Can Oil and Gas Be Exchanged With a 1031?

A 1031 is all about exchanging real estate. But what is defined as “real property” by the IRS and various states isn’t limited to just houses and condos. A fun fact, for instance, is that oil and gas can qualify as real estate.

The production of oil and gas involves access to the property that the resources are on and the rights to extract those resources from the land. This means that while the oil and gas are on the property they are treated like real estate and can be exchanged. Mineral, Water rights, and timber function in the same way, though whether they are considered real estate varies from state to state.

The beautiful part of this is that with a 1031 like-kind exchange, oil and gas can exchanged for any other real estate. If you’re tired of collecting royalty payments in cold cold Ohio, why not exchange it for a vacation rental in sunny Florida? A 1031 exchange has the power to free you and broaden your investment portfolio.

Why is the Housing Market Heating up?

The housing market is booming in many parts of the country. According to MarketWatch, buyer traffic across the country has been on the rise. But why are buyers scrambling to buy? The impending possibility of rising mortgage rates has many buyers looking to purchase while they can. Low inventory has led to frenzied buying in many areas where affordable housing is scarce. The 2018 tax reform also helped to set up states like Florida as favorable places to relocate. In fact, 6 of the nation’s fastest growing metro areas are in the Sunshine State. With its favorable tax environment and beautiful weather, it is no mystery as to why many are choosing to flee the cold and relocate in Florida.

Miami’s Luxury Market Heating Up in 2018

The Sunshine State’s most popular city has been enjoying a great beginning to the new year. According to the Miami Association of Realtors, luxury home sales and existing condominium sales increased in February. The boost in sales is credited to Florida’s favorable tax treatment. With no state income tax and a pro-business tax structure, many northern buyers from expensive high-income tax states have begun flocking to Florida. Luxury homes are still lingering on the market longer than they were last year. But as the market picks up and more Northerners flee the frozen north, luxury homes might not be sitting empty for very long.

First-Time Home Buyers Struggling Amidst an Unforgiving Market

First-time homebuyers don’t have it easy in today’s housing market. According to a report by Trulia, over the past six years starter homes have been getting pricier, smaller, and poorer in quality. With some of the lowest inventory on record, starter homes have been far more affected by these problems than any other category of housing that Trulia tracked. As supply shrinks, first-time homebuyers will be expected to spend far more of their income on buying their first home than new homebuyers in the past. Trulia doesn’t have an optimistic view of the 2018 buying season for young homebuyers plagued by a “perfect storm.” Millennials looking to settle down and start families of their own will have to hold tight for the near future.

 

South Florida Real Estate Holding Strong After Irma

After hurricane Irma left Florida smarting from billions of dollars in damage, many worried about the future of the sunshine state’s real estate market. But after a month-long slump, South Florida’s real estate market remained strong. Both Palm Beach and Miami Beach logged an increase in high-end home sales in 2017, according to a report from ONE Sotheby’s International Realty and Integra Realty Resources. And according to the report, luxury home sales are still expected to increase by a modest amount in 2018.

The weakening dollar is expected to draw in international buyers, while the favorable zero state income tax is expected to attract tax refugees from heavily taxed states in the Northeast. Irma might have shaken the state up a bit, but Florida’s real estate market still seems resiliently poised for a bright future.

How Much Do I Need to Reinvest With a 1031?

When you begin hunting down replacement properties for your 45 day list, it is important to keep in mind how much you need to reinvest while carrying out a tax deferred exchange. The IRS has a two-part requirement laid out for reinvestment with a 1031. The first one is that in order to defer all taxes you must purchase at least as much as your “net sale”, the contract price minus closing costs or the total left before any mortgage is paid off. The second one is that you must use all the “net proceeds” in your next purchase. This means that if there was a mortgage, subtract the mortgage that was paid off and the difference is your net proceed.

If you choose to take cash out or purchase less than what you sold, the unused proceeds will become taxable to the IRS. The proceeds that were reinvested in your exchange will remain sheltered from capital gains tax. You have an immense amount of freedom when it comes to allocation of your proceeds. Just because you sold a single-family home, doesn’t mean that you need to reinvest in another single-family home. A 1031 is also not necessarily a one to one process, it is the valuations that are the key. If you want to sell a single property and reinvest in multiple properties, you have the power to do so. Just remember that if you wish to defer all capital gains tax you will need to make sure that your reinvestment uses all of your proceeds.

