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.
Likewise, your CPA or accountant will determine how much of the gain relates to normal appreciation from the natural increase in the value of the property. This appreciation is currently taxed at a maximum rate of only 15%. Your CPA will also determine if any state income tax or capital gains tax would be incurred. This would also include 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.
It is a good idea to stipulate in your purchase agreement your desire to utilize the 1031 Exchange option. You have established that the purchaser agrees to cooperate with the 1031 Exchange. Also, you have established the groundwork for the closing. For an example of the cooperation clause go to www.1031podcast.com.
At this point, your closing can now take place, and your sale will be completed. Once the sale is complete, and the net sales proceeds have been paid directly to your Qualified Intermediary, your 10131 countdown will begin. The day after the closing is considered "day one." From this day, you have forty-five days to identify in writing the properties you want to purchase as your replacement property. It is also the first day of the 180 day exchange period that you have to complete the 1031 exchange and acquire your replacement property.
To sum up, from the beginning the you should first determine what capital gains tax bill (including deprecation recapture and state and local taxes) would be with your CPA or accountant, and decide if doing a 1031 Exchange will benefit you. Next, you should document your intent to sell the property to your purchaser, as well as your desire to complete a 1031 exchange by inserting text in your purchase agreement and contacting a qualified intermediary early - before closing on the sale of your relinquished property.
Having completed your 1031 Exchange, you have started the process of deferring taxes and keeping your money working for you.
U.S. investors can save a lot of money by using 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 IRS.
The basic premise behind a 1031 exchange is that that you, the taxpayer, are shifting all of your equity from one property to the next. In effect, the old debt is being offset by the new debt on the replacement property. However, there are two ways to usurp this premise and cash out some of your equity: pre-exchange refinancing, and post-exchange refinancing. Pre-exchange financing will be discussed first.
To keep in line with the 1031 rationale, all of the proceeds from the sale are supposed to pass to the qualified intermediary - this prevents you from receiving any cash benefit from the sale. But, suppose you want that new car or want to take the family on a vacation and don't have the cash to do it. So, you decide to refinance your property shortly before the 1031 exchange and use that equity for your desired luxury item. A smart move? Probably not, according to IRS v. Garcia.
We have tax case IRS versus Garcia which tells us that the refinance must be done well prior to the 1031 Exchange. Garcia tried to avoid taxes and ran afoul of the 1031 rationale and the IRS. He ran into problems because he refinanced just before the 1031 Exchange and tried to take proceeds without paying the taxes. Therefore, you can't take out equity unless you pay taxes on it.
Now, you want to avoid the Garcia issue so you decide to refinance the replacement property. This is where post-exchange financing comes into play. Not all taxpayers want to leave their equity in the replacement property - some want to take out that equity and buy more real estate. But, how long should you wait after completing the 1031 exchange before you take out the equity in the replacement property? Some say wait a nanosecond.
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 using 1031 tax exchanges to defer all of their capital gains tax on the sale of investment property. A 1031 exchange is like an interest free loan from the U.S. Government.
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.
When you take advantage of the 1031 exchange laws, you can save a lot of money, thereby allowing you to leverage your equity by purchasing even more property (which may have not been possible without the added tax savings).
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. Secondarily, you will need to locate a property to replace your property if you have not yet done so, and make sure it is identified clearly in writing within 45 days to your Qualified Intermediary. It is necessary to close on the sale on the replacement property within one 180 days.
3. In order to defer all of the taxes, all your money made in that sale must be used to purchase the new replacement property.
By following these rules you will be better positioned to make a 1031 Tax Exchange. This will be well worth it to you in the end, even if it seems a little complicated from time to time, the basic procedure is really quite simple. Go ahead and keep your money working for you by using a 1031 exchange to defer your capital gains taxes!
U.S. investors can save big 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 Uncle Sam.
Watch the video on 1031 exchange rules to learn more.
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.
The answer to your dilemma is a 1031 exchange, a tactic which, although extensively used by real estate investors, has not as of yet become a common gambit of those dealing in antiques and collectibles such as classic cars. This is unfortunate, because the capital gains rates associated with sales on these investments are, as I mentioned before, much higher than those on real estate transactions, so a 1031 tax deferment would confer the greatest benefit on those in your line of business.
