If it is a gain, The Federal Government
will tax it!
1031 exchanges provide investors
with one of the best tax strategies for preserving
the value of an investment portfolio. By using an
exchange, the investor can defer recognition of capital
gains taxes .
Whether the investor's property
is owned free and clear or encumbered, the benefits
of an exchange are significant! Tax dollars saved
can be utilized to purchase additional investment
BENEFITS OF EXCHANGING
ALLOW for relocation
or create joint ownership
of estate planning
Generally, investors complete tax deferred exchange's
to defer the capital gains tax on the disposition
of their investment properties. However, there are
many additional underlying reasons in investor might
want to exchange one property for another. The motives
often fall along standard risk-reward or cash flow-appreciation
scales. These are some of the typical non-tax motives
Exchange from a fully
depreciated property to a higher value property that
can be depreciated.
Exchange from property
which cannot be refinanced, such as vacant land, to
improved property, which will support a new loan thereby
giving the client the ability to obtain cash after
the acquisition of the replacement property.
Exchange from non-income
producing raw land to improved property to create
a cash flow from the rental income.
Exchange from a property
with maximized were minimal cash flow, such as an
apartment building, to a higher cash flow property,
such as a retail shopping center, to generate a larger
Exchange from a stagnant
or slowly appreciating property to a property in an
area with faster appreciation.
Exchange for a property
or properties that may be easier to sell in the coming
Exchange to meet the
client's location requirements, for example, the client
moves to in other state and wants to have their investment
provide advise about specific tax consequences.
Investors should seek the counsel of their accountant
Dos and Don'ts
Do an advanced
planning for the exchange. Talk to your accountants,
attorney, broker, lender and qualified intermediary.
miss your identification and exchange deadlines.
Failure to identify within the 45 day identification
period or failure to acquire replacement property
within the 180 date exchange period will disqualify
the entire exchange. Reputable qualified intermediaries
will not act on backdated or late identifications.
Do keep in mind
these three basic rules to qualify for complete tax
- Use all proceeds from the relinquished property
for purchasing the replacement property.
- Make sure that debt on the replacement property
is equal to or greater than the debt on the relinquished
property. (Exception: a reduction in debt can be
offset with additional cash; however, a reduction
in equity cannot be offset by increasing debt.)
- Receive only :like-kind" replacement property.
Do not plan to
sell and invest the proceeds in property you already
own. Funds applied tour property already owned purchase
"goods and services," not "like-kind"
Do attempt to
sell before you purchase. Occasionally exchangers
find the ideal replacement property before a buyer
is found for the relinquished property. If this situation
occurs, a " reverse" exchange (buying before
selling) may be necessary. Exchangers should be aware
that "reverse" exchanges are considered
a more aggressive exchange variation because no clear
IRS guidelines exist.
Do not dissolve
partnerships or change the manner of holding title
during the exchange. A change in the exchangers legal
relationship with the property may jeopardize the