Real Estate Archives - Makris Legal

The Basics of a 1031 Exchange and The Different Kinds of 1031 Exchanges

Bill Makris — Mon, 26 May 2025 11:00:50 +0000

At some point in your life, you may either encounter some money or work your tail off to make enough money in order to start purchasing real estate for investment purposes. Whether it is a single-family house, condominium, office building, or a plaza, one thing these properties all have in common is that they are types of properties that a real estate investor would be looking to buy. One tool that real estate investors use to help them save, or put off, capital gains taxes is to do a 1031 exchange. What exactly is a 1031 exchange and why is it important if you plan on dealing with investment properties?

A while back, the Internal Revenue Service (“IRS”) released rules governing deferred exchanges, which can be found in Section §1031. Under these rules, real estate owned as an investment or used in a trade or business can swap their property tax-free for “like-kind” real estate. Typically, when a property is sold, the seller of the property will usually be stuck paying the capital gains they receive from the sale. However, under a 1031 exchange, the seller is allowed to prolong paying capital gains taxes by essentially “swap out” the properties for another like-kind property.

For example, Igor the Investor has bought a commercial plaza for $500K and decided to spruce it up and get some better tenants with long leases. A few years down the road, Igor sees another commercial plaza hit the market for $800K and realizes he has to have it. With the work Igor put into his plaza, he was able to sell it for $800K and then a few weeks later, he buys the new plaza for $800K. By doing a 1031 exchange, Igor avoided paying a capital gains tax of about $300K.

When performing a 1031 exchange, there are three (3) basic steps to follow:

1. Identify the property you want to buy and sell.

2. Choose a qualified intermediary.

3. Tell the IRS about your transaction.

As mentioned above, the first step requires you identify the property type. Although it does not have to be the same exact type, quality, or grade of property, it must be similar. This would mean that you cannot use proceeds from a single-family rental property to buy a commercial plaza. Next, you must choose a qualified intermediary, which is also known as an exchange facilitator. The qualified intermediary will hold the funds in escrow until the exchange is complete. This is important because you do not want to lose money and miss important deadlines which could cause you to pay a lot of money in taxes sooner rather than later.

Lastly, you need to tell the IRS about your transaction. This is done through Form 8824 with your tax return. On the form you will describe the properties, the timeline of when the properties were sold and bought, who was involved and also the money that was involved with the transaction. There are certain requirements that must be met for the properties you sell and the property you buy.

There are a few common ways to do a 1031 exchange in Florida. The different kinds of exchanges are:

Delayed exchange
Reverse exchange
Simultaneous exchange
Improvement exchange

A delayed exchange is typically the most common 1031 exchange not only in Florida but throughout the country. In this 1031 exchange, you sell the property and then you purchase another property The timeframe for this exchange has a forty-five (45) day identification period, which gives the seller time to identify the property to buy, and then a one hundred eighty (180) day completion period, to complete the exchange.

The reverse exchange is essentially the opposite of a delayed exchange. The seller would first buy a replacement property and then sell the original property. This 1031 exchange is less common because it requires the seller to use their own cash up front to purchase the new property. For example, Igor sees that new plaza for $800K. Although he is trying to sell his current plaza, he is not getting any real interest. So, Igor decides to buy the new plaza first and was able to negotiate the price down to $700K in order to not miss the opportunity. In order for Igor to do a reverse 1031 exchange, he will need to sell his plaza within the required timeframe.

The next 1031 exchange is a simultaneous exchange. This 1031 exchange is very risky because the closings of both selling the property and buying the new property must happen at the same time. If there is even a slight delay, it can result in full taxation. For example, Igor found a buyer for his plaza and already has an offer on the new plaza. He was able to get a buyer for his plaza for $700K and he received an accepted offer for the new plaza for $700K with both closings to take place on September 1, 2022. If there are no delays and both properties close on September 1, 2022, then Igor will have completed a simultaneous 1031 exchange.

