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Happy 1031? IPX1031


NO TRICK: A Treat for Unsuccessful 1031 Exchanges!

A treat from the IRS? Taxpayers should not be spooked if they are unable to complete their 1031 Exchanges. A treat may exist for a calendar-year taxpayer who initiates a 1031 tax-deferred exchange during the last few months of this year only to find that the exchange fails (they are unable to purchase new replacement property within the time periods set forth in Section 1031). Since the exchange period will go into 2018, the IRS provides an option called “tax straddling” which allows most taxpayers to pay the tax that is due on their 2018 return as opposed to their 2017 return.

Of course the major benefit for a taxpayer who successfully completes a 1031 Exchange is 100% deferral of taxes and the ability to invest all of their equity into new property. Unfortunately, if a taxpayer is not able to purchase new property to successfully complete the 1031 Exchange, the taxes associated with the sale of their investment property will be due. However due to “tax straddling” the taxpayer may receive a one year tax payment deferral thanks to the coordination between IRC §453 and §1031 provided in the §1031 regulations.

How does this work? If a delayed 1031 exchange begins in the latter portion of 2017, the exchange period may run into 2018. If the exchange fails or if the taxpayer (having a bona fide intent to do an exchange) receives cash boot in 2018, the 1031 regulations treat the exchange as an installment sale allowing the taxpayer to consider that the exchange proceeds were received (and are taxable) in 2018.

However, if a taxpayer prefers to pay their taxes as soon as possible, in accordance with IRC section 453 (d) a taxpayer may “elect out” of the installment method. By electing out, the taxpayer can recognize the gain in 2017 instead of 2018. To elect out, the sale should be reported on Form 8949, Form 4797 (or both) and not on Form 6252. The election must be made by the due date, including extensions, for filing the 2017 tax return. For more information about the procedure and forms to use, see IRS Publication 537 and consult with your tax advisor. Additionally, tax straddling does not apply to all sales and any gain attributed to debt relief will have to be recognized in the year of sale.

The IRS does not penalize investors for attempting to complete a 1031 Exchange. Tax straddling provides an added incentive to taxpayers selling investment property at the end of the year. Why not attempt to complete a 1031 Exchange when a one year payment deferral is available as the back-up plan?

Please call us at IPX1031 to discuss tax straddling and other valuable tax-deferral solutions. Be sure to consult with your tax advisor before participating in a 1031 exchange.

Recently I was showing a potential Leasing Client spaces for a Med Spa usage. While some of the potential locations were in good shape and clean; we walked in the to perfect location that was filthy, had an unflushed toilet if you know what I mean-even a broom would have made a difference.  Leasing agent called before during and after the showing; it is too bad that if she was so motivated (she told me to bring ANY offer) that she did not at least bring out a broom herself or strongly encouraged the Landlord to bring out a cleaning crew. Windows were so dirty that you could not even look in. This had me thinking on Commercial Space. A couple of years ago I sold a beautiful office condo-in a very competitive market.  But while it was vacant; the owner lightly staged (for Commercial) and my showings were very positive.  I certainly had property brochures onsite along with CCRs.

One of my favorite television channels is HGTV. I love the Property Brothers, Love it or List it, Design on a Dime, and Flip or Flop.

Given my vocation, this is predictable as I do a similar thing for a living – although not residentially.

One thing universal in all of the HGTV offerings – the condition of a house during showing is critical. If the house shows poorly with outdated colors, visible repair needs, oversized furniture or evidence of residents – your purchase price will suffer as potential buyers will discount their offers to deal with the shortcomings.

OK, I get it! But, is there a parallel in commercial real estate?

My answer is a resounding YES! Staging your commercial real estate is not as easy as a few v-dinted pillows and strategically placed sofas, however. Staging commercial real estate involves the condition of the building and how it shows to prospective tenants and buyers.

If the condition of your commercial real estate is tantamount to achieving maximum value, what improvements should you consider before selling or leasing?

Leasing improvements: If your goal is to lease your commercial real estate quickly and for an above market lease rate, you must invest some dollars placing the property in “rent ready” condition. The carpeting in the office should be replaced or at a minimum removed so that a prospective tenant knows that new flooring is in the plans. A fresh coat of paint throughout the office and warehouse brightens things and adds an air of new. All of the systems – plumbing, heating, ventilating, air conditioning, roof, sprinkler system, loading doors, electrical panels, fire alarm system should be checked and certified. The outside of the building is important as well. Remember, if your commercial real estate lacks curb appeal, the tour might hop-scotch your building for one that looks good. Paving, landscaping, and truck loading areas should be shored up and maintained during the vacancy. Most potential tenants have a limited imagination or patience for the way “things could be”. Therefore, delaying the above could cause an occupant to bypass your building for another that is move-in ready.

Sale improvements: If your goal is to sell your commercial real estate for top dollar, you want to plan your refurbishment wisely. If you cannot justify a 100% return or greater – question the investment. Said simply, if you repaint the building at a cost of $20,000, that investment should translate into a $20,000 increase in value. In my experience, the items in a building purchase that give buyers the greatest heartburn are the condition of the roof and air conditioning. I generally advise my clients to perform an inspection of these systems. We then know if any issues exist and can plan accordingly.

Biggest mistake: Some owners will adopt the attitude of “waiting until the occupant appears before investing in any building refurbishment.” Certainly, there are reasons for this position – no available funds for investment is the most common – but the downside is steep. If a prospective occupant perceives the owner is not “open for business”, he will scatter like ashes in a Santa Ana wind.

Showing condition: If the property is vacant during showings – and your broker is not present during showings – complete literature should be available to prospective occupants.

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