Learning From A 1031 Exchange Company On How To Start Saving Money By Deferring Taxes

To start a 1031 Exchange, you first check with their CPA or accountant. You and your CPA need to figure out how much you would have to pay in taxes if you just sold the property outright. Your CPA can determine your adjusted basis in your property. Once your basis is known, you can then determine what the “normal” capital gain tax liability would be; and, also the amount of taxes that would be due to “depreciation recapture”, which is currently taxed at maximum rate of 25%. Note: The rate of capital gains taxes is higher for the portion of the gain that is attributable to depreciation.

Normal appreciation can be determined by your CPA or accountant from the natural increase in the value of your property. Normal appreciation is currently taxed at a maximum rate of only 15%. If you are in a state with an income tax or state capital gains tax, your CPA might also determine the amount of state and municipal tax liability.

Once all of the tax liabilities have been determined, an informed decision can be made as to whether to sell the property outright or to utilize the benefits of a 1031 Exchange. Typically, the cost of doing a 1031 Exchange is far less than the tax bill if you just sold the property outright.

Once the potential taxes are determined, a Qualified Intermediary should be brought in to help you complete a 1031 Exchange. Also, you need a written purchase agreement signed by both you as the seller and your purchaser stipulating your desire to sell your relinquished as part of a 1031 Exchange.

In addition, it is a good idea to add a stipulation or clause in the purchase agreement stating that you want to complete a 1031 Exchange with regards to the property and that the purchaser agrees to cooperate with such. You have now laid the basic groundwork for the closing. For sample cooperation clause go to www.1031podcast.com.

At the closing, the sale will become complete. The deed crosses the desk to the purchaser, and the net sales proceeds are paid directly to the Qualified Intermediary. This starts the 1031 countdown. The day after the closing is considered “day one” in the forty-five day identification period. During the forty-five days, you must identify in writing the property that you want to purchase as your replacement property. This “day one” is also the start of the 180 day exchange period that you have to complete the 1031 exchange and acquire your replacement property.

Now, I will review the steps you need to make in order to complete a 1031 Exchange transaction. The first step is to determine the capital gains tax bill, including depreciation recapture and state and local taxes. This step would be performed by your CPA or accountant. The next step is to determine if the 1031 Exchange process would be of benefit to you. This step would be made by your CPA or accountant with the help of a 1031 Exchange Qualified Intermediary. In step three, you should document your intent to sell the property to the purchaser, as well as your desire to complete a 1031 Exchange by inserting appropriate text in your purchase agreement.

If you do all of the above, you will start the process of deferring taxes and keeping your money working for you.

United States investors can save a lot of money by utilizing 1031 tax exchanges to defer all of their capital gains tax on the sale of investment property. 1031 exchanges are like an interest free loan from the U.S. Government.

Transform Your Debt With A 1031 Tax Exchange

We all know that the 1031 Exchange is used for transferring equity from an old property to a replacement property. What is not customarily known is that you can use some of the equity from your property through proper refinancing. You can use pre-exchange refinancing or post-exchange refinancing.

1031 rationale requires all of the proceeds from the sale to pass to the Qualified Intermediary. This prevents you from receiving any cash benefit from the sale. There may be times, however, when you would like to use some of your equity for your own entertainment or investments. If you decide to refinance your property shortly before the 1031 exchange and use that equity for your own entertainment, you may run afoul of the IRS.

Garcia was a taxpayer who decided to refinance his property in anticipation of the 1031 exchange. The IRS successfully argued that when Garcia took out money before the 1031, it was akin to telling the settlement agent to pay him some of the sale proceeds at closing. In short, you cannot take out your equity just before the 1031 exchange. Cashing out equity, called “boot,” is acceptable if you pay taxes on it. Garcia tried to avoid the tax and ran afoul of the 1031 rationale, and the IRS.

The other way of recovering funds via refinancing is the Post 1031 Exchange Finance on the replacement property. This is a good way for you to take some of that equity out of the replacement property and buy more real estate. There is a question, however, on how long you have to wait before the refinancing after the 1031 Exchange is completed.

The nanosecond refinance is waiting just long enough after the 1031 to show the IRS, through the closing statement, that you’ve re-invested all of your equity into the replacement property. In a separate transaction, a new settlement statement is used to show that the replacement property was encumbered with new debt via a loan or mortgage, then there is a cash payment from the lender to you. Thus, there is a pool of money you can access after the exchange.

Whether the nanosecond exchange is legal is debatable. There are risks because there is no definitive IRS rule regarding how long you have to keep the equity in the replacement property. The conservative school of thought says to keep the money in the replacement property in order to avoid the Garcia trap. In this case, keep the equity in the replacement property until the following tax year, or until two years have passed from the 1031 exchange to the ultimate refinance.

U.S. investors can save a lot of money by utilizing 1031 exchanges to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is similar to an interest free loan from the U.S. Government.