When making an exchange on personal property, however, you must be careful that you are complying with like-kind requirements. Unlike an exchange on real estate, in which there is some leeway in terms of what will qualify as like-kind, personal property exchanges are held to a stricter reading of these requirements.
This simply means that a car cannot be exchanged for anything except for another car, and this rule applies to any type of personal property used in an exchange. Among classic car collectors, the 1031 exchange is an incredibly useful but largely unknown tactic.
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!
Antique or collectible items such as classic cars can be highly lucrative investments - as a matter of fact, collectible cars have greatly increased in value in recent years, and demand is for them is currently at a high.
The rates for the sale of collectible property are much higher than those on the sale of real estate. So, is there any way to avoid paying inflated capital gains rates on the sale of your collector car? The answer is to make a 1031 exchange. This is a tactic that is often used by real estate investors, but that can be particularly helpful in the sale of collectible property.
By making a 1031 exchange instead of selling outright, you can defer your capital gains taxes indefinitely, allowing that 28% to be reinvested and continue working for you. This is useful for real estate investors, but even more so for those holding personal property for investment. Here are a few things that you should keep in mind when making 1031 exchanges on personal property, such as a classic car or other collectibles or antiques.
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.
1031 exchanges on personal property are conducted in much the same manner as real estate exchanges, but one important difference is that the like-kind requirements that must be met for the exchange to be valid are quite a bit more stringent. While a real estate investor can, for example, exchange an apartment building for farmland of equal or greater value, an investor dealing with personal property can only exchange a car for a car, a plane for a plane, and so on.
Now is the time to reap the benefits of your collectible car investment, but why sell outright and watch 28% of your profits go down the drain? A 1031 exchange gives you the opportunity to put the money that would have been lost to capital gains taxes towards a new investment, keeping your money working for you.
United States investors can save a lot of 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 Uncle Sam!
As a real estate investor, you probably are aware of the advantages of a 1031 exchange over outright sale of a property. An exchange defers your capital gains taxes, keeps your money working for you, and helps to build equity and maximize your returns. But 1031 exchanges are allowed not only for the good of the investor; by allowing investors to move their capital to the most advantageous investments, section 1031 stimulates the U.S. economy.
By this logic, it wouldn't make sense to allow 1031 exchanges to be made on properties overseas, and this is indeed prohibited. Section 1031 is at least partially intended to encourage investors to invest in property located in the U.S., both for the sake of the economy and because it can be difficult or impossible for taxes to be collected on foreign property (remember that a tax deferral is more of a loan than a gift, and the IRS expects to collect on this loan in the event that you sell a replacement property outright).
If 1031 exchanges are limited to the U.S. so that the economy will benefit and the IRS will be able to collect capital gains taxes in the future, then you may be wondering what rules apply to U.S. territories such as Guam, the U.S. Virgin Islands, and Puerto Rico. In private letter rulings, the IRS has stated that a Virgin Islands property can only qualify as like-kind in an exchange with a U.S. property if it is income-producing, which is more restrictive than the normal requirements for a like-kind exchange, which merely state that the property must be held for your trade or business or as an investment.
So if you are considering making an exchange outside of the fifty states (and Washington D.C.), make certain that your replacement property will, in fact, be considered to be like-kind to the property that you are selling. In order to be absolutely sure, you may even want to request a private letter ruling on your particular case.
U.S. 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 almost like getting an interest free loan from Uncle Sam!
One of the key concepts behind the process of a 1031 exchange is that a property investor must not receive any direct benefit from the money resulting from the sale of his or her 1031 property; any kind of monetary benefit from the transaction is considered to be boot, and as a result it is liable for capital gains taxes. In accordance with this logic, refinancing for the purpose of removing equity from your replacement property delves into a very nebulous area in terms of compliance with Section 1031.
In a case brought against an investor named Garcia, a tax court ruled that any benefit received by a taxpayer resultant from the refinancing of a real estate in advance of selling it in a 1031 tax exchange will be deemed to be boot. This decision represented the establishment of a precedent for dealing with these kinds of situations . Currently, a more common strategy is waiting until after the closing on the replacement property, and to refinance the property at some point later. This tactic, however, brings up the issue of how long one ought to wait before refinancing and taking value from a property.
