Help With 1031 Exchanges
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Exchanging property through a 1031 exchange can save you capital gains taxes. If you own investment property, you can sell it and invest the proceeds in a new one without paying taxes! But there are strict IRS rules to follow, so using a qualified intermediary is a must.
What is a 1031 Exchange?
Also called a Starker Exchange, this tax deferment is like getting an interest free loan on the tax dollars that you would have ordinarily used to pay from the cash sale of your investment property. You can retain more equity in the property this way, and it helps you trade up to more valuable real estate each time you do a 1031 exchange. You can defer the capital gains taxes if you use all of the exchange funds to purchase like kind investment property. Click Here for a Leading 1031 Exchange Resource!
When you sell real estate that is held for investment purposes, you are eligible to do this type of exchange. Other uses that qualify are real estate for income production and business use. You can't defer taxes on your own personal home, though, the deferment is reserved for investment properties and not property used for your own personal use.
You must also exchange like property with like property. For real estate means real property must be exchanged with other real property, but not necessarily land for land or apartments for apartments. You can exchange one property for many, or purchase one home from the sale of several with 1031 exchanges. Any proceeds leftover that you don't use for the new purchase get taxed as a cash sale. Before you sell your property, locate an intermediary, also known as an accommodator. This company or person is a neutral party that holds the proceeds from your sale, then uses the funds to purchase the new property and transfers the title to you. Because the IRS code is so complex, it really pays to hire somebody who is qualified and experienced with 1031 exchanges.
Before you put your property under contract, identify a replacement property. You have 45 days from closing on the sold real estate to identify up to three replacements. You have to send the list to your intermediary in writing. Closing dates for the new property or properties must take place within 180 days of the closing on the property you sold. That gives you up to six months to pay for your new property without having to pay taxes on the profit!
Be sure to have the wording on your contracts specify your intent to do a 1031 exchange. That is where an intermediary can be helpful, since they sometimes offer additional services. Or, your real estate agent can help you with this. Be sure to send a copy of the sales contracts to your intermediary, along with any other information they might need.
The Importance of Keeping in Touch with Intermediaries
Intermediaries take care of most of the paperwork with 1031 exchanges, so they really do make your life easier. However, since you do have six months to complete the transactions, be sure to keep in touch with your intermediary. Let them know where your deals stand at all times so they can process your transactions properly. After all, they are helping you to save thousands of dollars on your taxes!
Benefits of Hiring a 1031 Exchange Expert
Finding a 1031 exchange expert on the Web is so easy. Just look for a member of the Federation of Exchange Accomodators, and you know you have found a qualified intermediary. This expert entity or person will help you get through your exchange transactions with ease.
A 1031 exchange expert will know the IRS code inside out, and can help you make the right decisions regarding your real estate investments. He or she can also let you know about any properties available that would fall under the requirements for this exchange, in case you haven't yet found a replacement property. Since most investors do not fully understand the rules and regulations, having an expert's help is important.
You don't want to make a mistake when it comes to such large sums of money. A 1031 exchange is such a great way to save tax money and is almost like getting an interest free loan on the money to buy a new property with. So hiring a 1031 exchange expert who is knowledgeable on the subject can not only save you taxes, but time and trouble as well.
Avoid costly mistakes by consulting with the experts. You probably already have enough on your plate with your real estate investments and memorizing and understanding the IRS tax code is probably not high on your to-do list. Let an expert guide you through the process and make your life that much easier.
Types of 1031 Exchange Options
When you consider your 1031 exchange options, you might not realize that there are actually four other types of exchanges besides the delayed (Starker) exchange. You automatically think of the delayed exchange because it is so common. However, there are also simultaneous exchanges, construction exchanges, reverse and multi-property exchanges.
The Starker 1031 exchange options allow you to exchange like kind property within a 45-day identification period. The replacement property must be closed by the 180th day, and that includes the 45 day identification period. Once you identify the replacement property, your intermediary will purchase it and trade with you.
Other 1031 exchange options include the simultaneous exchange, where both properties must close on the same day, and the construction, or improvement, exchange. This is where the intermediary keeps ownership of the replacement property and improves it. Once the renovations are finished, the intermediary exchanges the property with you.
A final option is the reverse exchange. In a perfect world, you could sell your property first before replacing it. However, sometimes, you must acquire the replacement property before you close on the relinquished property. You can do this through a reverse exchange, which is allowed under the IRS code if done properly. That is why you should always have a qualified intermediary handle the exchanges for you.
Timing and 1031 Exchange Properties
Locating 1031 exchange properties is a necessity from the start of your transaction. In order to take advantage of deferring capital gains taxes, you have to plan an exchange from the beginning, before you sell your property. Otherwise, you might not be eligible to do the exchange.
Since you have only 180 days to close on your property, you need to act quickly. That is why finding 1031 exchange properties is so important. Your real estate agent, and sometimes your 1031 intermediary, can help you identify properties that are eligible for exchange, and help you save money on taxes.
Often, you cannot close the sale of your relinquished property, for whatever reason, before you close on your new property. Instead you buy the new property before selling the old one. When that happens, it is called a reverse exchange. This can provide you with more flexibility in timing when you are trying to complete the sale and purchase of 1031 exchange properties.
Intermediaries can help you speed up the paperwork and complete the extra documentation necessary to exchange properties in reverse. They are experts at the IRS code and know how to work within its parameters to ensure that you get the best deal possible. Let them help you locate your exchange properties and close on them within your 180 day time frame.
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