1031 Tax Exchange Information

April 21, 2009

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

Filed under: 1031 tax exchange — 1031institute @ 6:22 am
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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 http://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.


April 1, 2009

Transform Your Debt With A 1031 Tax Exchange

Filed under: 1031 tax exchange — 1031institute @ 6:12 am
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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.

March 4, 2009

You Don’t Have To Pay Your Capital Gains Taxes

Filed under: 1031 tax exchange — 1031institute @ 3:03 am
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Property investors often mistakenly sell their investment property or business and wind up needing to pay Uncle Sam thousands of dollars in capital gains taxes. They may not be aware of the tax laws in effect that provide them with the opportunity to retain their capital gains taxes on the sale of their business or investment property.

This law defers and can even eradicate taxes you would normally have to pay if you were selling your property. However, the money you make from selling your property must be used exclusively to purchase a like-kind property that you also intend to use for business or investment purposes.

Using a 1031 exchange is like a carpenter using a hammer to drive a nail, it gives him so much more leverage – and likewise the money you can save can be leveraged to purchase even more property to compound your wealth.

The 1031 Exchange provision has saved investors millions and millions of dollars, and it is well worth your time to explore the benefits of it for yourself. In order to reap those rewards, there are some specific procedures you need to follow.

Be sure that you select qualified intermediary (A.K.A. “Q.I.”) with a solid track record and professional reputation. Dealing exclusively with doing 1031 exchanges, a Qualified Intermediary is an expert with the facilitation of such a deal.

Your Q.I. provides a written agreement to change the transfer from and outright sale to an “Exchange” then transfers your relinquished property (that you are selling) and takes that money and uses it to purchase your replacement property on your behalf.

You must abide by the following 1031 rules to qualify for an exchange:

1. Firstly, the investment property that you are replacing must have been used for investment purposes or use in a trade or business and must be “like-kind” (i.e. US real estate for other US real state).

2. Second, you must find a replacement property if you haven?t already, clearly identify it in writing to your Q.I. it within 45 days. It is necessary to close on the sale on the replacement property within one 180 days.

3. To defer your capital gains taxes, all of the proceeds from the sale of the first property must be used to purchase your new replacement property.

Follow these 1031 rules and you will be in the best position to faciliate your exchange. The procedure is simple enough but even if the path seems a little complicated from time to time, it will be well worth it with the money you will save. Do yourself a favor and keep your capital gains by using a 1031 exchange instead!

Investors in the U.S. can save big money by using a 1031 exchange 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 IRS.

Watch the video on 1031 Exchange Rules to learn more.

February 13, 2009

What You Should Know About Closing Expenses On 1031 Exchanges

Filed under: 1031 tax exchange — 1031institute @ 5:41 am
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When closing on the sale of a property, you will likely incur a variety of expenses, and you may find yourself wondering what is and isn’t acceptable to debit off your closing statement. This is particularly important when you are making a 1031 exchange.

Any proceeds or cash benefits you receive from a 1031 transaction are known as boot. Boot is not part of a like-kind exchange, and is therefore considered taxable.Closing on a sale will always carry associated costs such as agents’ commissions and deed recording fees. It is acceptable to debit these off on your closing statement, because they do not represent any extra cash benefits for you. Expenses such as prorated rent and security deposits that must be transferred to the new owner are another story.

The correct way to deal with these is to write the owner a check from your own operating account. Debiting these expenses to your closing statement would result in a cash benefit in that money in your operating account would be freed for your use, and this money is considered to be boot.

You should be equally wary when you are closing on the your replacement property, especially in regard to fees related to the acquisition of new debt. Just as expenses such as security deposits and rent proration on the sale of your old property must come out of your own pocket, so must loan origination, underwriting and processing fees.

The message you should take away from this article is that it is best to simply pay these kinds of expenses out of your own account rather than making a risky attempt to walk out of a 1031 exchange with extra cash in your pocket. The IRS has pursued litigation against investors who have tried these kinds of tactics, one notable example being the case of the Commissioner v. Garcia.

