Am An Expert At 1031 Investments & Tax Exchanges
IS THE 1031 TAX DEFERRED EXCHANGE IMPORTANT TO A REAL ESTATE PROPERTY
An investor in real estate understands how important
it is to preserve wealth and assets. In the frequently changing world
of taxation, the investor is fortunate to have IRC Section 1031. This
tax code allows the investor to exchange from one investment property
to another and defer taxes on the gain. This means that a 1031 Exchange
is a rollover of equity of like properties, rather than an avoidance of
tax. Thus the investor continues to build wealth through real estate investment,
and maintains the hard earned equity. Any tax liability through inheritance
will be limited to the gains from the date of the inheritor’s acquisition,
not during the years of ownership. So in essence the taxes that are saved
now are never paid.
TO GO ABOUT A 1031 EXCHANGE AND GUIDLINES REGARDING THE 1031 EXCHANGE:
Taxpayer finds a buyer and sells the property through a Qualified Intermediary.
• Taxpayer buys a replacement property through the Intermediary.
• The parties may not know each other and their properties can
be in different states.
The exchange period begins on the day the relinquished property is transferred
and ends on the earlier of 180 days thereafteror the due date (including
extensions) of the tax return for the taxable year in which the transfer
of the relinquished property occurs.
• The taxpayer's agent, broker, attorney, accountant or family
member is excluded as a qualified intermediary.
Current Market Value = $200,000
Mortgage = $ 80,000
Equity = $120,000
Depreciation Taken = $ 20,000
Taxable Gain on Sale = $ 70,000
$200,000 Current Market Values
- $150,000 Original Purchase Price
+ $ 20,000 Depreciation
= $ 70,000 TAXABLE GAIN
ON GAIN AT 20% = $14,000 - OTHER EXPENSES/LOSES COULD AFFECT THE GAIN
(A property can be sold for less than purchased for and still have a
A PROPERTY EXCUTED 1031 EXCHANGE:
Equity ($120,000) less tax ($14,000) = $106,000 available towards purchase
of a new property.
A PROPERLY EXECUTED 1031 EXCHANGE:
If the tax-deferred exchange of the property was properly executed,
TAX WILL BE DEFERRED and the investor will have $120,000 to use towards
the purchase of another investment property. The concept of a tax-deferred
exchange is easy to understand. However, there are many details involved
in an exchange that need careful consideration. Before taking steps
towards a 1031 tax-deferred exchange, please consult your CPA, attorney,
or tax advisor.
WHAT REAL PROPERTY QUALIFIES FOR A 1031 EXCHANGE?
Relinquished and replacement properties must be property held for investment
HOW LONG DO YOU HAVE TO FIND A REPLACEMENT PROPERTY?
Identification must be made within 45 days of the closing date of the
WHEN MUST THE REPLACEMENT PROPERTY CLOSE?
The replacement property must close within 180 days from the closing of
the first relinquished property or the date the Exchanger must file their
tax return (including extensions), whichever occurs first. *The are no
extensions for Saturdays, Sundays, or
WHO CONTROLS THE PROCEEDS?
The proceeds must be held and controlled by a Qualified intermediary,
NOT by an agent, escrow company, or related party, including relatives.
The Taxpayer/Exchanger should notreceive any cash or cash equivalent to
any time during the exchange.
MAY THE TAXPAYER/EXCHANGER RECEIVE "GROWTH FACTOR"/INTEREST
ON THE NET PROCEEDS (FROM THE RELINQUISED PROPERTY)?
Yes, however, any "growth factor"/interest earned will be subject
to taxation according to the Taxpayer's/Exchanger's method of accounting.
WHAT IS "BOOT"?
"Boot" is any excess money or unmatched property coming from
the relinquished property.
WHAT IS "ADJUST BASIS"?
This is generally determined by taking the sales price from when the property
was aquired, plus the cost of capital improvements, less depreciation.
WHAT IS "FAIR MARKET VALUE" FOR THE PURPOSE OF
A 1031 TAX-DEFERRED
"Fair Market Value" is the sales price of the relinquished property
and the purchase price of the replacement propery, without regard to any
debts on either property.
WHAT IS "LIKE FOR LIKE" PROPERTY?
Prior to the new rules, if you sold an apartment building, you had to
buy an apartment building. However, according to the new rules, "like
for like" simply means selling an investment property and purchasing
an investment property. In other words, a single family rental may be
exchanged for a multi-family property, which may be exchanged for a commrecial
property, which may be exchanged for an office building, etc. Please note
that foreign real property is not considered like kind to U.S. real property.
FROM WHOM DOES THE BUYER OF THE RELINQUISHED PROPERTY RECEIVE
The Buyer may receive the Deed directly from the Exchanger on the relinquished
property and the Exchanger may receive the Deed directly from the Seller
on the replacement property.
HOW DOES THE TAXPAYER DEFER ALL TAXES?
The Taxpayer (i.s. Exchanger) must re-invest all cash into the replacement
property and the debt on the replacement property must be greater than
the debt on the relinquished property.
WHAT IS THE BEST WAY TO ESTABLISH THE TAXPAYER'S INTENT
TO EFFECT A 1031 EXCHANGE?
The intent language should be in the Real Estate Contract and Escrow Instructions/Purchace
Contract. However, a sale can be converted into an Exchange by the creation
of a amendment to the Escrow Instructions/Purchase Contract. (We will
supply the suggested intent langauge upon request)
WHO MAKES THE DEPOSIT ON THE EXCHANGER'S REPLACEMENT PROPERTY?
The Taxpayer (i.e. Exchanger) may make the deposit directly to the closing
agent/escrow company and be reimbursed at the closing or the Qualified
Intermediary may make the deposit from the proceeds of the relinquished