Duck Key, a Luxury Community with a lot of history

 


Many do not think of Duck Key as an old Key. It was bypassed by the railroad in 1912 and the Overseas Highway after  when rebuilt after the 1935 Hurricane. As it is today at MM 61, it is a new Key. Bryan Newkirk purchased the island in 1956 and with a consortium of partners pumped several million dollars along with many million cubic yards of fill. 

                            - Name - 

-Like most of the Keys, Duck Key was unnamed on early Spanish charts. It was included as one of the "Key Vaccas", or Cow Keys. It is not specifically named on the 1733 Spanish treasure recovery maps. A 1772 chart by DeBrahm labels it as Reynolds; however, William Gerard de Brahm, a Swiss, gave many the Keys his own names. He was the first Surveyor General for British East Florida.  

     Again it took George Gauld to name it Duck Key in his chart of 1775. Gauld names the west end of "Duck Key" as a fresh water source in his "Of the Watering Places on the Florida Keys." Gauld did a credible job of surveying the Keys; however , was interrupted by the Revolutionary War of 1776.

- Land Ownership -
  Anyway, Key Vaca and four small islands were granted to Don Francisco Ferreira by a Spanish Land Grant in 1814. Therefore, Duck Key was part of one of two Spanish land grants in the Keys, Key West being the other. While under Spanish ownership, Ferreira of St. Augustine petitioned on January 4, 1814 "To his Excellency the Governor. . . ."to grant him ". . . in absolute property a Key situated among those called the Florida Keys, and is also know as Key Baca and also four small islands which are situated in the vicinity. . ." It was approved the next day "As the services rendered by the petitioner are well known, and in consideration of the great losses which he has suffered by the Revolution. . ." Duck Key belonged to Ferreira. 
       When Florida became an American possession in 1821 and its Board of Florida Land Commissioners accepted Ferreira's claim which was later approved by an Act of Congress, May 26, 1830. Others in the U. S. and Florida governments treated the five islands as public domain and transferred ownership for various programs. The positive legal ownership debate goes on and on, but was evidently resolved in 1899. 
       Duck Key was excluded from some of the legal discussions as Ferreira had sold Key Vaca to Isaac Cox for $3,000 on September 4, 1824, (Deed book E, St. Johns County, Florida) which was $1,000 more than the selling price of Key West. Three years later, Cox sold Key Vaca (all five islands) to Charles Howe of Indian Key fame for $1,500. However, another case of the Spanish owners selling land twice as they did Key West, Ferreira also sold Duck Key to Sol Snyder on June 11, 1823. 


 - Salt Ponds -
       There are references to salt ponds on Duck Key in the early 1800s. The industry is well documented in Key West involving some the city leaders as Simonton, Fitzpatrick, Whitehead, Fleming, etc. The Lafayette Salt Company was incorporated in 1829 and began production in earnest in 1834. 
       Today, the American society is trying to reduce salt intake; however, if necessary many acclaimed chefs still suggest the natural element of sea salt or "fleur de sel." Before refrigeration, salt was absolutely necessary for prolonged food preservation, processing and shipment. 
       It is believed that salt production was the goal for Charles Howe's acquiring Duck Key in 1827. The Key West Register on April 9, 1829 printed: "Election Notice - In pursuance of law . . . the following named persons to be the judges of the election, which will be held the first Monday in May, next for a - Delegate to Congress on Indian Key, the store of Thomas Gibson - judges: Charles Howe, Joseph Prince and Thomas Gibson. . . ." 
       It is about 30 miles from Indian Key to Duck Key and Indian Key had the only store next to Key West; therefore, was it  possible for him to be living on Duck Key? The 1830 census, which did not list specific locations and only the name of the head of the household, listed Charles Howe as a household of 13 members, five of which were slaves. Therefore, the slaves could have been operating the salt ponds. 
       Early salt production was labor intensive. Generally the lower technology consisted of gates to allow seawater to enter evaporation vats at high tide, close the gates, allow evaporation, allow more seawater, etc. until a brine was obtained, siphon off the brine into a separate pickle vat, then to a crystallizing vat, where the salt was raked off, dried and bagged. As this required considerable construction, the author believes that even a simpler method was used at Duck Key. 
       Charles Howe was appointed and confirmed a Monroe County Justice of the Peace on January 18, 1831. 
       John Lee Williams in his 1837 Territory of Florida wrote: "Duck Key is a narrow rocky islet, containing some fine salt ponds. Mr. Howe, from Charleston, made a considerable establishment on the island for the purpose of making salt, but having died since, the project has been abandoned. It is about two miles long." 
       Was Williams wrong about Howe's death are was there another Charles Howe? 
        The Charles Howe of Indian Key was born August 12,1801 in Massachusetts and married his first wife, Ann Cole on April 20, 1825,  had three children, Sarah, Edward and Charles Jr., and he died January 27, 1873 in Hadley, Mass. His son Charles Jr. married in 1852 a Mary Ann Johnson of Duck Key. 
       The land deed of Isaac N. Cox to Charles Howe of Key Vacas, ". . . Charles Howe, of the city of Charleston, the state of South Carolina." However, Horatio Crain, Howe's son-in-law, in 1885 stated to the land commission that "my father-in-law, Charles Howe, who had the salt works there and who subsequently sold to Willaim C. Dennis whose heirs hold the title." 
       Of interest are excerpts from the Charleston Daily Courierdated January 10, 1858 of a voyage made to Knight's Key with Charles Howe: ". . .Commenced with Knight's Key, containing about one hundred and twenty-five acres of arable [plowable] land, and has a comfortable house and cistern. On this Key we have twelve hundred cocoanut trees and about fifty thousand Sisal hemp plants, most of which are fit to cut and manufacture into hemp...." They sailed on "...Passed Duck Key, where much money was expended on forming a salt pond...."  
Regardless, there were salt ponds on Duck Key and later Charles Howe obtained controlling interest in the salt works in Key West in 1843, then sole ownership after the hurricane of 1846. 
       The state survey the Keys in the 1870s and the Duck Key portion of map is shown to the right. 
      Duck Key is about the same size as the kingdom of Monaco and set for a major change. 