U.S. investors can save big money by using a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is almost like getting an interest free loan from Uncle Sam!

January 27, 2009

1031 Exchanges Are Especially Beneficial Classic Car Investors

Filed under: 1031 tax exchange — 1031institute @ 9:51 am
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As those in the business know, however, the downside of investing in classic cars or other collectibles is the prodigious capital gains rates that come with their sale. While you can still come out of a classic car sale with a tidy sum, you would likely balk at the 28% hit to your profits that accompanies these transactions.

While an exchange involving personal property is conducted in much the same way as a real estate exchange, it is important to note that in a personal property exchange, one has less leeway in terms of what will fulfill like-kind requirements. If you are exchanging a car, you will only be able to exchange it for another car of equal or greater value. The same rule applies to any piece of personal property used in an exchange.

Currently, there is a very high level of demand for collectible items, especially classic cars, which have appreciated greatly in value. You may be thinking that this is the right time to sell, and to cash out on the good investment decisions of yesteryear.

You’d be right, but you’d do well to consider the possibility of a 1031 exchange. A 28% capital gains tax represents a large portion of your profits, and if you’re like me, you’ll take the option that allows you to reinvest that money, maximizing your potential profits.

United States property investors can save their money by utilizing a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is like an interest free loan from Uncle Sam!

September 27, 2008

When Selling Classic Cars Use A 1031 Exchange

Filed under: 1031 tax exchange — 1031institute @ 6:42 am
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If you invested in a classic car several years ago, you’re probably patting yourself on the back right now. Collectible car investments have appreciated considerably in recent years, and they are in high demand. But if you decide to sell, don’t be surprised when you find yourself looking at a 28% capital gains rate.

Now is certainly a great time to cash in on the classic car you’ve been holding for investment, but a look at the tax rates on the sale of collectibles might put a damper on your enthusiasm; as much as 28% of your profits could end up going to capital gains taxes.

Imagine, for example, that you have a 1967 Ferrari that you bought for $270,000 but which has since appreciated in value to $800,000. At this point, you’re likely quite pleased with your investment. But you might balk at the 28 percent capital gains rate on the sale of this car, and you’d be right to do so, because a 1031 exchange could save you that 28 percent and let you reinvest that money instead of losing it to taxes.

First of all, you need to be aware that like-kind requirements on personal property are far stricter than those on real estate. When making a 1031 exchange on real estate, you can, for example, exchange an apartment building for a farm. When making an exchange on a collector car, you can only exchange it for another car, not for a crane or a piece of aircraft equipment. Also keep in mind that it is best to exchange for property of equal or greater value. If you downsize, you will not receive the greatest possible tax deferment.

With the demand for collector cars at an all time high, how can you afford to lose that 28% of your profits? The smart collector will opt to make a 1031 exchange instead of paying the exorbitant capital gains rates.

So why take the 28% hit from capital gains taxes when you can defer those taxes and put the money you save towards a new investment? 1031 exchanges aren’t just good for real estate investments; they can save you a bundle in taxes when you are seeking to sell personal property as well.

U.S. investors can save their money by utilizing a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is almost like getting an interest free loan from Uncle Sam!

September 5, 2008

Take Care When Making 1031 Exchanges Outside of the U.S.

Section 1031 of U.S. tax code is based on the idea of a mutually beneficial relationship between the real estate investor and the U.S. economy as a whole. 1031 exchanges allow investors to put their capital to work in the most advantageous ways possible, which in turn stimulates the economy by creating more jobs and greater opportunity in the U.S. This is one major reason why 1031 exchanges cannot occur outside of U.S. territory. In addition, a tax deferment means that the IRS will want to collect your capital gains taxes in the event that you someday sell your replacement property, and it can be very difficult for them to collect taxes on the sale of foreign property.

