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  • What is a 1031 Exchange?
    A 1031 exchange is a strategy for deferring the capital gains tax from the sale of a property. By exchanging a relinquished property for like-kind real estate, owners may be able to defer their federal taxes and use the proceeds for the purchase of replacement property.Answer
  • What is “like-kind property”?
    Generally any form of property held for business or investment purposes qualifies including Apartment Buildings, Single-Family Rentals, Vacant Land, Office Buildings, Self-Storage Facilities, Shopping Centers, and Hotels. These property types may be 1031 eligible properties.
  • What does it mean to be “1031 eligible”?
    Not all real estate investments are eligible for 1031 exchanges. In order for your investment in real property to be 1031 eligible you must have a direct ownership in the underlying real estate. Debt investments aren’t eligible because they are interests in a promissory note, not the underlying real estate. Similarly, partnership interests (including LLC’s) where an investor owns a share of a partnership interest instead of a share of the underlying real estate would be ineligible. However, per the IRS’s Revenue Ruling 2004-86, ownership of a beneficiary interest in a Delaware Statutory Trust does qualify to be part of an investor’s 1031 Exchange.
  • What is a Delaware Statutory Trust Property?
    Commonly known as “DST”, this entity is often used to hold title to real estate similar to an LLC. Instead of owning a membership interest in an LLC, a DST investor owns a beneficial interest in the DST. Also like an LLC, the entity shields the investor from individual liability. However, unlike an LLC, a DST 1031 property will qualify as a “like kind” exchange replacement property for a 1031 exchange per Internal Revenue Ruling 2004-86.
  • What are the downsides of investing in a DST?
    The DST is typically managed by the DST Trustee and the beneficial owners do not have voting right like they would typically have in an LLC. Instead the DST and therefore the real property investments held by the DST are managed by the Trustee, not the investors themselves. Additionally, the IRS established seven prohibitions over the powers of the DST Trustee, which includes the following: -Once the offering is closed, there can be no future equity contribution to the DST by either current or new co-investors or beneficiaries. -The DST Trustee cannot renegotiate the terms of the existing loans, nor can it borrow any new funds from any other lender or party. -The DST Trustee cannot reinvest the proceeds from the sale of its investment real estate. -The DST Trustee is limited to making capital expenditures with respect to the property to those for a) normal repair and maintenance, (b) minor non-structural capital improvements, and (c) those required by law. -Any liquid cash held in the DST between distribution dates can only be invested in short-term debt obligations. All cash, other than necessary reserves, must be distributed to the co-investors or beneficiaries on a current basis, and The Trustee cannot enter into new leases or renegotiate the current leases.
  • What is a Springing LLC?
    DST Agreements often contain a provision that allows the Trustee to convert the DST to an LLC (the “Springing LLC”) if the Trustee determines that the DST is in danger of losing the property due to its inability to act because of the prohibitions in the trust agreement. The conversion to an LLC will allow the Trustee, who becomes the Manager of the LLC to raise additional funds, renegotiate terms of existing debt, and enter into new leases. However, because a membership interest in a Springing LLC is not a 1031 eligible the members (investors) lose their ability to defer capital gains upon the sale of the property owned by the LLC through another 1031 exchange.
  • What are the basic requirements to complete a 1031 Exchange?
    The following is a list of the basic elements involved in typical 1031 Exchanges: -A Qualified Intermediary, sometimes referred to as a “1031 Accommodator” is used to exchange the funds from the real estate that is sold to the real estate that is purchased. -Investors identify their replacement properties (typically 3 properties) with their 1031 Accommodator within 45 days of sale of the initial property. -Investors reinvest 100% of the net sales proceeds from the initial property sale into their replacement properties. -Investors acquire an equal or greater amount of debt on the replacement properties than they had on their initial properties. -Investors close on the purchase of the replacement properties within 180 days of the sale of their initial property. 1031 Exchanges can be very complicated and you should consult with your CPA and Attorney before proceeding with an exchange.
