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| Compass
Investments &
1031 Exchange Who
We Are
Compass Investments & 1031 Exchange are leaders
in identifying replacement property solutions suitable for 1031 Exchanges. While
our offices are located in New England, we maintain professional relationships
down the entire east coast.
What’s In It For You
Whether
you are the exchanger or the trusted advisor, our job is the same. Educate, Analyze
and Recommend.
Our process is to educate our clients about replacement
property solutions. This can remove the headaches of active property management.
Analyze
the exchanger’s current situation and ultimate goals for completing the exchange.
The exchanger may want to defer taxes but still receive income from real estate.
Recommend
suitable replacement properties that meet an exchanger’s risk level, time horizon
and ultimate goals. Why
We’re Different
Our step by step process as well as our property selection
due diligence is what makes us different. While everyone will tell you they’re
process driven and detail oriented, we really mean it.
Each party involved
in the exchange will become part of our process which clearly details and outlines
every step that needs to be accomplished.
Compass Investments & 1031 Exchange
will go through its own critical research driven analysis of each property before
it is ever recommended to a client. We will assess your entire financial picture
and goals before determining if a 1031 exchange into passive real estate management
is right for you. |
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Revenue Procedure 2008-16 just went into effect in March of this year. It clearly sets forth guidelines to follow when attempting to complete a §1031 exchange involving vacation properties. Our article highlights the key issues or you can click the blue box to the left to read Revenue Procedure 2008-16 in its entirety. |
Vacation Homes and Tax-Deferred Exchanges |
Recent guidance released by the Internal Revenue Service (IRS) certainly clears a lot of the mystery that has surrounded the viability of completing a §1031 exchange upon the sale of a vacation home. Revenue Procedure 2008-16 (rev proc 2008-16) became effective in March 2008 and provides a safe harbor for taxpayers looking to complete an exchange with a vacation home. The ramifications are now clearly defined as to when the IRS will not challenge whether a vacation home will qualify for “being held for investment purposes” as required under §1031.
Basically rev proc 2008-16 clarifies the difference between a vacation home held for personal enjoyment versus investment purposes. This is not to say that the vacation home can not be used at all by the taxpayer, as long as defined “personal enjoyment” timeframes are not exceeded. In order for a vacation home to qualify for a tax-deferred exchange:
- The property must have been held for at least 24 months prior to the exchange. This is called the “qualifying use period”.
- Within each 12 month period of the qualifying use period, the dwelling unit must have been rented to another person at fair market rental value for at least 14 days.
- Personal use of the dwelling unit by the taxpayer must not exceed the greater of; 14 days or 10% of the number of days during each 12 month period that the dwelling unit was rented to other persons at fair market rental value.
So you can see under these new guidelines that a vacation home that is sometimes used by the taxpayer can still qualify for a §1031 exchange. A beach home, lake home or even a ski cabin or condo unit that is used for some long weekends by the taxpayer will qualify for a tax-deferred exchange as long as the above guidelines are adhered to. As an example, a taxpayer that has a seasonal property that is rented at fair market rental rates for about 2/3 of the year (approximately 240 days) can personally use that property personally for up to 24 days. Keep in mind that rental period is calculated as the first 12 month period immediately preceding the exchange and is not calculated on a calendar year. The same must hold true for each 12 month period prior. The second 12 month period ends on the day before the first 12 month period begins, and begins 12 months prior to that date… and so on.
There are also some qualifications that must be met on the replacement property if that too is to be used as a vacation home:
- It must be owned by the taxpayer for a minimum of 24 months immediately following the exchange. The “qualifying use period”.
- Within that qualifying use period, the same rental and personal enjoyment rules apply for each qualifying 12 month period: the taxpayer must rent the dwelling unit to another person at fair market rent for at least 14 days.
- Personal use of the dwelling unit must not exceed the greater of 14 days or 10% of the number of days during any qualifying 12 month period that the unit is rented to another person at fair market value.
This opens up a lot of options to the taxpayer. You can see it is now an option to upgrade your vacation property through a §1031 exchange. As long as the guidelines set forth in Revenue Procedure 2008-16 are met the IRS will not challenge whether a vacation home will qualify as property “being held for investment purposes” under §1031 rules.
This also opens the door for the taxpayer to consider other options for completing a tax deferred exchange upon sale of a vacation property. Perhaps the taxpayer would like to increase their income from the property, or reduce their involvement in managing the property (no more screening potential renters or traveling to clean the property to get it ready for the next set of renters). In this instance, the taxpayer may consider a tenant-in-common (TIC) property for their replacement property. A beach property that is only rented during the summer months or a ski property only rented during the winter season does not maximize the potential income. An exchange into a TIC property can offer steady year-round income. TIC properties are often institutional grade properties that have a national tenant profile. Professional management is in place so there is no more active dealing with the tenants, toilets and trash.
Be sure to carefully plan with your tax advisor before you attempt to complete a §1031 exchange. This is one of the most powerful tools you can utilize to build your real estate portfolio while deferring capital gains and state taxes. Careful planning under Revenue Procedure 2008-16 can help you upgrade your vacation property or even exchange into a property that produces more income…without the headaches of being an active landlord.
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A
qualified intermediary plays a crucial role in completing a 1031 exchange. Call
us for a referral to a qualified intermediary in your area. 877.298.1031. |
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We
understand tax deferral is top priority for most of our clients. Being able to
invest 100% of your proceeds from selling real estate is a huge advantage to your
overall wealth plan and future goals. We evaluate your 1031 exchange as part of
your overall financial picture, not just as a snapshot of the particular property
being relinquished. Our step by step process is very detail oriented to guide
you smoothly through the sometimes confusing rules of the 1031 exchange.
After
taking full advantage of deferral of capital gains taxes and depreciation recapture,
our
clients realize how liberating it is to be free from day to day hassles of property
management. We specialize in locating suitable replacement property that will
qualify for your 1031 exchange, defer your taxes and put you into a passive, rather
than active management role…all while still enjoying the benefits of owning real
estate.
Alternative replacement property offerings typically involve higher
end, institutional grade property. Our offerings are geared toward the middle
range real estate investor that normally may be blocked out of owning institutional
grade real estate individually. These programs include but are not limited to
tenant-in-common (TICs), NNN Leases, 721 Upreits, Delaware Statutory Trusts (DSTs)
and oil and gas programs.
Our management team is always available for
you to speak to directly. Todd Thibodeau is Founder & Managing Partner. Lee Copson
is Vice President of Investments. Both Todd and Lee are involved from beginning
to end in each transaction. We want to work as a team with both professionals
and clients. We welcome conference call situations with professionals and their
clients who may be interested in the 1031 exchange.
We work with accountants,
attorneys, real estate professionals, qualified intermediaries, and finally, the
client selling the property. Multi layered due diligence is performed on every
property we present to our clients. We evaluate the property, the real estate
market it is in and the tenants and leases in place for the property.
We
travel up and down the east coast giving NBI and Lorman CPE based seminars on
the topic of the 1031 exchange and replacement property solutions. We also offer “webinars” where you may log on from your computer and enjoy one of our educational
presentations. Please call our toll free number for
more information about signing up for one of our webinars.
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| Toll
Free: 877.298.1031
Compass Investments & 1031 Exchange
632 Westfield Street
West Springfield, MA 01809
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