- Modern Day Duck Key -

     Duck Key took a herculean leap forward in 1951. Bryan W. Newkirk, an internationally know financier and mining executive purchased the island for about $4,000,000 to make it a 400 acre island community. Newkirk had made Coral Gables, Florida his winter home since 1924 and had definite ideas for the island's amenities. An airport was available 12 miles away at Marathon; however, a golf course and yacht club would be needed and an improved 16,000 foot entrance causeway.

     By 1952 a wooden bridge connected Duck Key to highway U.S. 1 and construction really took off with Alonzo Cothron of Islamorada as the principal contractor. The interconnecting canals were the source of landfill.

      On January 2, 1953, the million dollar causeway from US 1 to Duck Key was officially opened for vehicle traffic. State Representative Bernie C. Papy was the master of ceremony. 
- 
       Newkirk was smarter than other developers and made all his canals through waterways so they could flush with the tidal changes. Actually, he made five islands, Indies, Centre, Harbour, Plantation and Yacht Club islands. There are about 10 miles of paved roads and four decorative stone bridges not including the entrance causeway. 
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    Ownership changed in 1983 when the Pompano Beach Barrington Group purchased the holdings and made extensive changes. The resort was the Hawk's Cay Resort and Marina. Additional swimming pools and recreational facilities were added in the late 1990s. 
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       The Singh Company of Key West, well known for the Truman Annex,  entered the Upper Keys in the middle 1990s and began Hawk's Cay Village. This added several hundred Caribbean style cottages all with water views, porches and the traditional white picket fence. 
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       All in all there must be approaching 400 homes, multiple recreational facilities and complete convention facilities. Duck Key is now (2004) struggling with Keys wide wastewater disposal problems. Hawk's Cay Resort has a treatment plant, but the individual homes are on septic tanks.

Gary McAdams, PA
Realtor, Notary Public 
Barbara A. Anderson Realty 
Serving Key West and the Florida Keys

Sandy’s Cafe, Key West


Just about everybody who lives in Key West, and many who has visited, has had a coffee or a sandwich at Sandy’s café. You might not think of a small walk up service only restaurant located inside a laundromat as being quality authentic Cuban cuisine but it is. The daily lines at the ordering window should serve as proof. I always like to know the history of successful small family run businesses. I am a history buff. Here’s a little background information on how Sandy’s got started. What can I say? 

Sandy’s Café at the M&M Laundromat on the corner of White and Virginia Streets first opened over thirty-five years ago in 1984 and continues to be owned by the Santiago Family, which has an over 60 year tradition of local Cuban eateries in Key West including Sandy's Restaurant, Two Brothers Café & the El Cacique Restaurant. Sandy Santiago, Sr. and his son Sandy, Jr. began this Key West tradition together and established a culture of quality Cuban and Conch (People born in Key West are called Conch’s) cuisine and Cuban coffee as well as family-oriented customer service, which they became famous for. Sandy’s Café remains today at its landmark location where tourists and locals alike gather to sit at our counter and enjoy people watching on White Street.


Sandy’s has been featured on Andrew Zimmerman’ show “Delicious Designations” on the food Network.


Stop by Sandy’s Café for fast friendly service with two convenient walk-up windows and ample parking, or call in your order for fast, pick up or delivery.


Next time you’re looking for a great breakfast, perfect cup of coffee or an amazing lunch sandwich, stop by Sandy’s, 1026 White Street 
(M&M Laundry).  You’ll be glad you did. 

Gary McAdams, PA
Realtor, Notary Public 
Barbara A. Anderson Realty 
Serving Key West and the Florida Keys

The Blue Hole, Big Pine Key


 THE FLORIDA KEYS ARE KNOWN for their natural beauty and oceanic wildlife, from the coral reefs sitting just offshore to the diverse marine population that attracts coastal kayakers and sport-fishermen from around the world. The only thing visitors won’t find, in fact, is freshwater — except for one oasis.


Sitting in the middle Big Pine Key — of one of the largest islands in the chain — an abandoned rock quarry forms a freshwater lake now known as the Blue Hole. The Blue Hole is an old limestone quarry. The rock was used to build many of the original roads on Big Pine Key in the 1930s and ’40s.


There is no inlet or outlet to the Blue Hole, its existence is dependent on rainfall and from saltwater which flows through the surrounding porous limestone. Because freshwater is lighter than saltwater, it floats on top, forming a lens. Freshwater is very important in this island ecosystem and the Blue Hole provides a vital resource to many animals, including the Key deer, American alligator, turtles, and many species of birds. The Blue Hole also is home to many different types of fish, in fact, there are both saltwater and freshwater species here!


The Blue Hole forms the epicenter of the Florida Keys National Wildlife Refuge, and more specifically the National Key Deer Refuge — a large expanse of reserved forest meant to house and preserve the unique Key Deer (a miniature and endangered species of deer), which only live on Big Pine Key.

