Common 1031 Misconceptions |28

Pictured: Frio Town Ranch, Frio County

1. Purchase like-kind Replacement Property of equal or greater value than the Relinquished Property (buy equal or greater in value).

2. Reinvest all of the net equity (exchange funds) from the sale of the Relinquished Property into the Replacement Property (spend all of the net equity); and

3. Replace the value of the debt paid o on the Relinquished Property with cash (from outside of the exchange) or debt placed on the Replacement Property.

As a practical matter, satisfying the rst two rules, buying equal or greater value property and reinvesting all of the exchange funds, will result in the debt requirement being satis ed.

Partially Tax Deferred Exchanges I sold for $100,000 but I cannot defer my taxes since the new property I plan to purchase has a sales price of only $92,000. Therefore, I cannot defer my taxes via a 1031 Exchange. FALSE

A 1031 Exchange does not need to be an all or nothing proposition. A partially tax deferred 1031 Exchange is valid. If you purchase property lower in value or take a portion of the cash from the closing of the sale and do not reinvest all of your exchange proceeds, you will have a partially tax deferred exchange. You will pay taxes on the “boot”, which are those funds not reinvested or debt replaced. At times, a partial exchange may be advantageous to an Exchanger. Depending on your circumstances, it’s a strategy worth discussing with your legal and tax advisors. Identi cation Rules It doesn’t really matter that I did not identify any property for my exchange within 45 days if I eventually purchase a new property and follow the other rules. FALSE

The rules under section 1031 are very strict. If you do not identify any property within the identi cation period, your exchange will fail. There are no exceptions. It is important to remember from the day your Relinquished Property transfers, you have 45 calendar days to identify potential Replacement Property using the 3 Property Rule (most common), 200% Rule or 95% exception. You can change your identi cation at any time before the expiration of the 45-day identi cation period, but not after it expires. The statute is very clear, to be eligible for deferral under section 1031, the like-kind property must be identi ed within 45 calendar days and acquired within 180 calendar days from the transfer of the Relinquished Property.

Penalties The IRS will penalize me for not completing an exchange. FALSE

If you set up your sale as a 1031 Exchange and cannot locate new property to complete your exchange, you will not be penalized by the IRS, nor by IPX1031. The exchange simply “fails”, and you will pay the same taxes as if you had never attempted to complete a 1031 Exchange. However, there are strict rules in the 1031 regulations as to how long you will need to wait before IPX1031 can return your funds to you.

Pictured: Hickory Hill Farm, Hardin County Partnerships & LLCs A partnership or multiple member LLC can sell property, and after the closing the partners/members can each take their percentage of sale proceeds and go their separate ways to buy Replacement Property on their own. FALSE

Only real estate is eligible for a 1031 Exchange. A partnership interest is a personal property right to the assets owned by the partnership. If partners or members intend to go their separate ways after the transfer of the Relinquished Property, planning and re-structuring of the ownership entity should be accomplished well in advance of placing that property for sale.

Improvements I can buy lower valued Replacement Property, take title and then make improvements after closing using my exchange proceeds, my own cash and/or nancing to increase the property value in the exchange. FALSE

Once the taxpayer takes title to the Replacement Property the exchange is over. Any improvements made after taking title regardless of how they are paid for will not count towards the exchange. If you would like to build on or make improvements to a Replacement Property, you can use the exchange proceeds by structuring an Improvement Exchange, also known as a Build-to-Suit Exchange or a Construction Exchange. This structure adds complexity and ultimately more cost to your exchange yet can be very bene cial.

Starting an Exchange I closed yesterday but haven’t touched the funds. I can still set up an exchange. FALSE

Unfortunately, you cannot defer your taxes via a 1031 Exchange if you have already closed on your property. To comply with the requirements of the 1031 regulations, you must enter into an Exchange Agreement with a Quali ed Intermediary (IPX1031) and the Quali ed Intermediary must assign into the contract between you and your buyer before the “bene ts of bene ts and burdens of ownership” transfer to the buyer. The process to begin opening an exchange can be quickly accomplished online here or by phone 888-771-1031, however it is important that the taxpayer contacts the QI prior to the transfer of the Relinquished Property to set up the exchange. A 1031 Exchange cannot be opened after the property has been transferred.

35 ACRES hwy 90

Seguin, TX Guadalupe County COMMERCIAL

Lake Placid Ranch

60 +/- Acres

Seguin, TX Guadalupe County Guadalupe Brazos Valley, tx

Agent Spotlight

Perry Donop III

Perry Donop brings over 19 years of Farm and Ranch Real Estate experience and ranch operation background to West & Swope Ranches. He joined West & Swope in 2018; and in addition to bringing years of industry experience, he also has a vast knowledge of the Texas Hill Country.

Where do you live? I live on my family ranch in Kendalia, Texas. Kendall County is in the heart of the hill country with a rich German history and ranching heritage. I enjoy being away from the city.

Where did you grow up? I was born and raised in San Antonio, Texas. My family has been in the Bexar County area since the 1940’s.

What drew you to ranch real estate? My father is in the real estate business and my family has been ranching in Texas since the 1850’s. Farm

What are the three most important things to look for when looking for an agent to represent you? The three things I would look for in an agent are knowledge, of the land and of the area that the property is in, availability or accessibility because the last thing you want is an agent you can’t get ahold of, and someone who is personable and at the end of the day, cares about building a relationship with you and is easy to get along with.

What is the most profound lesson you have learned from spending time on ranches? The most profound lesson I have learned is that things are constantly changing. New challenges face landowners every day and you need to be ready and willing to

is the way we have always done it” no longer works.

If you could give in one sentence, a piece of advice about how to live life, what would that be? The older I get the more I realize that nothing lasts forever; family and friends are extremely important so make sure to take the time to be with them. What is your most memorable deal to date?

with West & Swope Ranches. I had a listing that two of my friends owned together. From that listing, it sented numerous challenges, it was a great experience and my friends walked away happy.

When looking for a brokerage, what drew you to West & Swope Ranches? My father ran into Mitch West and told me he and Louie Swope had just opened a new Ranch Brokerage and that I should go talk to them. I knew of Mitch’s reputation as a successful Broker, and my father had done some deals over the years with Louie’s father in Law, so I had a pretty good understanding of what to expect. Mitch is the real deal. What you see is what you get. He’s humble in a business that seems to be getting more braggadocious. Ranching runs deep in his blood and not too many brokers have his kind of Texas roots. Louie is a hustler and

late. He understands the new marketing technology and techniques and is building a great business. I’m really fortunate to work with them.

What is your greatest accomplishment to date? Without a doubt marrying my wife, Traci.

Who is someone who has had a profound impact in your life or in your business? My grandfather has had the biggest impact in my life by far. He’s the reason my father and I ranch. I live in the ranch house he built in the 1950’s and I think about him everyday. As far as business goes, I would have to say my friends. If it wasn’t for them I wouldn’t be able to do what I love for a living. COORDINATES | PAGE 35