Lastly, the improvement exchange, or construction exchange, is a 1031 exchange that allows the seller to improve their replacement property with the profits from the original property. For example, Igor ended up finding a buyer for his plaza for double of what he paid for it, $1,000,000! He sold his plaza and bought the new plaza he has been eying for a long time for $750K. However, right before he closed in the new plaza, he discovered it needed more work than anticipated. Igor decided to use the profits from selling his old plaza and fix up the new plaza he just bought.

At the end of the day, when buying and selling investment properties, there are ways to avoid having to pay taxes upon the sale of investment properties, so long as the requirements are met and the timelines are strictly followed. Although Makris Legal, P.A. is a real estate and business law firm, we primarily do NOT issue tax advice. The information in this blog post is strictly informational and shall NOT be construed as legal advice. It is highly recommended to consult with a tax professional for tax advice.

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What is Unlawful Detainer and How is it Different From an Eviction?

Bill Makris — Sun, 14 Jul 2024 11:00:12 +0000

After allowing a tenant to stay at your property, most property owners who then want to remove the tenant believe that they must file an eviction in order to get them out. However, that is not always the case. Florida allows a property owner to remove a tenant by means of unlawful detainer for certain situations. Below are some of the different scenarios where unlawful detainer would be sufficient instead of an eviction.

To start, what is the difference between an eviction and unlawful detainer? In an eviction the landlord is trying to remove the tenant for either possession of the property or both possession of the property and for damages, such as overdue rent, damages, attorneys’ fees, etc. In an eviction there is a lease between the landlord and the tenant which defines the tenancy. Unlike an eviction, unlawful detainer is commenced when a property owner wants to remove a person who has no legal or equitable title nor any interest or right to the property.

For example, Paul the property owner decided to allow Gina his girlfriend to move into his property shortly after they started dating. Paul did not require Gina to pay anything while living at the property. After a few months, Paul found out Gina was cheating on him with Paul’s friend, Frank. After this shocking news, Paul told Gina to take her things and leave and to never return. Gina did not cooperate and refused to leave. In this scenario, Paul would need to file for unlawful detainer against Gina in order to remove her from the property. Since Gina was never required to pay anything, she had no legal or equitable title nor any interest or right to the property upon Paul kicking her out. However, if Gina was paying rent to Paul or contributing to the mortgage payment each month, unlawful detainer may not be appropriate.

Unlawful detainer also apply to family members, friends, or anyone who the property owner allows to stay at the property at some point but now wants the person to vacate the property. For example, Paul heard his friend Larry was laid off. With nowhere else to go, Larry went to Paul and Paul let Larry stay at his house for a short time until Larry got back on his feet. After three months, it was clear to Paul that Larry was taking advantage of him and Larry never intended to look for a job, and Paul wants Larry gone. The appropriate action for Paul to take would be to file for unlawful detainer against Larry to remove him from the property.

Although individuals usually do not have any defenses in an unlawful detainer action, there are some rare defenses an individual may use to have the unlawful detainer dismissed. Some of these defenses include that the individual paid rent or they paid the mortgage. For example, Paul lets Frank stay at his house as long as Frank pays $500 a month. If Frank makes his monthly payment each month, then Paul may not be able to remove Frank via an unlawful detainer action because Frank is making the monthly payments to stay at Paul’s house. If a property owner does file an unlawful detainer action while the occupant is paying the property owner, then the Court will most likely dismiss the action.

Another difference between an eviction and an unlawful detainer is in an eviction, the landlord is required to provide the proper notice to the tenant whereas in an unlawful detainer the landlord is not required to provide notice to the tenant. The length of the tenancy will determine on how much notice a landlord must give to a tenant in order to start the eviction process. With unlawful detainer, a landlord simply needs to file the complaint to get the process started. Although the process for an eviction and unlawful detainer are similar, the general process for an unlawful detainer is:

1. The property owner files the complaint and summons in County Court.

2. The person the property owner wants to kick out has to respond to the complaint.

3. If the person does not respond to the property owner’s complaint, a default will be entered.

4. A judgment is issued if the Court rules in favor of the property owner.

5. The clerk will issue the Writ of Possession to be executed by the sheriff which removes the person from the property.

Since the property owner is not required to provide notice to the person he is trying to remove, then an unlawful detainer action would generally be quicker than an eviction since there are less steps to take.