Since it’s such a large source of fresh water, the Blue Hole attracts multitudes of wildlife unique to the Keys beyond just the Key Deer, including large invasive iguanas, tropical birds, various snakes, and reptiles, and of course the Florida Alligator — missing from most parts of the Keys but happy to live and bask in this oasis.

To get there, drive down the Overseas Highway (US 1) to Big Pine Key and head down 21st Street (Key Deer Blvd) until you see signs for the refuge/Blue Hole. Be very cautious of the speed limit on Big Pine Key. The Key Deer run out of the woods into the street. Especially on Key Deer Blvd where the speed limit is is 30 mph and they will ticket you for going 31.

Gary McAdams, PA
Realtor, Notary Public 
Barbara A. Anderson Realty 
Serving Key West and the Florida Keys

The Southernmost Point, Key West


Everyone who visits Key West stops along the shore to take a photo with the colorfully painted Southernmost Point buoy, but why is this landmark so iconic? No trip to Key West is complete without a visit to this iconic landmark and it’s important to know its history.


Originally, the Southernmost Point was marked and identified by a small hand-painted wooden sign. The sign would attract travelers to the southernmost point in the United States, and many would take pictures in this area to share with their friends and family. This location was also popular for street vendors who would sell conch shells as souvenirs to those visiting Key West on vacation, which are still popular souvenirs to this day.


This popular wooden sign, denoting the “Southernmost Point” had been repeatedly stolen over the years, in addition to being damaged by hurricanes. The frequent theft became an exhausting and costly burden to Key West. To solve this ongoing problem, the town of Key West, Florida decided to erect a 12ft tall, 7ft wide anchored concrete buoy in 1983.


This massive monument serves as the official marker of the Southernmost Point and notes that Cuba is only 90 miles away. The top of the monument states “The Conch Republic” which refers to when Key West tried to secede from the US, declaring itself The Conch Republic in a protest stunt, that resulted in a boom in tourism and local pride. Every April, Key West celebrates this with a big party lasting 10 days. Key West locals enjoy referring to themselves as “conches”. To the right of the monument, you’ll see a plaque commemorating the brave Cubans who have drowned trying to get to America.

In September of 2017, the Southernmost Point landmark was badly damaged by Hurricane Irma. Thankfully, the City of Key West hired the original artist, local painter - Danny Acosta, to bring the concrete buoy back to life, and to this day, The Southernmost Point still remains as the most-photographed landmark in all of Key West.

While the Southernmost Point landmark is an absolute must, you may be shocked to discover that it isn’t actually the most southernmost point in Key West...or even in the United States. Roughly 500 ft farther south from the marker is Fort Zachary Taylor Historic Park, and even that isn’t the most southern point! Ballast Key is actually the true most southern point of Florida which is a private island south and west of Key West located 10 miles away.

It’s also surprising to note that Cuba is actually 94 miles away, which is 4 miles further than what’s indicated on the monument.

Be sure to get your picture taken at the Southernmost Point then head off to enjoy your day in Key West. It is just as much of it a”Must Do” as the Sunset Festival at Mallory Square.

Curry Mansion History


The Curry Mansion located at 511 Caroline Street is more than a stop along the historic walking tour, it’s a place to stay, relax and enjoy Key West.  Located between Eaton and Greene Streets, this inn is centrally located to the activities of Duval Street.


History

This is the site of two Curry mansions.  William Curry, Florida’s first self made millionaire raised his eight children in the original house built on the site.  That home was built in 1869.  Later, his son, Milton, tore down the original home, except for the stone kitchen and built the new grand victorian in 1905, we still see today.

Prior to Milton inheriting the property, his dad, William lived in the home for nearly 40 years.


Structure

The home is made from Dade County pine.  This is part of the reason why the home still stands over 110 years after being built.  Dade County pine is incredibly durable and resistant to insects.   The woodwork inside the home is carved from Birdseye maple and can be found throughout the 22 rooms in the home.


Key Lime Pie

It is believed that Aunt Sally, William’s house cook created the first Key Lime Pie at the original Curry Mansion.  The birthplace of Key Lime Pie can be traced not only to Key West, but to the Curry Mansion.


Today

Today the home is owned by Edith and Al Amsterdam.  They arrived in Key West in 1975 and on a stroll through Caroline Street, found the neglected home.  They immediately bought it and began the long, laborious journey to restore the home to its former glory.

The rising taxes and costs associated with the renovation made the Amersterdams re-think their original idea of keeping the home their personal residence.  At the suggestion of their son, they turned the beautiful mansion into the Amsterdam Curry Mansion Inn.


The Inn

Today the Curry Mansion has 28 unique guest rooms in three different structures.  You can tour the mansion daily, even if you are are not a guest.  There are three floors in the main house and the attached guest house wraps around to provide privacy to the pool and seating areas.  The third structure is across the street.  Room prices vary, depending on time of year and events happening in town.  The Curry Mansion does allow small dogs on the property and in the rooms.

The room rates include free parking, a full breakfast and a two hour cocktail party every evening.  Steps aways from Duval, the location lets you enjoy the restaurants and shopping close by.

Gary McAdams, PA
Realtor, Notary Public 
Barbara A. Anderson Realty 
Serving Key West and the Florida Keys

Pay less Capital Gains taxes with a 1031 Exchange

Nobody likes paying tax. Good news, you can save a lot of taxes on real estate investments. The 1031 Exchange rules can save you a lot of money in Capital Gains Taxes.  The 1031 Exchange rules have changed quite a bit over the last five years. Read the information below carefully to make sure you follow every step for the maximum tax savings allowed.

