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1031 Property Exchange Page
1031 Property Exchanges
You can use a 1031 to defer tax gains that you would usually have to pay as a result of selling a property. This means that you can continually defer your tax-basis until death, in which case, you (obviously) or your kin will not have to pay taxes (ever). The idea is to continue to carry over the basis (your profits) and leverage your non-taxed money to help you make more money.
There are a few details to be aware of when considering a 1031 Property Exchange. First and foremost, you must have held the property for at least a year. Secondly, you have to know your timeframe for selling the property that would have the gain. This is called the Relinquished Property. Prior to selling and closing on this Relinquished Property, you have to arrange for the equity, or sale proceeds to go into a 3rd Party account. This 3rd Party is called a "Qualified Intermediary". The Qualified Intermediary CANNOT be your closing attorney, but can be another real estate attorney or title company.
Once you close on the Relinquished Property, you have a 45 day window to come up with a list of potential properties that you will buy to fulfill the 1031. You have 180 days from the sale of the Relinquished Property to close on a Replacement Property, and that property had to be in the list that was specified in the 45 day window.
The Replacement Property must be of equal to or greater value than the Relinquished Property. You can do a one-to-many, or a many-to-one property exchange as well. You just have to make sure the sum of the Replacement Properties is greater than or equal to the sum of the Relinquished Properties. As you can imagine, coordinating several closings is more difficult than coordinating two closings, but the rewards are certainly worth it.
Many people are hesitant to re-invest all the proceeds from their sale into another property. If you would like to spend some of the proceeds, there are a couple of options.
You can cash out a portion of your profit from sale. This is called a "boot", and you pay tax on this portion. The remaining portion that you want to keep invested, would carry over as the tax basis into the Replacement Property. For example, you may have purchased an investment property for $100,000 5 years ago. You now owe $90,000 because you payed down $10,000 of the principle. The house is now worth $200,000, and you find a buyer that is willing to pay it's worth. You start the 1031 process, and arrange for the $110,000 equity to go into the account with the Qualified Intermediary. Keep in mind, that $100,000 is considered the gain (difference between your purchase price and your sales price). Let's say you want to cash out $20,000. You would cash out $10,000 tax-free, because you paid this principle over the 5 years. An additional $10,000 would be your "boot", which you would have to pay taxes on. The remaining $90,000 would not be taxed, and would carry-over into the Replacement Property.
You can invest the full amount of profit into another property, and do a cash-out equity refinance loan. In this case, you would not be paying any taxes, but would still have full access to your equity.
 When you Absolutely, Positively Have To Sell Quickly - CALL US TODAY!
To learn more about GrovetownInvestors.com, please contact us at 702-880-3260 or email us.
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