I Am An Expert At 1031 Investments & Tax Exchanges

WHY IS THE 1031 TAX DEFERRED EXCHANGE IMPORTANT TO A REAL ESTATE PROPERTY INVESTOR?

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.

HOW 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.

CALCULATION EXAMPLE:
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

TAX 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 gain)

WITHOUT A PROPERTY EXCUTED 1031 EXCHANGE:
Equity ($120,000) less tax ($14,000) = $106,000 available towards purchase of a new property.

WITH 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.

QUESTIONS & ANSWERS

WHAT REAL PROPERTY QUALIFIES FOR A 1031 EXCHANGE?
Relinquished and replacement properties must be property held for investment purposes.

HOW LONG DO YOU HAVE TO FIND A REPLACEMENT PROPERTY?
Identification must be made within 45 days of the closing date of the relinquished property.

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
Holidays.

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
EXCHANGE?
"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 THEIR DEED?
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 property.