FAQs About 1031 Exchanges


DOES MY PROPERTY QUALIFY?

Any property held for productive use in a trade or business or for investment can be exchanged for like-kind property. Like-kind refers to the nature of the investment rather than the form. Any type of investment property can be exchanged for another type of investment property. A single-family residence can be exchanged for a duplex, raw land for a shopping center, or an office for apartments. Any combination will work. The exchanger has the flexibility to change investment strategies to fulfill their needs.

You cannot trade partnership shares, notes, stocks, bonds, certificates of trust or other such items. You cannot trade investment property for a personal residence, property in a foreign country or “stock in trade.” Houses built by a developer and offered for sale are stock in trade. If an investor buys “fixer-uppers” and sells them as soon as they are improved, the properties may be considered as stock in trade and cannot be exchanged.

If an investor attempts to exchange too quickly after a property is acquired or trades many properties during a year, the investor may be considered a “dealer” and the properties may be considered stock in trade. Persons dealing with stock in trade are called dealers and are not allowed to exchange their real estate unless they can prove that it was acquired and held strictly for investment. There are no clear guidelines as to what constitutes being a dealer. The purpose and motivation behind the acquisition and use of real estate, how long the property is held and the principal business of the owner may be considered when determining if a real estate is dealer property.

If we find the asset being relinquished does qualify for a 1031 Exchange, the next question is what the replacement property will be. As discussed previously, section 1031 applies to both “real property” and “personal property.” The primary difference between a personal property exchange and a real property exchange is the definition of like-kind.


WHAT DOES NOT QUALIFY FOR A 1031 EXCHANGE?

Property held for productive use in a trade or business or for investment qualifies for a 1031 Exchange.

The tax code specifically excludes some property even if the property is used in trade or business or for investment. These excluded properties generally involve stocks, bonds, notes, securities and interests in partnerships.

Property held “primarily for sale” is also excluded. This excluded property would include business inventory. For real estate, it means property purchased with the intent to sell it, such as a fixer-upper or vacant land to be developed into a house. An investor who “turns” residential properties, or a private developer, may be classified as dealer.

A primary residence usually does not qualify for an exchange because it is not used in trade or business or investment. That said, that portion of the primary residence that is used in a trade or business or for investment may qualify for a 1031 Exchange.

HOW DO I GET STARTED IN A 1031 EXCHANGE?

Getting started with an exchange is as simple as calling your Exchange Facilitator. Before making the call, it will be helpful for you to have information regarding the parties to the transaction at had (for example, names, addresses, phone numbers, file numbers, and so on). During the phone call, the exchange coordinator will ask questions about the property being relinquished and any proposed replacement property.

The initial discussion will vary dramatically from company to company with respect to the amount of detail requested. There is very little actual information required to structure a basic delayed exchange. We at Equity Advantage take a more in-depth approach to the process; we like a proactive rather than reactive position. The more we understand our client’s objectives, the better equipped we are to help them achieve them. For this reason, we encourage our prospective clients to both ask questions and answer ours.

HOW DO I CHOOSE A FACILITATOR?

In preparation for your exchange, contact an exchange facilitation company. You can obtain the names of facilitators from the internet, attorneys, CPAs, escrow companies or real estate agents. Facilitators should not be acting as “agents” as well as facilitators. Escrow companies, attorneys, real estate agents, etc. are agents and should not be used as facilitators. Ask questions about the procedures employed and the assistance they can provide if problems arise. Price, though important, should not be the qualifier. Exchange fees typically range from $400 to $750, the difference in price often reflecting a difference in service. You may wish to obtain copies of the documents the facilitator will use for review by your attorney.


WHAT ARE THE TIME REQUIREMENTS IN AN EXCHANGE?

From the time of closing on the relinquished property, the investor has 45 days to nominate potential replacement properties and a total of 180 days from closing to acquire the replacement property.

Identification requirements: The investor must identify the replacement property prior to midnight on the 45th day. The investor normally nominates three potential properties of any value, and then acquires one or more of the three within 180 days. Typically, a common address or an unambiguous description will suffice. If the investor needs to identify more than three properties, it is advisable to consult with your 1031 facilitator.

WHAT RESTRAINTS DO I FACE WHEN IDENTIFYING MY REPLACEMENT PROPERTY(IES)?

As an Exchangor, you are required to provide an “unambiguous description” of the potential replacement property on or before the 45th day after closing on the relinquished property. (A legal description or property address will suffice). If you wish to identify or purchase multiple properties, you must follow one of the following guidelines:

  1. Identify up to three properties of any value with the intent of purchasing at least one.
  2. Identify more than three properties with an aggregate value that does not exceed 200% of the market value of the relinquished property.
  3. Identify more than three properties with an aggregate value exceeding 200% of the relinquished property, knowing that 95% of the market value of all properties identified must be acquired.

WHAT CLOSING COSTS CAN BE PAID WITH EXCHANGE FUNDS AND WHAT CANNOT?

The IRS stipulates that in order for closing costs to be paid out of exchange funds, the costs must be considered a Normal Transactional Cost. Normal Transactional Costs, or Exchange Expenses, are classified as a reduction of boot and increase in basis, where as a Non Exchange Expense is considered taxable boot. The following table indicates what is and is not considered a Normal Transactional Cost.

