FAQs Archive - Page 4 of 4 - Horvath & Tremblay

Q: Can an Investor 1031 exchange out of property held in one Title Holding Trust and buy property held in a different Title Holding Trust?

Yes, as long as the underlying beneficiaries of both Title Holding Trusts are exactly the same the transaction will qualify for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code. Both properties do not need to be held in a Title Holding Trust. You could sell Relinquished Property, that was held in a Title Holding Trust, and acquire Replacement Property, that is held in your individual name as long as the individual was also the beneficiary under the Title Holding Trust.

Q: Can an Investor 1031 exchange property be held in a Title Holding Trust?

Yes, the Title Holding Trust is a fully revocable, grantor trust, that can be terminated, altered, amended or updated by the trustor and/or beneficiary at any point in time. A full or partial assignment of a beneficial interest in the Title Holding Trust is treated as a conveyance of the underlying property held in the Title Holding Trust.

Q: What type of real estate can be exchanged under Section 1031?

Only two types of real property qualify for a 1031 Exchange – Investment Property and Property held for use in trade or business. Principal residences, vacation homes and time shares do not qualify. Among the types of real property that are eligible for 1031 Exchange treatment are multi-family apartment buildings, single-tenant net-leased properties, hotels, factories, commercial office buildings, shopping centers, farmland, quarries and oil fields. In general, any type of real estate may be traded for another type of real estate as long as it satisfies the qualified use test.

Q: What is a 1031 Exchange?

A 1031 Exchange is a mechanism by which you can dispose of certain real property and defer the payment of your capital gain and depreciation recapture taxes by exchanging the real property (the “Relinquished property”) for qualified “like-kind” property (the “Replacement property”).

Q: What are the benefits of a 1031 Exchange versus a Traditional Sale?

A 1031 Exchange is one of the few strategies available to defer the recognition of capital gain and depreciation recapture taxes on the sale of qualifying property. The 1031 Exchange allows you to sell and subsequently acquire properties in order to reallocate, consolidate or diversify your investment portfolio without paying tax on any capital gain or depreciation recapture taxes. Typically, by selling your investment property, you will trigger federal and state capital gain and depreciation recapture taxes, which will leave you with less equity to reinvest. This makes it difficult to trade-up in real estate value and/or increase your cash flow when you have to recognize and pay these tax liabilities. By completing a 1031 exchange, you can defer your capital gain and depreciation recapture tax liabilities and therefore keep 100% of your net proceeds from the sale of your investment properties available to reinvest in other like-kind replacement properties.

Q: Are 1031 Exchanges a new concept?

No, in fact the first tax free exchange dates back to the 1920’s and Section 1031 of the IRS code was first introduced in 1921. The early exchanges involved two parties who simply traded properties. The concept of “like-kind” exchanges gained momentum, in common practice, as an investment and tax deferral tool in 1990 with a re-write of Section 1031. At that time, it became legal to sell one type of investment property and buy any other type of real estate (multi-family, beach property, vacant land, commercial property, etc.). The code was also updated to include specific rules and timetables that must be followed for the transaction to qualify as a successful 1031 Exchange.

Can an investor structure a tax-deferred exchange on vacation property or a second home?

The primary issue that needed to be addressed and clarified [...]

Can an investor structure a tax-deferred exchange on vacation property or a second home?Horvath & Tremblay2018-02-15T13:04:15-05:00

Can an investor sell rental property and pay off a loan on another property through a 1031 exchange?

No, you must sell real estate and acquire other replacement [...]

Can an investor sell rental property and pay off a loan on another property through a 1031 exchange?Horvath & Tremblay2018-02-15T13:03:33-05:00

Can an Investor 1031 exchange out of property held in one Title Holding Trust and buy property held in a different Title Holding Trust?

Yes, as long as the underlying beneficiaries of both Title [...]

Can an Investor 1031 exchange out of property held in one Title Holding Trust and buy property held in a different Title Holding Trust?Horvath & Tremblay2018-02-15T13:03:08-05:00

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