problem.

Your professional 1031 tax deferred exchange Qualified Intermediary can help you identify a fractional interest in real property when you are completing your identification form during your 45 day identification period.