1031 Tax Exchange Information

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.

After determining all of the tax liability from selling your property, you can decide to sell it outright or to sell it utilizing the tax advantages of a 1031 Exchange. Knowing all of the tax liability helps you to make a clear decision. Normally, the 1031 Exchange will result in a far less tax bill than if you sold the property outright.

After your potential taxes are determined, you should call a Qualified Intermediary, and inform them (the QI) of your wish to complete a 1031 Exchange. Typically, you also need a written Purchase Agreement, signed by both you as the seller, and your purchaser, stipulating your desire to sell your relinquished property as part of a 1031.

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 have all of these things done, you can start the processes of deferring taxes and keeping your money working for you.

U.S. 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 like an interest free loan from Uncle Sam.

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.

In a 1031 exchange, all the proceeds from the sale are supposed to be passed on 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 that money for other purposes. If you decide to refinance your property shortly before the 1031 exchange and use that equity for your desired luxury item, you may find yourself violating IRS rules. (IRS vs. Garcia)

In IRS vs. Garcia, it was decided that Garcia when refinancing his property in anticipation of the 1031 exchange, should have paid taxes on the money not used on the new property. 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.

The legality of the nanosecond exchange is debatable. There are risks because there is no definitive IRS rule regarding how long you are to keep the equity in the replacement property. A more prudent approach would be 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 finance.

United States investors can save a lot of money by utilizing 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 U.S. Government.

Many investors make the mistake of selling their business or investment property and end up having to pay thousands of dollars to the government in capital gains taxes. What they may not know that there are tax laws that provide them the ability to defer all of the capital gains taxes on the sale of property which has been held as a trade or business - thereby retaining their gain.

This law defers (and can even eliminate the capital gains taxes) you would typically need to pay when selling business or investment property. The money that is made on the sale of your business or investment property, must also be used only to purchase another "like-kind".

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).

A benefit to many investors, the 1031 exchange law has the potential to save you a boat-load of money, and is worth the time an effort to put to use. To start reaping these financial rewards, you much follow some procedures first.

First, it?s important for you to choose a well respected and professional qualified intermediary also known as a "Q.I.". 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.

In order to qualify for this exchange you must abide by the following rules:

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!

U.S. investors can save big money by utilizing 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.

The general rule when it comes to 1031 exchanges is that all proceeds from the sale must be reinvested in the replacement property, but as a property investor you likely have experience with the other costs associated with closing on a sale, including your real estate agent’s commission, the recording of the deed, and know that some of your proceeds must be put towards these sorts of transactional expenses.  

But what about expenses that don’t necessarily fit into your typical closing statement, a classic example of which being rent proration and security deposits on the sale of a relinquished property?

The correct way to go about transferring future rent and security deposits to the new owner of the property is to cut a check from your own expense account.  If you debit these kinds of expenses to your closings statement, you are effectively freeing money in your account for your own use and taking what as known as boot from the proceeds of the transaction.  Any cash benefit or boot you receive from the sale is not considered part of a like-kind exchange, and investors who have attempted this have found themselves facing IRS litigation.

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 fact of the matter is that the IRS examines these sorts of transactions, and will not look kindly on your receiving non-like-kind proceeds or cash benefits from 1031 transactions.  With this in mind, you should be wary and take care regarding what expenses end up on your closing statement.

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 similar to an interest free loan from Uncle Sam!

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!

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.  

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.

In light of the enormous capital gains tax hit that accompanies the sale of classic cars and other such collectibles, those who have put money in these kinds of investments have a unique opportunity to profit from making an exchange instead of selling up front, and will benefit even more from the tax deferral than those with real estate investments.

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 a lot of 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!

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.

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.

United States investors can save their 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!