YES (Exchange Expense)

NO (Non-Exchange Expense)

MAYBE

Sales CommissionRent ProrationAppraisal Fees
Legal FeesUtilitiesInspection/Testing Fees
Finders FeesPoints
Escrow FeesMortgage Insurance
Inspection/Testing FeesProperty Liability Insurance
Transfer TaxesApplication Fees
Title Insurance FeesLender’s Title Insurance
Recording FeesAssumption Fees
Property TaxesHome Owners Dues
Exchange FeesRepairs/Termite Work
Messenger FeesSecurity Deposits
Document FeesReplacement Property Loan Acquisition Fees
Statement Fees
Tax Service
Processing Fees
Notary Fees

If an Exchangor wants to take money out of the exchange to pay a Non Exchange Expense, they must do so at closing and taxes will be owed on the amount paid. Taking money out for a Non Exchange Expense while the money is sitting with the Exchange Facilitator may jeopardize the exchange.

IS IT OK TO GO DOWN IN VALUE AND REDUCE THE AMOUNT OF DEBT I HAVE IN THE PROPERTY?

An exchange is not an “all or nothing” proposition. You may proceed forward with an exchange even if you take some money out to use any way you like. You will, however, be liable for paying the capital gains tax on the difference (“boot”).

DOES A VACATION HOME QUALIFY FOR EXCHANGE?

The answer is “yes” if the dwelling meets the qualifications set forth in Revenue Procedure 2008-16. Effective March 10, 2008. This revenue procedure clarified what was once considered a muddled area of 1031 exchanges. The qualifications are the following:

Relinquished property

  1. The holding period for the vacation home is at least 24 months immediately before the exchange*;
  2. For each of the two-12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
  3. The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.

* For this purpose, the first 12-month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day) and the second 12-month period ends on the day before the first 12-month period begins (and begins 12 months prior to that day).

Replacement property

  1. The holding period following the exchange is at least 24 months*;
  2. For each of the two-12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
  3. The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.

* For this purpose, the first 12-month period immediately after the exchange begins on the day after the exchange takes place and the second 12-month period begins on the day after the first 12-month period ends.

Here’s an example to analyze this revenue procedure. Let’s assume that taxpayer has owned a beach home since July 4, 2002. The taxpayer and his family use the beach home every year from July 4, until August 3 (30 days a year.) The remainder of the year the taxpayer has the house available for rent. Now, the taxpayer has negotiated the sale of his beach home so that ownership of the house transfers on May 5, 2008. Under the Revenue Procedure, the IRS will examine two 12-month periods: (1) May 5,2006 through May 4, 2007 and (2) May 5, 2007 through May 4, 2008. To qualify for the 1031 exchange, the taxpayer was required to limit his use of the beach house to either 14 days (which he did not) or 10% of the rented days. So, the IRS will need to find that the taxpayer actually rented the house at a fair market value for 300 days each during the two 12 month periods for the vacation home to qualify for a 1031 exchange.

As always, your CPA and/or attorney can advise you on this tax issue.

WHAT INFORMATION IS NEEDED TO STRUCTURE AN EXCHANGE?

Typically the only information we require in order to structure your exchange is the following:

  • The Exchangor’s name, address and phone number
  • The escrow officer’s name, address, phone number and escrow number

With this said, the following is a list of information we would like to have in order to thoroughly review your intended exchange:

  1. What is being relinquished?
    When was the property acquired?
    What was the cost?
    How is it vested?
    How was the property used during the time of ownership?
    Is there a sale pending? If so, what is the closing date?
    Who is closing the sale?
    What are the value, equity and mortgage of the property?
  2. What would you like to acquire?
    What would the purchase price, equity and mortgage be?
    If a purchase is pending, who is handling the escrow?
    How is the property to be vested?

IS IT POSSIBLE TO EXCHANGE OUT OF ONE PROPERTY AND INTO MULTIPLE PROPERTIES?

It does not matter how many properties you are exchanging in or out of (1 property into 5, or 3 properties into 2) as long as you go across or up in value, equity and mortgage. The only concern with exchanging into more than three properties is working within the time and identification restraints of section 1031.

AFTER BUYING A RENTAL HOME, HOW LONG DO I HAVE TO HOLD IT BEFORE I CAN MOVE INTO IT?

There is no designated amount of time that you must hold a property before converting its use, but the IRS will look at your intent. You must have had the intention to hold the property for investment purposes. This could include, but does not require, renting the property out at a fair market value. Since the government has twice proposed a required hold period of one year, we would recommend seasoning the property as investment for at least one year prior to moving into it. A final consideration on hold periods is the break between short- and long-term capital gains tax rates at the year mark.

CAN I MAKE AN OFFER ON A PROPERTY AND SIGN A CONTRACT BEFORE MY RELINQUISHED PROPERTY IS SOLD?

If you are in a situation where you locate a property you would like to acquire before you have a buyer for the property you own, it is okay to make an offer prior to the closing of your relinquished property. Many Exchangors in this situation make the purchase contingent on whether the property they currently own sells. As long as the closing on the replacement property is after the closing of the relinquished property (which could be as little as a few minutes), the exchange works and is considered a delayed exchange.

If however, you find a property that you must have and need to close on prior to having a buyer in place for your relinquished property, you can acquire it using a Reverse Exchange. While the Reverse Exchange approach is much more costly, many Exchangors prefer it because they know they will get exactly the property they want today while selling their relinquished property in the future.

CAN I TAKE ADVANTAGE OF A 1031 EXCHANGE IF I WANT TO ACQUIRE A REPLACEMENT PROPERTY IN A DIFFERENT STATE THAN THE RELINQUISHED PROPERTY IS LOCATED?

Exchanging property across state borders is a very common thing for investors to do. In fact, a great number of our clients do exactly that. It is important to recognize that the tax treatment of interstate exchanges vary with each state and it is important to review the tax policy for the states in question as part of the decision-making process.

