Mr. Bill Realty
A 1031 exchange can defer the capital gain taxes that are due when you sell property that has increased in value or been depreciated for tax purposes. These federal and state capital gain taxes can be costly.
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Internal Revenue Code Section 1031 can benefit you in several other ways. By deferring taxes, you have increased flexibility, leverage and buying power. Exchanges also allow you to change, diversify or consolidate your investments.
6 Things to know....
The IRS Rules for Exchanges...
You will need to follow six primary rules for your exchange to meet stringent IRS regulations:
1. Real Property Use. Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.
2. 45 Day Identification Period. You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.
3. 180 Day Exchange Period. From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45-day list. Again, there are no exceptions to this deadline.
4. Qualified Intermediary (QI). The IRS mandates that you use a QI to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it.
5. Proper title holding. You must purchase and take title to your new property exactly as you held title to your old property.
6 Reinvestment Requirement. To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all of the cash proceeds from your sale.
What is a Reverse Exchange??
NOW may be a perfect time to do a reverse exchange...
When the real estate market is a buyer's market, it may be a great time to buy but a lousy time to sell. One of the challenges in a buyer's market is also trying to do a 1031 exchange -- because you have to both buy and sell to accomplish a like-kind exchange -- otherwise you have to pay the capital gains tax. So the very nature of a buyer's market tends to cancel out the positive effects of an exchange -- but not so fast.... There's a type of exchange called a reverse exchange that can be very useful in a buyer's market.
In a reverse exchange, you get to do the exchange backwards: you buy your New Property first -- before you sell your Old property (as opposed to a regular straight or forward exchange where you sell first, and then buy).
With a reverse exchange, you can buy the property you've dreamed about while it's a buyer's market, and sell your old property LATER -- when the price is improved. If done properly, the reverse 1031 exchange will take care of all the capital gains tax issues for you.
But setting up and structuring a reverse 1031 exchange is far more complicated than a regular straight or forward 1031 exchange. It's important that you consult with a good QI to set up the reverse exchange process BEFORE you start scooping up all the great deals to be had in a buyer's market.
Choose a QI that knows all the legal, accounting, and the real estate aspects of the marketplace.
The regulations, court cases, and IRS rulings that apply to your exchange are ever-changing. It is important to choose a QI that understands these laws, and carefully monitors new legal developments.
Please call me if you are considering a 1031 Exchange. I will sell and or help you find your next investment property.
Mr. Bill