Qualified Opportunity Funds (QOFs, which invest in Opportunity Zones) are not eligible as replacement real estate in a 1031 exchange. For those with questions about investing in QOFs as an alternative to a 1031 exchange, you can review the proposed IRS regulations at https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-new-opportunity-zone-tax-incentive.
Will individual landlord taxpayers be able to claim a 199A 20% deduction of net rental income? The question begs clarity. At a meeting with the IRS, advocates said proposed Section 199A regulations should clearly state that all rental real estate is a trade or business. Politico has a good article on this issue: https://www.politico.com/newsletters/morning-tax/2018/10/17/desperately-seeking-clarity-377393
Ed Horan submits 199A comments to Treasury
Throughout last year’s tax reform process, Realty Exchange was heavily involved as part of an industry team to help save 1031 exchanges for real property. The team spent countless hours walking the halls of the Capitol, making great effort to ensure Congressional members knew the importance of 1031 exchanges in real property transactions.
Even after tax reform, Ed Horan continues to track 1031 exchange issues and provide input to regulators. He recently submitted comments to Treasury on the proposed 199A regulations which impact exchangers:
Ed’s comments were also picked up by Tax Notes, a collection of publications which provides news, analysis, and commentary for tax professionals.
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Internal Revenue Code (IRC) Section 1031(f) establishes the special rules for exchanges between related parties. In addition, the IRS published “Revenue Ruling 2002-83” in November 2002, to clarify the purchase by an exchanger of the replacement property from a related party.
IRC Section 1031(f)(1)(C) requires that the property received in a related party exchange, by the exchanger or related party, be held for two years after the date of the last transfer which was part of the exchange.
If the exchange properties are held for two years, it is clear that:
First, an exchanger can do a direct exchange. A direct exchange occurs when the parties swap properties directly with each other. This normally occurs simultaneously and may involve a qualified intermediary.
Second, also allowed is the sale and transfer of the relinquished property to a related property. This normally is a deferred exchange using a qualified intermediary, with the exchanger buying the replacement property from an unrelated party.
However, regardless of the time the exchanger holds the new replacement property, or the use of a qualified intermediary, it is clear in the “Revenue Ruling” that purchase of the replacement property from a related party may result in the IRS disallowing the exchange.
Between family members, a related person is an individual and his or her spouse, siblings, parents and children. Not related are aunts, uncles, in-laws, cousins, nephews, nieces and ex-spouses. Certain business entities can also be related parties; for example, a corporation or partnership/LLC in which the exchanger has more than a 50% ownership interest is considered a related party.
For purposes of Section 1031(f), the term “related person” means any person bearing a relationship to the exchanger as described in Sections 267(b) or 707(b) (1). If there is any doubt as to the related party status of the seller of the replacement property, the exchanger should consult with his tax advisor.
If the exchange involves a related person, then Part II of IRS Form 8824, Like-Kind Exchanges, must be filed for the year of the exchange plus two additional years.
Based on IRC 1031(f) and Revenue Ruling 2002-83, it is clear that the purchase of a replacement property from a related party should be avoided.
Exception: If the related party seller of the replacement property is not cashing out (that is, he is also doing an exchange), then the replacement property may be purchased from a related party. The requirement remains that the replacement property must be held for a period of two years.
This publication is designed to provide accurate information on tax-deferred exchanges. The publisher is not engaged in rendering legal or accounting services. If legal or tax advice is required, the services of a competent professional should be sought.
National Association of Realtors ( NAR) has published an excellent summary of the recent tax bill impact on Homeowners and Real Estate professionals.
Worth the read to understand the impact. XX
If you closed on your 1031 exchange relinquished property in the last quarter of 2017 and still have an active 1031 exchange you may want to file an on-time tax return extension.
The IRS 1031 regulations say: “The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return”.
If you closed on a relinquished property after October 2017, and will not receive your replacement property until after the normal 2017 income tax filing due date (Tuesday April 17, 2018, for individuals this year), you must file an on-time extension for the filing of your 2017 federal tax return to get the full 180 days to complete the exchange.
Taxpayers use IRS Form 4868 to file for an automatic six-month extension. If you closed on your relinquished property anytime in 2017, you must report the completed exchange on IRS Form 8824, Like-Kind Exchange, as part of your 2017 federal tax return. You may not file your tax return for 2017 until the exchange is completed.