Some 1031 Tax Exchange Rules investors must be aware of when completing a 1031 Deferred Exchange

If you are in a circumstance trying to defer 1031 capital gains by means of a 1031 tax exchange whether actively searching for candidate properties or simply in the beginning stages of deciding you want to go ahead with a 1031 tax free exchange, Westwood Net Lease Advisors can facilitate.

What is a 1031 Deferred Exchange?

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You need to look no further than the Internal Revenue Code to find a golden opportunity to sell certain real estate assets without paying 1031 capital gain taxes. Under the provisions of Section 1031 of the IRC, you can invest your profits from the sale in similar but usually more valuable property and possibly defer the capital gains indefinitely.

Please note several important reasons for you to consider when considering a deferred 1031 Exchange who s your caddy movie download living dying online

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When tax deferred exchanges are handled properly, you will be able to shelter 100% of your potential 1031 capital gains. In effect, the government is giving you an interest-free loan. You can trade from a high-maintenance property to a low-maintenance property. Here is a sample of a typical client of ours in a 1031 tax exchange that occurs at least once a week:

Client wants to sell an apartment building with four short-term tenants for a quality commercial building leased out to Walgreen’s on a long term lease. Walgreen’s will maintain the building and grounds and pay all real estate taxes and insurance premiums. Your revenue stream will remain strong, but the headaches of managing your property will fade away.

By using IRS 1031 Exchanges you can diversify your investment strategy by exchanging one property into three properties should you so desire. You can relocate your real estate investment to a more promising part of town or to an area of the country that is experiencing massive growth. By acquiring Triple Net Lease sweat download download before the devil knows you re dead online Properties you are not bound by boundaries since they involve no management or maintenance. If you are going to own a real estate investment, you might as well own a prime location in a growing area.

Let’s run through a good example of how a 1031 tax exchange can save you lots of money with real facts and numbers.

One of the most important things to remember about 1031 tax exchanges is that the money you would have thrown away in capital gains taxes is instead working for you. You can make a larger down payment on your new property. Here is one example of how a 1031 tax exchange can pump up the power of your investment dollar.

You paid $250,000 for a building 5 years ago, and you are now selling it for $400,000. You depreciated $5,063 for each year ($200,000 divided by 39.5 years=$5,063). Your 1031 capital gains tax would be 15% of your $150,000 profit, or $22,500, plus 25% on the $25,315 you already deducted on depreciation for the cumulative 5 years which adds another $6,328 you owe in taxes. A total tax bill of $28,828 is now gazing you in the face. If you still owed $200,000 on your mortgage and the sale cost you $15,000, you would be left with $156,172 to invest in another piece of property.

However, if you had the foresight to take advantage of a 1031 deferred exchange rather than simply selling one property and buying another, you would have an extra $28,828 to put into your new purchase. Based on a 25% down payment, you would increase your buying power by about $116,000!

A few basic rules of a 1031 tax exchange

• The property you sell and the property you buy must be used in a trade or business or for investment purposes.
• The proceeds from the sale of your original property must be handled by a qualified intermediary.
• Any profit from the original sale that is not reinvested in other 1031 tax deferred properties will be taxed.
• The level of debt on your new property must be equal to or higher than your level of debt on your old property.
• You have 45 days after you sell your old property to identify the new property you intend to purchase for your 1031 tax deferred exchange.
• You must purchase your new property within 180 days of the sale of your old property or by the due date for your tax return for the year in which the transfer of the old property takes place, whichever arrives first.
• You may identify up to three 1031 tax deferred properties for your exchange. If you choose to identify more than three properties, you must purchase at least 95 of the combined value of all the property you list as replacements for your old property.
• You can exchange any real property for any other “like-kind” property within the United States. Examples of property that qualifies for a deferred 1031 exchange include apartments, commercial property, condominiums, duplexes, raw land and rental homes if they are being used solely as an investment.

Property that does not qualify for tax deferred exchanges include your primary residence, stocks and bonds, notes, partnership interests, developed lots held primarily for sale and property that is to be resold immediately after its initial purchase or completion of improvements.

The 45 day rule on your 1031 tax exchange

The Internal Revenue Service gives you 45 days after the sale of your old property to complete the purchase of the new property or to identify the new property or properties you intend to purchase as part of your 1031 tax free exchange. You must provide your intermediary with this list within 45 days, even if the 45th day is on a Sunday or holiday. Your list must be in writing and must note the property’s address and legal description. It can include more than 3 properties if their combined value is less than twice the value of the property you sold.

The 180 day rule for your 1031 tax exchange

You must complete your 1031 deferred exchange within 180 days of selling your old property by purchasing one or more of the properties on the list you submitted to your intermediary within 45 days of the sale of your old property. You cannot buy property that was not on your list.

There are many other rules and nuances related to 1031 tax changes which can’t be listed in one article. Please be to sure visit our 1031 exchange section where we are starting to collect a large library of informative 1031 related articles.

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