The fact that 1031 exchanges are intended to boost the U.S. economy raises the question of whether one can exchange a property for one located overseas. The short answer is no. The money you save by making a 1031 exchange rather than selling outright is considered a tax deferment, which means that although you are temporarily liberated from capital gains taxes, the U.S. government will still want to collect the money if you sell your property at some point in the future. It is difficult and sometimes impossible for the IRS to collect taxes on the sale of foreign property.

In private letter rulings relating to the U.S. Virgin Islands, the IRS has ruled that a property must be income-producing in order to meet like-kind requirements. This is a more constricted definition of a like-kind exchange than that which is normally applied to exchanges made on properties in the United States, which merely requires that your property be held for the purpose of business, trade or investment.

The path of least resistance when it comes to making a 1031 exchange is to confine your transactions to the United States, which comprise the fifty states as well as Washington D.C. In the event that you find it necessary to make an exchange on property located in an outside territory, I advise you to carefully analyze your replacement property to make sure it meets like-kind requirements. You may even want to request your own private letter ruling from the IRS.

United States investors can save big money by utilizing a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is almost like getting an interest free loan from Uncle Sam!

March 31, 2008

Refinancing With a 1031 Tax Exchange

Filed under: 1031 tax exchange — 1031institute @ 7:32 pm
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One of the key concepts in the 1031 exchange process is that an investor must not draw any cash benefit from the funds resulting from the sale of his or her relinquished property; any kind of monetary benefit from the sale is considered to be boot, and this means, in fact, liable for capital gains taxes. In keeping with this logic, refinancing for the purpose of removing stored value from the 1031 replacement property delves into a rather gray area with regard to acceptability under Section 1031.

In a case involving an investor named Garcia, the court clearly asserted that any benefit gained by an investor resultant from the refinancing of a property in anticipation of selling it in a 1031 tax exchange will be considered to be boot. This court decision set a precedent for dealing with these kinds of situations . Currently, a more popular tactic is waiting until the replacement property has been closed on, and to refinance the piece of property at some point later. This tactic, however, raises some questions about how long it is appropriate to wait before performing this refinancing and removing equity from a property.

The old guard among real estate investors will advise you that you should wait a considerable period of time post-closing (perhaps two years), to make absolutely sure that you’re complying with the intent of 1031 tax exchanges. The popular mindset amongst more liberal minded contingency of real estate investors, however, is to assume that the closing on a replacement property marks the definitive ending point of to the exchange process, and that one need not fret over the substantiation of the exchange from there onward. For a property investor who looks at the exchange process from this perspective, it is not relevant how long one waits before refinancing one’s 1031 replacement property, and many do indeed elect to do this immediately after the closing has occurred.

If you are looking for any kind of hard and fast maxim as to when it is safe to refinance a 1031 replacement property, then you are destined to be disappointed, at least within the confines of this short article. The two schools of thought described in this article are just the opinions of a few, and they are examples of only a few of the viewpoints an investor may adopt. Property investors vary greatly when it comes to the way in which they elect to look at these sorts of gray areas, and the wisest suggestion I can {give you is simply to enlist the help of a qualified tax adviser or other legal expert in making your ultimate decision, and to work together with him or her so that you can decide on the approach that will work best in the context of your particular situation.

March 15, 2008

A profitable option is to conduct a 1031 tax exchange…

Filed under: 1031 tax exchange — 1031institute @ 4:28 am
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As a player in the real estate game, you must be aware that dollar that you have working for you is compounding your wealth, and, conversely, that every dollar not working for you can be considered a missed chance to further compound your profits. So, when it comes time to put your property up for sale pay capital gains taxes . Every time you pay money to the U.S. government you are throwing away potential profits.

The second and more profitable option is to conduct a 1031 tax exchange. A great way to keep more of your investment funds making you more money is to perform a 1031 tax exchange rather than making an outright sale. A 1031 exchange has a non-recognition provision; this means that you aren’t obligated to pay the taxes immediately following your sale; as a matter of fact, your capital gains liability are deferred for an indeterminate time span, while your funds are compounded by the extra income produced by investing your tax deferment.