HOW LONG DOES A PROPERTY NEED TO BE HELD PRIOR TO DOING AN EXCHANGE?

The tax code does not provide a specific time period for holding investment property. Time is less important than the investor’s intent at the time of acquiring the property (that is, did the investor intend to hold the property as an investment).

Often times, people have the general understanding that there is a one-year hold period for an exchange. The reason for this general consensus is that the government has proposed a one-year hold period several times. An additional indication that the IRS may like to see the one-year time period is that the tax code differentiates a long-term capital gain from a short-term capital gain at one year.

Again, there is not a tax code mandate of one year, but it may be that the IRS would like to see at least a one-year hold. The only minimum required hold period in section 1031 is a “related party” exchange where the required hold is a minimum of two years.

WHAT DOES A 1031 EXCHANGE COST?

At Equity Advantage, we take pride in our ability to make the most of a client’s exchange. We consider the exchange the tool to move a client from one investment to another. The course taken will vary from client-to-client depending on the client’s needs and circumstances. Often it’s not a question of doing an exchange, it’s a question of what kind of exchange to do.

The cost of an exchange varies depending on the circumstance and the type of exchange. A True Swap of properties can be as little as $500. A Delayed Exchange of two properties starts at about $750. More complex transactions such as Reverse or Improvement Exchanges start at $3,500.

When choosing an Accommodator, ask about procedures and the assistance they can provide if problems arise. Exchange fees should range from $400 to $1,000 for a basic Delayed Exchange. The difference in price is often the difference in service.

Price should be a factor of the decision process, not the decision process. Please contact Equity Advantage today for exchange consultation and a price quote.

ARE YOU SECURED/INSURED?

While the exchange industry as a whole is not regulated, we take great pride in making sure each one of our clients feels comfortable and safe during their exchange. We are backed by a fidelity bond, which insures up to $5,000,000 for each occurrence. Additionally, Equity Advantage maintains an Errors and Omissions policy to insure our work; this policy covers up to $1,000,000 per claim. Copies of these policies are available upon request.

When your exchange funds are sent to us, they are placed in a money market savings account. We do not commingle our operating account with your exchange funds. The money does not move from this account until authorized by the Exchangor to do so for the purpose of closing.

Ultimately, your greatest security is the comfort of knowing that Equity Advantage has been under the same ownership since 1991. We have handled tens of thousands of transactions during that time, and we have never suffered a loss or claim. Before bonding was available, a company’s reputation, policies and procedures were all the guarantee an investor had. We at Equity Advantage take great pride in our firm’s well-earned reputation in the exchange business.

WHEN EXCHANGING, DO I NEED TO RE-INVEST THE NET PROCEEDS OR THE SALES PRICE?

There is a common misconception amongst Exchangors on how much money needs to be re-invested when participating in an exchange. In order to be fully tax deferred, you must re-invest in a property that is equal to or greater than the sales price of the property you are relinquishing. If you are selling a rental house for $500,000 with $200,000 in equity, you must purchase a new property with a price of at least $500,000 and equity of at least $200,000. If you choose to go down in value or choose to pull some equity out, an exchange is still possible but you will have tax exposure on the reduction. The value and equity numbers are net after paying “normal transactional costs.” Please call Equity Advantage for a thorough explanation of costs and their effect on your exchange.

CAN I RECOUP MY INITIAL DOWN PAYMENT ON THE PROPERTY I AM SELLING?

No, the IRS takes the position that the first money out is theirs. In other words, you cannot be reimbursed your initial investment without incurring tax exposure. It is possible to receive money; however, any funds received will be taxed.

IS IT OK TO BUY THE PROPERTY THAT MY BUSINESS OCCUPIES AS A TENANT?

Depending on the behavior of your business as the tenant, it is possible for your business to be a tenant of your own property. It will be important that your business pays rent for the space at current market value and that the business does not get treatment that other tenants do not receive.

IS IT POSSIBLE TO CONVERT AN INVESTMENT PROPERTY INTO A PRIMARY RESIDENCE AND EVENTUALLY SELL THE PROPERTY APPLYING SECTION 121?

The IRS realizes that a person’s circumstances may change; therefore, a property may change in character over time. For this reason, it is possible for an investment property to eventually become a primary residence. If a property has been acquired through a 1031 Exchange and is later converted into a primary residence, it is necessary to hold the property for no less than five years or the sale will be fully taxable.

The Universal Exclusion (Section 121) allows an individual to sell his residence and receive a tax exemption on $250,000 of the gain as an individual or $500,000 as a married couple. In order to gain this benefit, the investor will need to live in the property for an aggregate of 2 of the preceding 5 years.

After the property has been converted to a primary residence and all of the criteria are met, the property that was acquired as an investment through an exchange can be sold utilizing the Universal Exclusion. This strategy can virtually eliminate a taxpayor’s tax liability and therefore is a tremendous end game for investors.

IF I HAVE A PROPERTY THAT I FIXED UP A YEAR AGO, AM I ABLE TO DO AN EXCHANGE ON IT NOW?

There is no clear answer to this question. The answer really has to do with your intent with the property. In order for it to qualify for an exchange, you must have held the property for investment purposes. Flipper properties do not qualify as investment properties. To determine whether your property may qualify, it is important to examine how long you owned the property before fixing it up, what your intention was when you first acquired the property, whether anyone has lived in the property during this time and what your intention is with the property you wish to buy with the proceeds.

