1031 Tax Deferred Exchange Information

By
Real Estate Agent with Dunes Marketing Group

Interesting Stuff!

What is a 1031 Tax-Deferred Exchange? In a nutshell, it's a way for owners of investment real estate to sell their property and buy other like kind property without paying the Capital Gains tax. These transactions are known as deferred exchanges, or 1031 exchanges, and allow the investor to continue their investment in another property without losing investment equity to taxes.


CONSIDER THE FOLLOWING:


● You may have some non-income producing real estate investments, such as raw land, which are not giving you any cash flow. You could exchange this for property that is income producing, such as a duplex or a rental home. Not only could you start realizing a cash flow, but you can also get income tax deductions such as depreciation, which you did not have with your raw land.


● Often people find that they have been holding properties long after their appreciation has topped out. You can start rebuilding your equity by disposing of those properties and acquiring new ones.


● The area your rental properties are located in has become economically depressed or is deteriorating. Why not trade those properties for others in a better location or neighborhood?


● If you have rental properties with problem tenants or they are in need of expensive maintenance or repairs, sell the properties and acquire other rentals with fewer problems. This may also give you an increase in appreciation.


● Many people think about selling and reinvesting into more income or investment property. One would be foolish not to do a tax-deferred exchange! If you sell and reinvest, you will pay income taxes on the realized gain. However, if you call it an exchange, you will pay no taxes. This means that more money is available as leverage for acquiring your next properties. Look at it as a free loan from the government!


● With proper estate planning you can keep exchanging properties throughout your lifetime. Neither you nor your heirs will ever pay income taxes on the gains.


● By doing a tax-deferred exchange, you can conserve your equity by not having to pay taxes on your net profits.

Step One: Sale of the Relinquished PropertyBefore the sale of the first property the Exchanger must complete the proper 1031 Exchange documentation. At closing, the proceeds are delivered directly to a Qualified Intermediary.

Step Two: Identification of the Replacement PropertyThe Exchanger must identify the property to be purchased (generally called the "Replacement Property") within 45 days following the sale of the Relinquished Property. The taxpayer may generally identify three properties as a potential Replacement Property, or more under alternate rules of identification.

Step Three: Purchase of the Replacement PropertyThe Exchanger must obtain the Replacement Property within 180 days following the sale of the Relinquished Property, which must be identified property, subject to the rules listed above. At closing, the proceeds are paid directly by the Qualified Intermediary, and the Exchanger receives the Deed to the Replacement Property.

Replacement Properties must be identified within 45 days of the sale of the Relinquished Property and must be purchased within 180 days of the sale of the Relinquished Property.

If you are considering selling an investment property, I can help you explore your real estate investment options here on Hilton Head Island or anywhere in the country. Contact me today for more information.

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Anonymous
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Scott

The best way to defer capital gains is to use 1031 exchanges, but as this article describes, "It's a tedious process and not many people know how to work the deal."

Defer'Em is one of the best resources for being able to understand the confusion - boot, taxable gain, deferred gain, and new cost basis - and it has a tool you can use to generate IRS Form 8824 for reporting Like-Kind Exchanges on your tax return. Defer'Em is a guided approach that helps you optimize deferrals using all deductible closing costs and exchange fees, and it also generates an Exchange Report which will help you visually understand all the elements of your 1031 exchange. 

Another tool that is very useful is Depreciate'Em, which accelerates depreciation by segmenting deductions, resulting in substantial tax savings. I came across both of these tools when I was reading a Forbes.com article about how landlords often miss major savings.

It's really nice to find resources like these that can help you learn and take advantage of tax-saving opportunities. I had a lot of difficulty understanding depreciation and 1031 exchanges, and even more difficulty reporting them, but tools like these make it very simple for anyone to do

July 04, 2007 03:53 PM #1
Rainmaker
130,709
Bill Exeter
Exeter 1031 Exchange Services, LLC - San Diego, CA
1031 Tax-Deferred Exchange Expert

Hi John,

Great information.  Good reasons and strategies as to when a 1031 exchange would most likely be beneficial for a real estate investors. 

December 21, 2007 02:47 PM #2
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John Robinson
Thanks for the comments...
December 21, 2007 03:02 PM #3
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John Robinson

REALTOR - Hilton Head Island, SC
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