To demonstrate, let’s say that you own some small investment properties, like triplexes or duplexes, whose values have increased over time. At this point, your first inclination may be to sell these properties and collect on your investments. But a wise investor with an eye to the future might decide to conduct an exchange and place the money gained from these investment properties towards the purchase of another piece of property, which will, itself proceed to appreciate in value over time and continue to compound your wealth. Best of all, the money available to you as a result of deferring capital gains taxes will function to heighten your ability to leverage for greater loans, maximizing your potential profits.

1031 exchanges are not limited to just buildings and land, either. It is possible to conduct a 1031 exchange on any real estate held for investment in a business or trade, as well as certain types of personal property, from cranes or backhoes to an aircraft or collector car. 1031 exchanges are especially advantageous for those who have money in antiques or collectibles such as collector cars, in light greater capital gains liability on the sale of these types of items. You cannot, however, exchange things like stock, bonds, or interest in an REIT.

So, next time you are in the position to sell a piece of real estate or other investment, pause for a moment and consider the profit you could reap were you to conduct an exchange instead. If you decide to conduct a 1031 exchange instead of selling outright, you can maximize your wealth and come out ahead.

February 21, 2008

Section 1031 of US tax code

Filed under: Section 1031 Exchange — 1031institute @ 7:58 pm
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The 1031 tax exchange is a method often used by property investors so that they may indefinitely defer capital gains tax liability on the sale of a property. This is achieved by transferring rights to a property one would like to sell to a qualified intermediary, who holds on to the funds gained from the sale of the relinquished property and uses them to acquire a replacement that complies with the rules set out in Section 1031 of US tax code.

While the present popularity of the 1031 tax exchange may lead one to believe that it only recently came on the scene, this is untrue. Actually, the history of the 1031 exchange extends as far back as 1921, although it was originally was significantly different from the exchange investors know and love. Section 1031 truly came into its own in the ’70s, which saw a host of significant modifications in the way that these exchanges were conducted. These modifications resulted in a more powerful conception of the 1031 process and also created greater interest among real estate investors.

The capital gains tax deferral a 1031 exchange provides to the taxpayer might, at first glance, seem to be a sort of gift from the United States government, however it is, in reality, more like an interest free loan. This is because there is an expectation that the taxpayer will repay the money gained from the tax deferral by paying capital gains taxes on the eventual sale of a replacement property. In addition, this interest free loan is one that may be kept by the investor for an indefinite period of time; an investor may conduct any number of exchanges before ultimately electing to make an outright sale, on which capital gains taxes must be paid.

Section 1031 of US tax code represents a mutually advantageous agreement between the investor and the U.S. government, providing a benefit for the U.S. economy as a whole in addition to the individual taxpayer. In viewing the transfer of value in an exchange as a continuation of an existing investment rather than as a separate transaction liable for taxation, investors gain the opportunity to transfer their money into the best possible investments. This, in turn, boosts the country’s economy by encouraging the growth of new jobs.

As with anything, Section 1031 has detractors. Some advocates of change in Section 1031 will pose the argument that the tax free profit provided to the investor in the exchange process creates an unreasonable advantage. Another common concern is that the strict time limits imposed on some aspects of the exchange process may engender a frenetic rate of buying, with a resultant increase in asking prices for replacement properties. These complaints, however, are only tenuously linked to reality, and the odds that Section 1031 will see any significant changes in the foreseeable future are quite slim. When looking at the big picture, most will concede that the 1031 exchange is immensely advantageous to all parties involved, allowing taxpayers increased profits on the sale of their property while also promoting the creation of jobs and consequently promoting the greater good of the U.S. as a whole. Little doubt exists that the 1031 tax exchange is destined to remain a part of the investment world for decades to come.

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