  • Can I invest if I do not currently own a 1031 eligible property?
    Yes. “Cash Investors” are investors who use non-1031 money to invest in a 1031 eligible deal. Once they have completed their investment, those investment funds become 1031 eligible and can be used as part of a 1031 exchange in the future.
  • Is my tax based on my equity or my taxable gain?
    Tax is calculated upon the taxable gain. Gain and Equity are two separate and distinct items. To determine your gain, identify your original purchase price, deduct any depreciation, which has been previously reported, then add the value of any improvements, which have been made to the property. The resulting figure will reflect your cost or tax basis. Your gain is then calculated by subtracting the cost basis from the net sales price.
  • Are reverse 1031 exchanges considered legal?
    Yes, although they can sometime become complex and always require appropriate planning. Most of our Qualified Intermediary or facilitator partners are owned by banks. This means that in most cases they will not handle reverse 1031 exchanges because liability reasons prevent them from holding title to property on behalf of an Exchanger. 1031 Crowdfunding, LLC suggests contacting one of our Partners for your reverse 1031 exchange planning and execution. They have demonstrated its unique planning and execution capabilities over a course of several years and they work closely with the most experienced tax attorneys in the country.
  • What are the time limits to complete a Section 1031 Deferred Like-Kind Exchange?
    While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the entire gain will be taxable. These limits cannot be extended for any circumstance or hardship except in the case of presidentially declared disasters. The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, and accountant or similar persons acting as your agent is not sufficient. Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified. The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.
  • Are Exchanges limited to one exchange and one replacement property?
    This is another exchanging myth. There are no provisions within either the Internal Revenue Code or the Treasury Regulations which restrict the amount of properties which can be involved in an exchange. Therefore, exchanging out of several properties into one replacement property or vice versa, relinquishing (selling) one property and acquiring several are perfectly acceptable strategies.
  • Should identifications be made to the intermediary or an attorney, escrow, closer or title company?"
    Identifications may be made to any party listed above. However, many times the escrow holder or closer is not equipped to receive your identification if they have not yet opened a transaction file. Therefore, it is easier and safer to identify through the Qualified intermediary or facilitator provided the identification is postmarked or received within the forty-five-day identification period.
  • Must all exchanges close at the same time?
    No, although there was a time when all exchanges had to be closed on a simultaneous basis, they are rarely completed in this format any longer. In fact, a significant majority of exchanges are now closed as delayed or deferred exchanges.
  • 1031 Exchange
    1031 Exchange is a method of deferring capital gains taxes on the sale of real estate held for investment purposes by exchanging proceeds from the sale of such asset, into like-kind property of equal or greater value that is held for investment purposes, as defined in IRC Section 1031.
  • 401k
    A 401(k) plan is an employer-sponsored retirement plan that allows eligible employees to make tax-deferred contributions from their salaries or wages. Employers can offer to match employee contributions up to a certain percentage of salary or specific dollar amount. The 401(k) plan was introduced by law in 1978. The IRS limits the amount an individual can invest into a 401(k). In 2019, the contribution limit was set at $19,000. Withdrawals from a 401(k) account are taxed and are charged with a 10 percent early-withdrawal penalty if drawn upon before a certain retirement age.
  • 50% Gross Income Test
    In order to qualify as a QOZB, an investor must demonstrate that a property or business generates at least 50 percent of its gross income from the active conduct of a trade or business in a QOZ. A trade or business will satisfy the 50% gross income test if it meets any of the following: Hours Test: at least 50% of hours spent performing services for a QOZB by its employees and independent contractors (and by the employees of independent contractors) are performed within the QOZ, or Pay Test: at least 50% of pay allocated to employees and independent contractors are in exchange for services performed in the QOZ, or Qualitative Test: the QOZB’s positioning in a QOZ is critical to the generation of at least 50% of the gross income of the trade or business.
  • 95% Rule
    Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their relinquished property to formally identify a replacement property or properties.
