1031 Exchange Rules in Pennsylvania

To accomplish a full tax deferral on the sale of rental property you must follow the IRS Section 1031 Guidelines. Corcapa 1031 Advisors recommends the following:

• Be in communication with your Corcapa 1031 Advisors representative well ahead of your proposed relinquished property sale closing date so we can begin to research and identify potential replacement property.

• Be sure to select and assign a Qualified Intermediary “QI” or Accommodator to receive the sale proceeds from escrow. Corcapa can recommend QIs for you. Be sure to research the financial backing of QIs before selecting them. Be especially careful to NOT take personal receipt of the funds or your exchange will be invalidated.

• From the day you close your relinquished property, you will have 45 days to identify your replacement property(ies). This identification must be in writing, and can follow one of three possible identification rules:

1. 3-property rule: Up to three properties are identified no matter what their value.
2. 200 percent rule: Any number of properties is identified as long as their combined fair market value (FMV) does not exceed 200% of the FMV of the relinquished properties.
3. 95 percent rule: Any number of properties are identified no matter what the aggregate FMV, provided 95% of the value of the identified properties is acquired.

• The investor must close on the identified replacement property(s) within 180 days from the close date of the relinquished property. This is an additional 135 days from the end of the 45 day period in which to close on your replacement property(ies).

• Additionally, for full tax deferral you must purchase equal or greater purchase price, equal or greater debt and reinvest all cash.

• Please review the IRS publication here for further details: http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031

No, 1031 exchange do not need to be in the same state. Like-kind exchanges are recognized and can be completed in all 50 US states.

It is important to recognize that although the majority of states conform to Section 1031 of the Federal Internal Revenue Code concerning 1031 exchanges, certain state-specific regulations do exist. Notably, states including California, Massachusetts, Montana, and Oregon have implemented claw back provisions. These provisions mandate that any appreciation in property value that occurs within these jurisdictions is subject to state taxation, irrespective of whether the property was subsequently exchanged for another in a different state.

To effectively navigate the varying regulations across states, it is advisable to consult with an experienced alternative investment specialist who can guide you through the intricacies of a 1031 Exchange.

The fundamental concept of a Pennsylvania 1031 Exchange aligns with the national standard. If you own real property that is used in your business or held for investment purposes, engaging in a sale may qualify you to defer federal and state income taxes normally due on such transactions.

Utilizing a 1031 exchange strategy allows for this tax-deferral. Essentially, it enables the seller to divest of their property and reinvest the proceeds into another ‘like-kind’ property, adhering to specific time limits established by law. This strategic approach offers significant financial benefits under appropriate circumstances.

A DST is an acronym for a Delaware Statutory Trust which is fractional ownership of real estate. In 2004 the IRS issued a Revenue Ruling clarifying the terms on structuring a DST investment for 1031 purposes. Please review the IRS Revenue Ruling 2004-86

The Revenue Ruling 2004-86 issued by the IRS governs how the DST should be structured so that the real estate program is likely to fit within the guidelines of a 1031 exchange. TICs have a Revenue Procedure 2002-22 that discusses the 15 structure points TIC programs should have in order to receive a “should level” tax opinion. Corcapa 1031 Advisors works with sponsors of DST and TIC offerings who structure the offerings with a legal opinion from experienced industry attorneys for 1031 exchange purchases. We recommend that you discuss this with your tax and legal advisors and we will provide all documentation to these advisors to use in analyzing your replacement property options.

The most common reasons that investors select Delaware Statutory Trusts are:

• Potentially Greater Cash Flow Than They Are Currently Receiving: Most DSTs have between a 4.00% – 5.50% projected cash flow based on the anticipated rental income less expenses. For example, if you invest $1,000,000 of equity into a DST with a 4.5% projected cash flow, this would provide a projected net annual income of $45,000. This could be a higher net cash flow than you are currently receiving on your rental property. As with all real estate the income cannot be guaranteed because the rental income and expenses can increase or decrease unexpectedly.
• Ability to Diversify: You can reinvest your relinquished property sale proceeds into multiple investments in different cities, states, and asset classes such as apartments and net lease retail.
• Non-Recourse Loans: Virtually all the loans within the DSTs that are approved by DAI Securities, LLC are non-recourse which means the investor does not personally guarantee them.
• Easier Financing: Access to financing for investors needing debt on their replacement property
• Passive Ownership Structure: Many investors desire to reduce their active property management as they grow older and DSTs offer passive ownership.

We recommend that all clients review each PPM in detail and consult their tax and legal advisors to full understand the benefits and risks of the investment. Corcapa 1031 Advisors is happy to attend a meeting with your tax and legal advisors or have a conference call to answer all questions.

You must report an exchange to the IRS on  Form 8824, Like-Kind Exchanges and  file it with your tax return for the year in which the exchange occurred.

Form 8824 asks for:

• Descriptions of the properties exchanged
• Dates that properties were identified and transferred
• Any relationship between the parties to the exchange
• Value of the like-kind and other property received
• Gain or loss on sale of other (non-like-kind) property given up
• Cash received or paid; liabilities relieved or assumed
• Adjusted basis of like-kind property given up; realized gain

If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

While Corcapa is happy to refer you to accommodators, we cannot provide accommodator/Qualified Intermediary services. We specialize in the replacement properties for our clients’ 1031 exchanges.