DISQUALIFIED PERSON

It's time for me to describe who is a "disqualified person" in a 1031 exchange, because invariably, I get asked this question almost every time I give a seminar on Section 1031.   In order to have a valid Section 1031 tax deferred exchange, an independent party must use a safe harbor.  In other words, the exchanger can have no control over the escrow funds being held in the exchange.  Our company, Bayview Financial Exchange Services, LLC, acts as a Qualified Intermediary; we hold the funds pursuant to the IRS regulations.  The question is, who cannot act as a Qualified Intermediary--in other words, who is "disqualified?"  Remember, a "disqualified person" may not hold the escrowed proceeds, nor may they receive the identification notice, nor may they serve as a Qualified Intermediary. 

The basic definition of a "disqualified person" is:  1) an agent of the taxpayer at the time of the transaction.  You are an agent of the taxpayer if you acted as the taxpayer's employee, attorney, accountant/CPA, investment broker, or real estate agent or broker within the past two years of the date of the sale of the relinquished property.  2) related parties and family members---this means that your mother, father, brother, sister, spouse, ancestors (includes your grandparents) and your lineal descendents (your children and grandchildren) are "disqualified".  Also if you own more than 10% of a corporation, partnership, trust, they are also "disqualified."  I always recommend to seek legal advice, if there ever is a question of whether someone is a "disqualified person."  Bayview Financial Exchange Services, LLC, and other valid QI's like us are completely independent and therefore, qualify to act as the Qualified Intermediary.

POPULATION FOLLOWS THE SUN

Wharton Business School professors, Peter Linneman and Albert Saiz just completed a study suggesting that "Americans are rapidly leaving cold, damp, and snowy areas for sunnier and drier climates."   They believe the growth will continue in places like the Western part of the United States, the Sunbelt and along the I-85 corridor between Raleigh, N.C. and Atlanta, Ga.  The professors even suggest that "Prospective real estate developers had better buy a good pair of sunglasses and some sun block."  They emphasize that the kind of amenities a city or region has to offer will help in the future growth of the area.  Professor Saiz notes:  "Growth today is based on quality of life, prevailing trends, the availability of parks and recreation, the character and variety of the architecture, the climate, taxes...and the quality of education available in any given location."  In a synopsis of the article, they describe a new paradigm for growth in an area. "...Traditionally, cities and metro regions are places where "productivity" occurs because of the presence of employment opportunities.  But, as the authors point out, a sweeping paradigm shift is already under way.  Now, cities will also have to measure their importance and their attractiveness in terms of "consumption."  Simply put:  Is the city in question a place where people, especially highly skilled workers, consumers, will want to spend their time and money?  Only those cities and regions where the answer can be an unequivocal "yes" should expect significant growth."  What areas do they predict to be the winners?  Here are their top 10 picks:  1) Phoenix-Mesa, AZ.; 2) Los Angeles, CA.; 3) Las Vegas, NV.; 4) Houston, TX.; 5) Orange County, CA.; 6) Miami, FL.; 7) Riverside County, CA.; 8) Fort Lauderdale, FL.; 9)  Dallas, TX.; 10) San Diego, CA.   Well, I live in Miami, Florida and even with the possibility of getting hit by a Hurricanes once every 15 to 20 years,  it is still a great place to live and according to the study will continue to be.

CONDO CONVERSIONS BACK TO RENTALS?

In South Florida, a number of developers purchased existing apartment buildings and converted them into condominiums.   The Miami Herald now reports that as a result of the condo glut, a number of developers are turning some of their projects back into rental properties.   Jack McCabe, a real estate consultant noted that he has seen eight South Florida projects totalling 2,256 units revert from condo conversions back to rentals. He noted:  "It's happening all over the country, but it started in South Florida because South Florida has been the leader in the condo conversion craze." 

  The reason condo conversions were successful is that it doesn't cost a lot to remodel them and the unit is available almost immediately, while on a new unit the buyer may have to wait as long as a couple of years for it to be completed.   Additionally, units that were converted to condo's are usually more affordable and from the developer's standpoint, the profit is about the same as new construction.  However, as we all know, the housing market has changed.  No longer are the long lines of people waiting to purchase these units.   One pundit reasoned:  "Many buyers of both new condos and conversions during the recent boom were investors who planned to flip -- or resell them quickly -- and pocket tidy profits.  With the market cooling, quick flips are no longer likely to work.  A lot of investors are putting their units back into the market as rentals."   I guess some of these investors need to read my article on contract exchanges which I wrote in the December 2005 issue of Commercial Investment Real Estate Magazine, for the CCIM Institute of the National Association of Realtors.  Contract exchanges are a viable tool--especially if you want to do a Section 1031 exchange.

INVOLUNTARY CONVERSIONS--DO THEY QUALIFY FOR A 1031 EXCHANGE?

Under Section 1033 of the Internal Revenue Code, if a taxpayer has their property involuntarily taken as a result  of destruction, in whole or in part, theft, seizure, condemned or threatened or imminence thereof, they can take the proceeds and replace them into property similar or related in service or use to the property so converted, and no gain will be recognized.  WHEW!!!   That was a big complicated sentence.  What does it mean?  First of all, this is not a Section 1031 exchange.  This is a different section of the Internal Revenue Code, it's Section 1033.  It allows the taxpayer if their property was taken, destroyed, etc, to take the proceeds they receive and purchase a replacement property.  They must purchase the replacement property within 2 years after the close of the first taxable year after the conversion occurred. 

The taxpayer does not need to use a Qualified Intermediary.  This rule is completely different than a Section 1031 exchange, which allows an investor to sell his investment property and replace it with any other investment real estate or real estate used in a trade or business.  The time limits to find the replacement property are much shorter in a Section 1031 exchange and you should use an independent Qualified Intermediary to hold the escrowed proceeds until the replacement property is purchased.  You have a lot more leeway under a Section 1031 exchange, because you can purchase any type of real estate.  Under Section 1033, you must purchase a similar property or one used for a related service as the property that was taken.  Suffice it to say, if your property is "taken"  and you want to defer paying any tax on your property, you will have to proceed under section 1033.  However, if you are an investor and are selling your property and want to defer paying your taxes, you will have to proceed under Section 1031 of the Internal Revenue Code.  If you have any questions on these sections, please give our office a call (toll free-866-903-1031).  You can speak to any of our Exchange Coordinators who will be able to explain these sections further.

FORM 8824 AND SECTION 1031

I get asked all the time if we can help the taxpayer fill out form 8824 for either them, or for their accountant.  The answer is, as an independent Qualified Intermediary, we must remain completely independent.  Although the 8824 form is not mandatory, the information requested on the form must be reported to IRS in order to avoid penalties under another section of the Internal Revenue Code.  The form (#8824) has been described by many as a little onerous and that is the reason why we receive phone calls "for help" all the time.  So, da tah da, HELP has now arrived!  Although you can't rely on our answers, we have now set up a system on our web site, to help you fill out form 8824.   Every time I tell this to CPA's and accountants at conventions where I speak, they go crazy.  It's like I have "parted the waters."   Go to our website: www.bayview1031.com and you too, can have the same experience.  Actually, you will also be able to obtain a lot of other information on our website as well as get the date, place and time of our next webinar.