money with a 1031
would you like to save thousands and not pay Capital
Gain Taxes on the sale of Real Estate? If you answered
"YES", then read on and contact us when you're
is a "1031 Exchange" aka "Like Kind Property
referred to as a "Starker Trust", a 1031 Exchange
is a transaction in which an owner of property held
for investment is allowed to sell one or more properties
and purchases one or more properties without a tax consequence.
It is the best strategy for the deferral of capital
gains tax that would ordinarily arise from the sale
of Real Estate. Real Estate owners can accomplish almost
any investment objective with 1031 Exchanges including
greater leverage, diversification, improved cash flow,
geographic relocation, and/or property consolidation.
does an Exchange work?
Exchange is usually a 3 way Exchange in which an intermediary
is used to facilitate the transaction. Four things ordinarily
occur in an exchange:
seller sells the relinquished property. At closing
the sale proceeds go to a Qualified Intermediary where
the funds are held in a trust account "For Benefit
Of" the exchanger.
seller identifies replacement properties within 45
days of the closing of the relinquished property.
seller (now the buyer) closes on the replacement property(ies)
within 180 days of closing on the relinquished property
and the funds are wired from the "FBO trust account"
by the intermediary to the closing agent.
would I want to be involved in an Exchange?
you own "management intensive" Real Estate?
Or perhaps you own property you purchased or inherited
years ago and would prefer another property. You have
probably realized good returns on investment that will
otherwise be lost to the IRS. The sale of every property
is a potential tax event with the tax consequence being
realized after the closing of the property. Section
1031 was written into the Internal Revenue Code in the
1920's. The IRS realizes that your investment in Real
Estate spurs the economy onward, however upon the sale
of the property, any profit realized from appreciation
must be reported, and is taxed at 20%. The depreciation
you have been enjoying will be taxed at 25%. If you
own passive investment property (raw land for example)
you may have enough profit to invest to generate a cash
flow by purchasing an income producing property.
qualifies as "Like Kind" Property?
can exchange any Real Estate investment for any other
type of Real Estate investment - for example, vacant
land can be exchanged for a warehouse, an office building
for an apartment complex, or a vacation home, an orange
grove, a golf course, horse ranch, whatever. As long
as the property being sold is not a primary residence,
and there is a tax liability to selling, an Exchange
should be considered.
DO'S AND DON'TS of 1031 Tax Deferred
plan in advance for the exchange. The Qualified
Intermediary cannot have a fiduciary relationship with
the exchanger; therefore the QI cannot give legal or
tax advice. The QI does consult with the exchanger,
as well as the exchanger's CPA, accountant, attorney,
broker, financial planner, and lender.
attempt to sell before you purchase. Occasionally
exchangers find the ideal replacement property before
the relinquished property is sold. In this situation
a "Reverse Exchange" may be necessary. We
are happy to discuss Reverse, Build To Suit, and Improvement
remember these basic rules. To qualify for
a complete tax deferral use all proceeds from the relinquished
property to purchase the replacement property. Make
sure the debt on the replacement property is equal to
or greater than the debt on the relinquished property.
An exception occurs when a reduction in equity cannot
be offset by increasing debt. And finally, receive on
Like Kind" property. Real Estate cannot be exchanged
for jewelry, stocks, mutual funds, etc.
plan to sell and invest the funds in property you already
own. Funds applied toward property already
owned are considered "Goods and Services",
not "Like Kind" properties.
change the manner of holding title during the exchange,
or dissolve partnerships. A change in the exchanger's
legal relationship to the property will jeopardize the
Exchange. Maintaining "Continuity of Title"
is critical to the Exchange.
miss the identification period (45 days) or the closing
date (180 days). A reputable Qualified Intermediary
will not act on back dated information or late identifications,
and the IRS is unforgiving on such matters.
contact Real Estate Exchange Services regarding
trusts, corporations, partnerships, option money, seller
financing, personal property included in the sale, farm
and ranch property, multiple units with one side owner
Exchanges must be reported in the tax year that
the relinquished property was closed, regardless of
the tax year the acquisition property was closed.
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