Overall, it is important to know the differences between an eviction and unlawful detainer because depending on the situation one will be successful and the other wont and as a tenant your defenses may be different. Retaining an attorney will benefit a property owner by helping them save time and money to remove an individual from their property, whether it is an eviction or an unlawful detainer. Click here to contact an attorney.

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An Overview of Escalation Clauses When Buying Property

Bill Makris — Tue, 25 Jun 2024 11:00:12 +0000

Are you in the market for a new house, condo, townhouse, or commercial property? Are you currently trying to sell your property? Depending on your location and the type of property, a seller may be presented with multiple offers or a buyer may be outbid by other prevailing offers. Currently it is a red-hot seller’s market and there is a high demand for properties. This is causing multiple bidding wars when trying to buy a property and properties are selling very quickly. As a buyer in a seller’s market, it can be challenging to make your offer stand out amongst the rest. One way a buyer may be able to get their offer to stand out is to include an escalation clause in the offer.

Escalation clauses have many different variations and contain different sections, but the concept they all share is that a buyer is willing to increase their initial offer. Generally, an escalation clause contains the amount of money to add to the buyer’s initial offer in order to become the highest offer, and the maximum purchase price that the buyer is willing to pay for the property. An escalation clause can range from being very simple to being more complex. For a simpler escalation clause, it may include only the basic core element. For example, a simple escalation clause may state something along the lines of, “Buyer agrees to pay $500 more than the highest offer, not to exceed a final purchase price of $300,000.” That example contains the general concepts and it tells the seller how much the buyer is willing to increase their offer to and also sets the maximum amount the buyer is willing to go to purchase the property. When it comes to creating a more complex escalation clause, it may have sections including, but not limited to:

Telling the parties how to handle one or more escalation clauses from competing offers.
Stating what exactly will be escalated, whether it may be the purchase price, net proceeds, or a combination.
Whether either party will be required to sign more documents if the escalation clause is triggered.
Identifying how the buyer will cover the escalated amount.

Additionally, in an escalation clause it will usually spell out the escalation procedure. This procedure specifies where exactly the increase of funds will come from. When an escalation clause is triggered, the increase can raise the down payment the buyer is willing to put down to purchase the property. Another place funds can be paid from as a result of an escalation clause is from the financing. For example, Beth the Buyer stated to Sam the Seller in her offer’s escalation clause that in the event of a competing offer, her offer will raise an additional $1,000 above the next highest offer to cap at $300,000 and that in the event of an escalation, Buyer will cover the increase in price by upping her down payment to maintain a 20% down payment and she will finance the rest. After competing offers come in and the escalation clause kicked in, Beth the Buyer’s offer was accepted after the final sales price increased from $250,000 to $265,000 due to the escalation clause. As a result of this acceptance, Beth the Buyer’s down payment increased from $50,000 to $53,000, meaning she will have to pay an extra $3,000 towards her down payment and her amount financed has increased to $212,000 pursuant to the escalation clause in her offer to buy the property.

In this crazy seller’s market, escalation clauses are becoming more popular, not only in other states, but especially in Florida. The positive side of having an escalation clause in a buyer’s offer is that it could potentially make the buyer’s offer stand out amongst the crowd of competing offers while helping the seller of a property finalize negotiations. Although price is not the only condition sellers look at when reviewing multiple offers on a property, there can be other conditions that makes an offer appeal to a seller even if it has a lower purchase price. The negative side is at the end of the day a seller is not required to follow the escalation clause unless the seller accepts the offer. A seller is not obligated to accept any offer on their property. A seller can either hold out for a higher priced offer, wait for an offer that has better conditions, or even accept an offer that has a lower price than the other competing offers. In the end, escalation clauses can be beneficial to both buyers and sellers when the market conditions favor the sellers.

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