The old guard among investors would likely advise you that you should wait a considerable period of time after closing (maybe even as long as 2 years after), in order to make absolutely sure that you're complying with the intent of Section 1031. The current trend amongst less conservative contingency of investors, however, is to make the assumption that closing on a replacement property marks a definitive end to the exchange procedure, and that an investor need not worry about the substantiation of an exchange from there onward. For an investor who looks at the exchange process from this perspective, it is not relevant how long one waits before refinancing a 1031 replacement property, and many will elect to do this directly after the closing .
If you're expecting any definitive maxim as to when it is safe to refinance a replacement property, then you are doomed to disappointment, at least in regard to this short article. The schools of thought described above are only the opinions of a few, and are examples of only a few of the viewpoints an investor take. Investors vary a good deal in the manner in which they look at these sorts of legal gray areas, and the best suggestion I am able to impart is simply to consult with a qualified tax adviser or other expert in making your ultimate choice, and to work closely with him so that you can figure out the approach that will work best in the context of your specific case.
If you are a estate investor, you know that dollar that you have working for you is compounding your wealth, and, in contrast, each and every dollar that isn't working for you can be considered a missed chance to further increase your profits. So, when the time comes to make a sale on a piece of property, you have two choices. The 1st way in which you can cash in on a piece of property's appreciated value is to make a outright sale and recognize a gain. Accepting this liability means you'll have to pay capital gains taxes . Whenever you had money over to the U.S. government in the form of taxes, you are losing potential profits.
The second, more lucrative choice is to make a 1031 tax exchange. A great way to keep more of your investment funds working for you is to perform a 1031 tax exchange rather than making an outright sale. A 1031 exchange has a provision of non-recognition, meaning that you do not have to pay the capital gains taxes immediately following your sale; in fact, your taxes are deferred for an indeterminate time span, while your funds are compounded by the extra income produced by investing your tax deferment.
As an example, let's say that you are the owner of several small investment properties, such as duplexes or triplexes, whose values have appreciated over time. At this juncture, your instinct may be to sell these properties and reap the benefits of your investments. A wise investor with an eye to the future might decide to conduct a 1031 exchange and put the money gained from these smaller investment properties towards buying another, larger piece of investment property, which will, itself go on to increase in worth over time and continue to compound your wealth. The best part of all is that the funds at your disposal as a result of deferring capital gains taxes will function to increase your capacity to leverage for further loans, maximizing your future profits.
Section 1031 doesn't apply only to land and buildings, either. You can conduct a 1031 exchange on any sort of real estate you are holding for investment in your trade or business, and some kinds of personal property as well, from cranes or backhoes to an aircraft or collector car. As a matter of fact, 1031 exchanges are especially advantageous for those who have money in collectibles or antiques like classic cars, because of the greater capital gains tax liability on the sale of these items. It is important to note, however, that you cannot exchange things like stock, bonds, or interest in a Real Estate Investment Trust.
Next time you find yourself planning a sale on an appreciated piece of real estate or other investment property, take a moment to consider the potential dividends you could reap were you to make an exchange instead. If you choose to perform a 1031 exchange rather than selling your property up front, you can maximize your profits and come out ahead in the long term.
A 1031 tax exchange is a tactic often used by investors in real estate and other property so that they may defer capital gains tax liability on a property's sale. This is done by transferring rights to a piece of property one would like to sell to a qualified intermediary, who holds on to the proceeds from its sale and uses the money to acquire a replacement that complies with the regulations set out in Section 1031 of US tax code.
While the current interest in the exchange may lead one to believe that Section 1031 is a recent development, this is untrue. In reality, the history of the 1031 stretches all the way back to 1921, although at its conception, it was quite a bit different from the 1031 exchange we have come to know and love. The 1031 Exchange really came into its own in the seventies, which saw many significant modifications in the way that these exchanges were conducted. These changes resulted in a more powerful conception of the 1031 process and created greater interest from real estate investors.