Depending upon your answers to those questions, you may or may not qualify for an exchange. If the answers indicate you held the property for resale, the exchange would not be possible. If, on the other hand, you and your tax counsel can show intent to hold as investment, the exchange is a logical next step.

CAN I EXCHANGE A FOREIGN PROPERTY FOR A DOMESTIC PROPERTY OR VICE-VERSA?

Property located in the United States is not considered “like-kind” to property located in a foreign country. It is not possible to exchange out of the United States into foreign property, and vice-versa.

There has been case law that passed that supports exchanging from the States and into a US territory. There are fourteen US territories: American Samoa, Baker Island, Guam, Howland Island, Jarvis Island, Johnston Atoll, Kingman Reef, Midway Islands, Navassa Island, Northern Mariana Islands, Palmyra Atoll, Puerto Rico, Virgin Islands and Wake Island. It is important to speak with your legal council when considering this option.

Section 1031 allows domestic for domestic and foreign for foreign. Please call Equity Advantage for a thorough discussion of your situation.

IS IT POSSIBLE TO DO AN EXCHANGE USING THE PROCEEDS FROM THE SALE TO IMPROVE A PROPERTY THAT I ALREADY OWN?

While not considered a conservative option, there are several “liberal” letter rulings that recognize this as a viable strategy. If this is an option that interests you, please call us so we can send you additional information.

MAY A PERSON EXCHANGE ONE FORM OF BUSINESS, SUCH AS A HOTEL, FOR ANOTHER BUSINESS, SUCH AS A RESTAURANT?

To answer this question, let’s keep in mind some general principals of a 1031 Exchange. A person’s business usually consists of three components: real property (real estate), personal property (usually depreciable tangible assets) and good will.

If a person’s business has a real estate component, the real estate (or real property) qualifies as like-kind property with other real estate (real property). For example, a single-family rental can be exchanged for a duplex, raw land for a shopping center, or an office building for an apartment. Any combination of real property will work.

Personal property, unlike real property, is more restricted in a 1031 Exchange. The IRS is less inclined to state that one type of personal property qualifies as like-kind for other personal property. For example, personal property may be characterized as depreciable tangible property, intangible property and non-depreciable personal property. Personal property within each category is not necessarily like-kind. Any personal property held as inventory does not qualify for exchange treatment.

Good will is the remaining portion of the business that is not characterized as real property or personal property. The good will of the business does not qualify for a section 1031 exchange.

So, with the information above in mind, it is well established that portions of a hotel business may be exchanged for portions of a restaurant. The real estate owned by the hotel may be exchanged for the real estate owned by the restaurant. It may be the hotel and restaurant own common assets that could qualify for a 1031 Exchange. The good will of the hotel could not be exchanged for the good will of the restaurant.

CAN I DO A CASH-OUT REFINANCE PRIOR TO AN EXCHANGE IN ORDER TO PAY OFF OTHER LOANS?

The whole point of the 1031 Exchange is moving investment money forward to invest in more property. Pulling money out tax free prior to the exchange would contradict this point. For this reason, you cannot refinance a property in anticipation of an exchange. If you do, the IRS may choose to challenge it.

If you wish to refinance your property you will want to make sure the refinance and the exchange are not integrated by leaving as much time in between the two events as possible. You can choose to refinance prior to the property going on the market (6 months to a year) or wait until after the exchange is complete and refinance the newly owned property.

IS IT POSSIBLE TO DO AN EXCHANGE WITH A PROPERTY THAT IS BEING AUCTIONED OFF?

While it is a bit more complicated, it is possible to use exchange funds to purchase a property being auctioned off. The IRS requires the Exchangor to provide an unambiguous property description if the property is not acquired prior to the 45th day of the exchange. For this reason, the auctioned property must be purchased prior to the 45thth day unless property descriptions are available prior to the auction.

On the day of the auction, you will need to get a check from us written out to the courthouse or whoever is to receive the money with a specified dollar amount. If you do not win the property, the check must be returned to us. To make sure everything runs smoothly and there is no concern of constructive receipt of the funds, it is important you talk with us throughout this exchange process and it is critical we buffer you from actual or constructive receipt of the exchange funds.

CAN A NOTE AND TRUST DEED SALE BE USED IN AN EXCHANGE?

A note typically represents equity in the property being relinquished. Since a 1031 Exchange requires all equity be carried forward into the replacement property, the note must be converted somehow prior to receipt of the replacement property in order for the exchange to be totally tax-deferred.

The Exchangor has the following options in converting the note:

  1. Use the note and cash in acquisition of the replacement property.
  2. Sell the note and then complete the exchange.
  3. The Exchangor buys the note from Equity Advantage.
  4. The note is a short-term note and is to be paid off prior to the acquisition of the replacement property.
  5. Finally, the Exchangor chooses to pay tax on the note, exchanging only the net equity.

IS IT POSSIBLE TO USE ALL OF THE PROCEEDS FROM AN EXCHANGE TO PAY DOWN A MORTGAGE ON A PROPERTY ALREADY OWNED?

To fully defer all taxes in a 1031 Exchange it is necessary to carry all equity from the relinquished property forward into a new replacement property. If, through the exchange, some or all of the proceeds from the relinquished property sale are used merely to pay down an existing mortgage, the Exchangor would have tax exposure on the funds received. Even if the Exchangor acquires new replacement property meeting the necessary value and debt requirements, the funds pulled out of the exchange to pay off the unassociated debt would have tax exposure.

One possible solution for a taxpayor in this situation would be to complete the exchange using all equity from the relinquished property’s disposition. After completing the exchange, and after a reasonable period of time, it may be possible to do a cash-out re-finance and take the desired proceeds to pay off the other property. The amount of time necessary to wait before the refinance is entirely up to the discretion of the taxpayor and their tax counsel.