  • Absolute Advantage
    An absolute advantage occurs when a company or country is able to produce a good or service more efficiently than competitors. The company is able to use fewer inputs or time to produce the same quality of goods or services as its competitors. This efficiency allows the company to generate more profit per unit of product. Companies or countries should focus on what they are able to produce efficiently and forego items they can’t produce efficiently. This is a form of specialization. For items that the country can’t produce efficiently, it can import those items from countries that are able to produce such items efficiently.
  • Accounts Payable
    Accounts payable is an accounting term that measures the sum of a firm’s short-term obligations to creditors and/or suppliers. Accounts payable must be paid off in a defined period of time to avoid default and maintain a firm’s credit rating, thus ensuring its access to debt financing in the future.
  • Accounts Receivable
    Accounts receivable (AR) is money owed by customers to a company. Companies extend credit to customers, allowing them to receive a product or service before paying for it. Customers are given credit terms that have a credit limit and a certain number of days that a customer can pay. Terms vary by industry and customer credit worthiness. Accounts received is a current asset on the balance sheet. It is also part of a company’s working capital. Companies much manage their AR by ensuring efficient collection of payments from customers. Otherwise, customer accounts can get old and uncollectible, causing a write off for bad debts.
  • Accretive
    Accretive means gradual or incremental growth. But its meaning varies for finance vs. general lexicon. For example, in finance or business, accretive is an increase in the growth of a business due to an acquisition. When company ABC acquires smaller XYZ, ABC’s overall growth may increase. This can be seen in ABC’s earnings per share. This growth is gradual (i.e., years) rather than immediate. Accretive also refers to growth in zero coupon bonds, which do not pay interest. However, a $1,000 zero coupon bond may be purchased for $500. Over a defined number of years, the bond will grow to $1,000, which is similar to a bond that pays interest.
  • Adjusted Basis
    Adjusted basis is the original purchase price of an asset plus its acquisition costs plus any capital improvements less the cumulative depreciation deductions
  • Actual Receipt
    Actual receipt is physical possession of, exchange proceeds or other property by an exchanger completing a tax-deferred like-kind exchange. Any receipt of the exchange proceeds during the exchange period will disqualify the entire tax-deferred exchange transaction under IRC Section 1031. An actual receipt isn’t a paper receipt for the purchase of something, such as might happen at a retail store. Instead, it is another term used to express possession of sale proceeds of the relinquished property in a 1031 exchange. A common form of actual receipt is a check for the sale proceeds. Two receipts can occur in a 1031 exchange. One is the actual, and the other is the constructive receipt. A constructive receipt may involve the client’s attorney. In this case, the attorney is an agent of the client and takes possession of sale proceeds then passes them on to the client. That violates the 1031 exchange rules.
  • Aggregate Demand
    Aggregate demand (AD) is the total demand for all services and finished goods at every price level over a specific time period. Over the long-term, AD is the same as GDP (gross domestic product), as they are calculated the same way. The formula for AD is C + I + G + (X - M), where C = consumer spending, I is capital goods or investment from companies, G is government spending, and X - M is known as a country’s balance of trade (exports minus imports).
  • Alternative Investment
    Alternative investment is an investment in asset classes other than the three traditional asset types (stocks, bonds, and cash). Most alternative investments are held
  • Anchor Tenant
    Anchor tenant is the tenant that acts as the primary draw to a commercial property. It is usually the largest tenant in a shopping center or retail development. A common example is a grocery store.
  • Antitrust Laws
    Antitrust laws prevent companies from taking over an industry sector and thus stifling fair trade within that sector. A single company that dominates a sector without competition is called a monopoly. Generally, monopolies are not good for economies, as they reduce choices and increase prices for consumers. Antitrust laws also prevent mergers that will result in less choice and competition. One of the most famous antitrust cases is that of Microsoft vs. The United States. Charges of antitrust were brought against Microsoft because of its Internet Explorer web browser, which was installed on Windows PCs by default. The court ruled that Microsoft constituted unlawful monopolization. Microsoft appealed the case and eventually reached a settlement.
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