| In spite of decreasing real estate values across the | | | | days? |
| nation, real estate investors continue to come up | | | | There are no extensions allowable. So, it is |
| with innovative ways to make their investment turn | | | | important that you start researching your acquisition |
| out profitably. | | | | as soon as you anticipate your sale is close at hand, |
| A powerful method for building real estate holdings | | | | and try to time the closings accordingly, since 45 |
| is the use of 1031 Exchanges, which lets investors | | | | days goes by very quickly. |
| defer capital-gains assessment on investment | | | | Is there a limit to number of properties that are |
| property by reinvesting sale proceeds into the | | | | identified in the 45-day period? |
| purchase of new property within a set time period. | | | | You may identify more than one property as a |
| Though 1031 Exchanges have grown in popularity as | | | | potential replacement property, but be aware of the |
| the number of active real estate investors has | | | | rules. You can identify up to three properties |
| grown, 1031 misperceptions continue. Here are | | | | without consideration to fair market value or you |
| some basic 1031 Exchange questions. | | | | may identify any number of properties provided that |
| What is a 1031 Exchange? | | | | the total value does not exceed 200% of the value |
| A 1031 Exchange is a tax avoidance tool that allows | | | | of the original property sold. You don’t have to |
| you to defer capital gains tax to a later date when | | | | close on all properties – and you may prefer to |
| selling investment real estate, permitting you to | | | | identify several just in case the sale of any one falls |
| reinvest money from the sale of one property to | | | | through. But you must be in compliance with these |
| another. You are, essentially, ‘exchanging” | | | | rules … or you pay taxes! |
| one property for another investment property of | | | | Is there a limit to the number of properties I can |
| equal or greater value. When the replacement | | | | “exchange?” |
| property is ultimately sold (not as part of another | | | | You may “exchange” a single property for |
| exchange), the original deferred gain, plus any | | | | multiple properties. Or, you can buy a single property |
| additional gain realized since the purchase of the | | | | from the proceeds of several, as long as all the |
| replacement property, is subject to tax. | | | | related timeline, identification and value rules are met. |
| Why do a 1031 Exchange? | | | | However: proceeds not used to purchase new |
| There are three basic advantages to investors in | | | | investment property are taxed as a cash sale. So, if |
| making an exchange: | | | | you “exchange” only part of your original |
| 1. To grow your portfolio: In deferring your tax | | | | sale profits, you will be taxed on the rest. |
| burden, you are getting an interest-free loan on the | | | | What are “qualifying properties”? |
| tax dollars you might have owed on your property | | | | * Exchanged property must be of “like-kind,” |
| sale. Your immediate tax savings is, thereby, | | | | which broadly speaking means property of greater or |
| employed instead as investment capital in a | | | | equal value. You can exchange a duplex for a |
| replacement property. | | | | five-story building or even a vacant lot, as long as |
| 2. To convert your “gain” into immediate | | | | you meet all other 1031 requirements, including the |
| equity and tax-free cash: The 1031 Exchange | | | | holding time required before re-selling real estate. |
| provides more equity, which lets you to move up | | | | * Property exchanged must be held for productive |
| into properties of increasingly higher appraisal every | | | | use in trade, business or investing, which may include |
| time you perform a 1031. Also, there’s an | | | | a residential rental property, strip mall, warehouse or |
| another benefit: Once your old property is sold and | | | | land held for speculation. Private residences or land |
| the succeeding property is purchased, you can turn | | | | in a developer’s inventory to sell later are not |
| around and refinance the new property, taking cash | | | | permissible. It is possible for property purchased in |
| out as a loan for anything you want, and the money | | | | an exchange to be converted at a later date to a |
| tax-exempt as income. | | | | primary residence or a vacant lot may ultimately be |
| 3. To utilize as an estate planning tool: Families that | | | | sold to a developer, but it is tricky. Therefore, |
| intend to pass along real estate holdings typically | | | | it’s advisable to consult with a 1031 expert and |
| deed them into a family partnership or LLC (limited | | | | wait at least two full tax years before to do this. |
| liability company). Management income can continue | | | | Trading Up with a 1031 Exchange |
| to be drawn from the properties by the parent or | | | | It should be apparent, the tax-deferred exchange is |
| principle, but heirs will inherit the property without | | | | a excellent way to build up your net-worth and |
| taxation .and “can continue to 1031 Exchange the | | | | maximize your investment dollars. There are many |
| property and grow a real estate portfolio,” | | | | more aspects to the 1031 exchange instrument that |
| according to attorney David P. Greenberger. | | | | are not discussed in this article that advanced |
| How do I get started? | | | | property investors regularly utilize, such as using them |
| The opening move is to identify real estate to | | | | in concurrence with “triple net leases.” |
| purchase, and contract to sell your property. | | | | However, the regulations regarding 1031 exchanges |
| Although you can sell your property to anyone you | | | | are complex, they vary from state to state, and are |
| want for an exchange, you must identify in a written | | | | subject to change by the IRS. It’s best for |
| document signed by you and executed with a | | | | property investors of all skill levels to consult with a |
| qualified exchange agent, the property you plan to | | | | professional trained in these transactions on a regular |
| buy within 45 days of giving up your original | | | | basis, as well as with your accountant, before |
| property. The exchange, or final sale of the | | | | engaging in a 1031 exchange. Once done, you will be |
| property, must be completed within 180 days after | | | | able to trade-up on a tax-free basis and accumulate |
| the transfer of your property. Sale proceeds must | | | | a significant real estate portfolio applying the tax |
| be escrowed in an account with a qualified | | | | code to your best advantage. |
| intermediary, until your “exchange” is | | | | * Excerpted from “Real Estate Flipping: Growing |
| complete. | | | | Rich Buying and Selling Property,” by Mark B. |
| What if you can’t locate a property within 45 | | | | Weiss, C.C.I.M., published by Adams Media. |