CAN OIL, GAS, MINERALS, WATER AND TIMBER RIGHTS BE EXCHANGED?

A successful 1031 Exchange requires that property be exchanged. Contractual rights and obligations pertaining to real property may or may not be characterized as a property interest and may or may not be eligible for an exchange.

A working interest is considered a real property interest, whereas a royalty interest is not. What is the difference? It is the Exchangor’s rights and obligations to access the property. A working interest is the exclusive right to enter land and extract oil, gas and minerals. It involves the right and cost obligation to explore, drill and develop the oil, gas and minerals. It also carries the obligation of paying for operating expenses. In contrast, a royalty interest allows for a percentage share of production only. There is not any obligation for development or operating expenses. As such, this interest is not considered a real property interest, but rather payment for services.

Clearly, a working interest in gas, oil and minerals may be exchanged to a different working interest in gas, oil and minerals, but what about other type of exchanges? Just as real estate properties can be exchanged as “like-kind” even though the properties are not exactly the same (for example, an apartment complex for a vacant lot), the same may be true for property rights, such as the rights to oil, gas and minerals. So, depending upon the particulars of the property, a working interest in oil may be exchanged for a rental house. In contrast, a royalty interest cannot be exchanged for a working interest.

Water rights (the right to access and receive water) and timber rights (the right to enter land and cut down timber) are generally characterized in the same manner as oil, gas and mineral rights. It should be noted, however, that these rights are characterized according to state law. For example, the State of Oregon characterizes that the right to cut standing timber is personal property, whereas the State of Georgia characterizes it as real property.

WHAT ARE THE GUIDELINES WITH A RELATED PARTY TRANSACTION?

A related party transaction is allowed by the IRS, but significantly restricted and scrutinized. The purpose for the restrictions is to prevent Basis Shifting among related parties. Using a third party to circumvent the rules is considered to be a Step Transaction and is disallowed. If your transaction is audited, the IRS will look at the chain of ownership for the property.

The definition of a related party for 1031 purposes is defined by IRC 267b. Related Parties include siblings, spouse, ancestors, lineal descendants, a corporation 50% owned either directly or indirectly or two corporations that are members of the same controlled group.

The restrictions vary depending on whether you are buying from or selling to a related party. The following lists guidelines for each.

Investor selling investment property to a related party:

  • 2-year holding requirement for both parties.
    • Does not apply where related party also has 1031 Exchange; death; involuntary conversion.
    • 2 years are tolled during the time there is no risk of loss to one of the parties (put right to sell property/call right to buy property/short sale).

Investor buying investment property from a related party:

  • Related party must also have a 1031 Exchange; or
  • Taxpayor’s deferment of capital gain is less than or equal to seller’s taxable gain from selling the property.

WHAT ARE THE RULES ABOUT CANCELING AN EXCHANGE?

It is possible to cancel an exchange but the cost and timeframe in which you can terminate a deal varies from facilitator to facilitator. The issue with exchange termination is the constructive receipt concept. Section 1031 requires the taxpayor not have actual or constructive receipt of the exchange proceeds. If a taxpayor can simply ask for and receive the funds at anytime, the exchange procedure may not be defendable.

Therefore, it is possible to terminate an exchange at the following times:

  1. Anytime prior to the close of the relinquished property sale.
  2. After the 45th day and only after you have acquired all the property you have the right to acquire under section 1031 rules.
  3. After the 180th day.

Please contact us directly if you have additional questions in regards to canceling your exchange.

WHAT IS THE DIFFERENCE BETWEEN SECTION 1031 AND SECTION 1033?

Although IRC 1033 and 1031 both allow for the deferment of capital gain on property, the code sections operate and impact the taxpayer differently. IRC 1031 may provide more flexibility on the type of replacement property that can be acquired. IRC 1033 offers more flexibility on time constraints and receipt of funds.

Here is a quick summary of the differences.

IRC 1031

  • Pertains to the exchange of property used in “trade or business or investment.”
  • Do not report gain if property is exchanged for “like-kind” property (e.g., real estate for real estate).
  • A third party intermediary is required.
  • May not have actual or constructive receipt of sales proceeds from the relinquished property (all funds must be deposited with the exchange-accommodator).
  • 180 days to replace the relinquished exchange property.
  • 45 days to identify replacement property.
  • Net equity must be reinvested in property of equal or greater value to the relinquished property.

IRC 1033

  • Pertains to property involuntarily converted or exchanged (destroyed, stolen, condemned or disposed of under the threat of condemnation).
  • Do not report gain if property received is “similar or related in service or use” to the converted property. Exception: If converted property is real estate used in trade and business or investment, then do not report gain if exchange is for “like-kind” property (e.g., real estate for real estate).
  • An accommodator is not needed; the deferment is reported on Form 4797.
  • OK to directly receive payment/proceeds for the involuntary conversion.
    3 years to replace real estate; 2 years for other property.
  • No time restrictions during which the replacement property must be identified.
  • Proceeds must be reinvested in property of equal value to the converted property.
I know this was a very long read and I thank you for your patience getting through it. When dealing with the IRS there are a lot of small details and tax laws. One mistake it cost you your whole 1031 exchange. When writing this post I wanted to make sure I covered everything so you can cover everything to pay the least amount of taxes possible. 

Gary McAdams, PA
Realtor, Notary Public 
Barbara A. Anderson Realty 
Serving Key West and the Florida Keys


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