The indefinite capital gains tax deferral Section 1031 grants to the investor might, at first glance, appear to represent a sort of gift given by the government, however it is, in reality, more like an interest-free loan. This is because the investor is expected to “repay” the money gained from the tax deferral by paying capital gains taxes upon the eventual sale of a replacement property. Additionally, this “interest-free loan” is one that may be kept indefinitely; an investor can elect to make any number of 1031 exchanges before finally deciding to make an outright sale, on which capital gains taxes must be paid.
The 1031 exchange represents a mutually advantageous arrangement 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 looking upon the transfer of money in an exchange as representing a continuation of an existing investment rather than as a separate transaction liable for taxation, investors gain the opportunity to move their money into the most profitable possible investments, which, in turn, boosts the country's economy by encouraging the growth of new jobs.
As with anything, the 1031 exchange has skeptics. one criticism that has been leveled against Section 1031 is that the tax-free profit provided to the investor in the exchange process creates an unreasonable advantage over other buyers. Another common issue of concern is that the strictness of the time limits imposed on some aspects of the 1031 procedure could promote an atmosphere of frantic buying, with a resultant increase in asking prices for replacement properties. These complaints, however, are only tenuously linked to reality, and the odds that the 1031 exchange procedure will see noteworthy changes in the coming years are slim. Looking at the big picture, most will concede that Section 1031 is immensely advantageous to all parties involved, as it allows taxpayers increased profits on the sale of their property while also encouraging job growth and consequently promoting the greater good of the country as a whole. There is little doubt that the 1031 exchange is destined to remain a mainstay of the investment business for decades to come.
A key fact regarding the 1031 process is that you CANNOT use your 1031 proceeds to construct property you own already. This is a common stumbling block for inexperienced property investors. In order to qualify for deferment of capital gains taxes, the replacement property must be of LIKE KIND with the property it is replacing. In this case, the property you acquire as a result of the 1031 exchange must comprise real estate with a value at least as high, if not greater than that of the relinquished property. An improvement that is not finished represents a “contract for service,” which constitutes personal estate but not real estate. Because a property acquired in a 1031 exchange must be of like kind and equivalent value with the property sold at the time of closing, it is, at times, difficult to locate a property that fulfills these requirements and meets his or her specifications.
So, is there a way to what you really want out of a exchange? There are two main methods by which you can go about acquiring a build to suit property that fulfills your wants and needs as well as complying with the accounting requirements necessary for a like-kind exchange under section 1031.
The first possibility is to perform what is known as a 'poor man's Build-to-Suit,' in which you request that the seller make particular improvements on a piece of property in order to increase its value prior to closing on the sale. To illustrate: if you relinquished a property worth $100,000, and were looking at a replacement property valued at $10,000, the seller of the property could make $90,000 of improvements to raise the value of the real estate. These completed renovations would constitute real estate. You could then buy the property for $100,000, fulfilling the requirement that the two properties be of equivalent value. Most sellers, however, will not be enthusiastic to construct these renovations so that you can make an exchange. This brings us to the second option.
In the second, more likely scenario a qualified intermediary who is holding the proceeds from the sale of the relinquished property buys the replacement property , taking title to the property in a limited liability company, intermediary-owned company. The intermediary would then use the remainder of the money to make the desired improvements on the property. Upon completion, the intermediary transfers the property to you, which then permits you to complete the exchange .
Back to the ten thousand dollar replacement property: the qualified intermediary would purchase the aforementioned piece of real estate for the asking price and would construct the desired modifications using what remains of the funds, returning the replacement property to you when the property's value suffices to establish likeness with the relinquished property.
Though a build to suit exchange can help you acquire the replacement property that you really want, it is important to consider the span of time required for the improvements that you would like to make on your property. You only have one hundred and eighty in which to complete an exchange, so it is important to be conscious of what can actually be completed in this time span. Be mindful that an improvement represents real estate when it is completed, and so a renovation in the process of construction doesn't add to the property's value. Though you may not be able to construct renovations as extensive as you might want, one hundred and eighty days is sufficient time to accomplish significant improvements, and to bring your replacement property that much closer to the property of your dreams.