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Real Estate Investments
Real Estate investing has been a growing trend in
America and Nashville has become a prime city for this
type of investment. Everything from rental
property, property rehab, land development and more.
Each week we will add a new article on real estate
investing. Feel free to contact us for more
information or if you would like a free consultation on
real estate investing.
Tax Savvy
Investing - 1031 Tax-Deferred Exchanges
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This article is meant to be an introduction on
the topic of performing tax-deferred exchanges.
There are a number of legal hoops that the IRS
makes you jump through to complete a
tax-deferred exchange, but they are actually not
that complicated once you study up on them a
bit.
A tax deferred exchange allows us to sell a
piece of investment (i.e. rental), trade or
business property, buy a new property with the
gain or profit from the sale, and not owe taxes
on the sale immediately. If you eventually sell
the new piece of property, you would owe taxes
at that time. Generally, all gains and losses on
sales of real estate are taxable, but an
exception lies where the property sold is traded
or exchanged for "like-kind" property. The new
property is seen as a continuation of the
original investment, so taxes are not due at the
time of the sale.
Many people view tax deferred exchanges as being
for huge corporations, or only for professional
investors. I believe that everyone should take
advantage of these where they can. Strategy --
purchase a rental home below market value, rent
it for a year, sell it, and buy two rental
properties with your gain. Note that if you do
this too many times, the IRS may take the view
that you are not a long term investor, and
disallow such exchanges. When you get ready to
do a tax-deferred exchange, you will need the
services of a qualified CPA or Attorney. This is
a basic introduction only, and you should always
get professional advice from someone who has all
the details on your deal, since so much
liability is at stake. In my course I list the
company that I use for these real estate
exchanges. They are a national company and can
help you out wherever you are in the country. I
have used them for several deferred exchanges,
and they have been an excellent resource and
extremely competent.
Let's look at how one of these deals would work.
Assume that you own a rental property that has
gone up in value. You'd like to sell this
property and then reinvest the proceeds into
some other rental real estate. You can avoid the
tax bill if you can find suitable property to
exchange for. The difficulty of the tax deferred
exchange is that the property you are going to
purchase must be identified within a certain
amount of time, and it must be closed within a
certain amount of time after it is identified.
Unfortunately, no extensions are possible.
Identifying Property
You must identify property in a written document
signed by you, and delivered to the party
assisting you with the exchange (cannot be
related to you!) on or before 45 days from the
date you sold the original rental property.
There is a growing body of support for
identification of properties, and closing of new
properties before the original property is sold.
This is somewhat controversial and outside the
scope of this discussion.
Technical Note: You can identify more than one
property as the replacement property. However,
the maximum number of replacement properties
that you may identify without regard to fair
market value is three properties. You may
identify any number of properties provided that
the total value of these properties is not more
than 200% of the value of the original property
you are selling. Note that you don't have to
close on all the properties you identify. You
can name several if you're not sure what will
close, or not close, but you have to observe the
rules in this technical note in terms of the
value of properties you identify. If at the end
of the identification period you have identified
more properties than you are allowed, you are
generally treated as if no property was
identified. This means that you pay taxes!
Time Limits For Completing the
Exchange
If you have correctly complied with the
identification phase of the exchange, you have
up to 180 days to complete an exchange, but the
period may be shorter. Specifically, property
will not be treated as like kind property if it
is received more than 180 days after the date
you transferred the property you are
relinquishing, or after the due date of your
return (including extensions) for the year in
which you made the transfer.
For multiple property transfers, the 45 day
identification period and the 180 day exchange
period are determined by the earliest date a
property is transferred.
Avoid Boot!
Boot is defined as any money or any type of
property of unlike kind (example, a car received
as part of down-payment). You will be taxed on
this boot regardless of whether or not you carry
out the exchange correctly. You will want your
exchange company, or attorney to examine your
transaction closely to make sure you don't
receive anything that could count as boot.
Special rules apply for exchanging property with
assumed mortgages.
Summary
The tax-deferred exchange is a great way to
maximize your wealth. By keeping your
investments growing without immediately paying
taxes, you can do wonders for your net-worth.
You will need to search out a good intermediary.
I am happy to provide the name of mine for our
members. This may seem like a dry subject, but
it is important to understand when you begin to
accumulate some rental properties.
Remember that this article is to provide basic
information only. If you are planning on doing a
tax deferred exchange, you really need to speak
with a professional that handles these
transactions on a regular basis. Information
here is subject to change by IRS regulations or
statute, so be sure to use current information
provided by your accountant or other
professional when planning a strategy involving
tax deferred exchanges. |
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