 

Relocating Your Real Estate Investing to a Second Tier City

Big gateway cities like New York and Miami are exciting and alluring. But they are also home to expensive and oversaturated markets full of real estate investors from all around the world. Rather than struggle as a little fish in a big pond why not relocate to a smaller secondary city? Secondary markets like Raleigh and Tampa Bay are some of the fastest growing areas in America. With strong job growth and an influx of driven young professionals, these markets are hungry for housing.

A deliberate strategy of relocation of investment portfolios from gateway to second tier cities can be incredibly advantageous. Traditionally, gateway cities and larger urban areas are appreciation rich but cash flow poor areas for investment real estate. When appreciation begins to slow in primary markets it is a good time to seek cash flow in smaller secondary cities. Second tier cities often come with numerous tax advantages of their own and with much less investor competition. The 1031 is the key. Carrying out a like kind exchange from a primary city to a secondary city will give you the power to maximize your real estate investing without worrying about capital gains tax.

Timing is Everything With a 1031 Exchange

When it comes to a 1031 the IRS has a specific and rigid timeline laid out for your exchange. From the day that you close the sale of your investment property, it is important to know that there are two periods for you to honor — the identification period and the exchange period. From the day you close the sale of your old property you have 45 calendar days to produce a list of potential replacement properties. Forty-five calendar days is all you have — weekends and holidays count. During that period of time, you must either identify potential replacement properties or take the title of a new property and finish the process. At the very least you need a clear and easy to understand list that shows the properties you are considering purchasing. It’s important to remember that on day 46 your 45 day list cannot be changed. You are stuck with what is on that list for the remainder of the exchange period.

Alongside the 45 day period is the total exchange period of 180 days. From the day that you close the sale of your property, you have 180 days to complete the process. The replacement property that you purchase has to be on or more of the properties that are on your 45 day list. The 180 day exchange calendar does have one little caveat that you need to pay attention to; it’s actually not always 180 days. The statute reads that “You have 180 days or until the date of your next required tax filing.” If you find your tax filing date rapidly approaching, filling for an extension with IRS will get you back on track. The 45 day list can be daunting and along with it there are some additional identification requirements that can complicate it, so make sure you are working with a good QI.

How to Swap a House for an Apartment Complex

A 1031 link-kind exchange is a powerful tool. The process allows you to defer capital gains taxes on investment real-estate while reinvesting your money into new real-estate. But just because you’re selling a rental house doesn’t mean that you need to exchange it for a rental house.

“Like-kind” refers more to its use than its type. Any type of investment real-estate can be exchanged for any other kind of real-estate used for investment. Real-estate located in the United States can only be exchanged for real-estate in the United States and a select few U.S. territories. Real-estate outside the United States can be exchanged for other investment real-estate outside of the U.S.

If you meet those requirements you have an immense amount of freedom when it comes to choosing a replacement property. Your like-kind property can be located in any state or city whether you currently reside there or not. If you are getting bored managing a vacation rental you could even make the switch from residential to commercial and choose a business warehouse as a replacement property. With a 1031 and some creativity you have an immense amount of power to shape your portfolio for your benefit.

Choosing the Right Qualified Intermediary For a 1031 Exchange

If you are planning on going through with a 1031 exchange you are going to need a qualified intermediary to help carry out your like-kind exchange. But what makes a qualified intermediary qualified?

The law is only specific in that it must be an unrelated third party. Someone that you have no ties to. This disqualifies anyone that you have a familial or business relationship with. Your realtor, hairdresser, and accountant cannot be your 1031 exchange accommodator. But just because someone is not disqualified from being your intermediary does not mean that they necessarily qualify. This is why it is important to vet intermediaries that you might be looking to hire. You should ensure that they have the proper experience and demonstrable results to show.

It is also vital that you find a qualified intermediary before you begin the exchange process. If you close the sale of your property without an intermediary in place, three things will prevent you from doing an exchange. First, the QI was not involved per the IRS code. Second, the exchange was not documented properly on the closing documents and statements. Third, you received the money. The IRS will not allow you to have control of your money when you are doing a 1031 exchange. Whether you have the actual money or whether the money is sitting in your attorney’s escrow account or your title company’s account, waiting for your direction, it isn’t allowed.

Experiences, references, and results are everything, investigate thoroughly to ensure that you get the best possible service from your QI.