How Much Do I Need to Reinvest With a 1031?

When you begin hunting down replacement properties for your 45 day list, it is important to keep in mind how much you need to reinvest while carrying out a tax deferred exchange. The IRS has a two-part requirement laid out for reinvestment with a 1031. The first one is that in order to defer all taxes you must purchase at least as much as your “net sale”, the contract price minus closing costs or the total left before any mortgage is paid off. The second one is that you must use all the “net proceeds” in your next purchase. This means that if there was a mortgage, subtract the mortgage that was paid off and the difference is your net proceed.

If you choose to take cash out or purchase less than what you sold, the unused proceeds will become taxable to the IRS. The proceeds that were reinvested in your exchange will remain sheltered from capital gains tax. You have an immense amount of freedom when it comes to allocation of your proceeds. Just because you sold a single-family home, doesn’t mean that you need to reinvest in another single-family home. A 1031 is also not necessarily a one to one process, it is the valuations that are the key. If you want to sell a single property and reinvest in multiple properties, you have the power to do so. Just remember that if you wish to defer all capital gains tax you will need to make sure that your reinvestment uses all of your proceeds.

 

Relocating Your Real Estate Investing to a Second Tier City

Big gateway cities like New York and Miami are exciting and alluring. But they are also home to expensive and oversaturated markets full of real estate investors from all around the world. Rather than struggle as a little fish in a big pond why not relocate to a smaller secondary city? Secondary markets like Raleigh and Tampa Bay are some of the fastest growing areas in America. With strong job growth and an influx of driven young professionals, these markets are hungry for housing.

A deliberate strategy of relocation of investment portfolios from gateway to second tier cities can be incredibly advantageous. Traditionally, gateway cities and larger urban areas are appreciation rich but cash flow poor areas for investment real estate. When appreciation begins to slow in primary markets it is a good time to seek cash flow in smaller secondary cities. Second tier cities often come with numerous tax advantages of their own and with much less investor competition. The 1031 is the key. Carrying out a like kind exchange from a primary city to a secondary city will give you the power to maximize your real estate investing without worrying about capital gains tax.

Timing is Everything With a 1031 Exchange

When it comes to a 1031 the IRS has a specific and rigid timeline laid out for your exchange. From the day that you close the sale of your investment property, it is important to know that there are two periods for you to honor — the identification period and the exchange period. From the day you close the sale of your old property you have 45 calendar days to produce a list of potential replacement properties. Forty-five calendar days is all you have — weekends and holidays count. During that period of time, you must either identify potential replacement properties or take the title of a new property and finish the process. At the very least you need a clear and easy to understand list that shows the properties you are considering purchasing. It’s important to remember that on day 46 your 45 day list cannot be changed. You are stuck with what is on that list for the remainder of the exchange period.

Alongside the 45 day period is the total exchange period of 180 days. From the day that you close the sale of your property, you have 180 days to complete the process. The replacement property that you purchase has to be on or more of the properties that are on your 45 day list. The 180 day exchange calendar does have one little caveat that you need to pay attention to; it’s actually not always 180 days. The statute reads that “You have 180 days or until the date of your next required tax filing.” If you find your tax filing date rapidly approaching, filling for an extension with IRS will get you back on track. The 45 day list can be daunting and along with it there are some additional identification requirements that can complicate it, so make sure you are working with a good QI.

How to Swap a House for an Apartment Complex

A 1031 link-kind exchange is a powerful tool. The process allows you to defer capital gains taxes on investment real-estate while reinvesting your money into new real-estate. But just because you’re selling a rental house doesn’t mean that you need to exchange it for a rental house.

“Like-kind” refers more to its use than its type. Any type of investment real-estate can be exchanged for any other kind of real-estate used for investment. Real-estate located in the United States can only be exchanged for real-estate in the United States and a select few U.S. territories. Real-estate outside the United States can be exchanged for other investment real-estate outside of the U.S.

If you meet those requirements you have an immense amount of freedom when it comes to choosing a replacement property. Your like-kind property can be located in any state or city whether you currently reside there or not. If you are getting bored managing a vacation rental you could even make the switch from residential to commercial and choose a business warehouse as a replacement property. With a 1031 and some creativity you have an immense amount of power to shape your portfolio for your benefit.

Choosing the Right Qualified Intermediary For a 1031 Exchange

If you are planning on going through with a 1031 exchange you are going to need a qualified intermediary to help carry out your like-kind exchange. But what makes a qualified intermediary qualified?

The law is only specific in that it must be an unrelated third party. Someone that you have no ties to. This disqualifies anyone that you have a familial or business relationship with. Your realtor, hairdresser, and accountant cannot be your 1031 exchange accommodator. But just because someone is not disqualified from being your intermediary does not mean that they necessarily qualify. This is why it is important to vet intermediaries that you might be looking to hire. You should ensure that they have the proper experience and demonstrable results to show.

It is also vital that you find a qualified intermediary before you begin the exchange process. If you close the sale of your property without an intermediary in place, three things will prevent you from doing an exchange. First, the QI was not involved per the IRS code. Second, the exchange was not documented properly on the closing documents and statements. Third, you received the money. The IRS will not allow you to have control of your money when you are doing a 1031 exchange. Whether you have the actual money or whether the money is sitting in your attorney’s escrow account or your title company’s account, waiting for your direction, it isn’t allowed.

Experiences, references, and results are everything, investigate thoroughly to ensure that you get the best possible service from your QI.

Dreaming Big with Your Real-Estate Investing

It is easy to feel trapped if you have been doing something one way for a long time. Real-estate investing is no different. The prospect of moving to a new city or investing in a different kind of real-estate might seem beyond your reach. But if you utilize the proper tools your real-estate investing is limited only by your imagination.

One such tool is a 1031 exchange. A 1031 exchange lets you sell investment real-estate and defer capital gains taxes, giving you the opportunity to use your tax dollars for your benefit. If you are looking to move from one type of real-estate to another that is very much an option. And the best part is that the property that you exchange for can be located anywhere in the country.  A 1031 exchange gives you the opportunity to maximize your investing and broaden your portfolio.

How the New Tax Plan Affects 1031 Exchanges

A 1031 exchange is the go-to process for anyone looking to maximize their real estate investing and defer capital gains taxes. But how will president Trump’s new “Tax Cuts and Jobs Act of 2017” impact 1031 exchanges?

In the past, a 1031 exchange could be used to defer capital gains taxes on both real estate and personal property. If you had a house with a bunch of furniture inside you could exchange both the house and the furniture without encountering any capital gains taxes. Under this new bill, personal property can no longer be exchanged using the 1031 method. However, if you were already in the process of exchanging personal property and had closed on a sale or acquired replacement property before December 31, 2017, then you are free to finish the exchange in 2018.

While these changes will have a big effect on art collectors, real estate investors will come out on top. Those looking to utilize the power of a 1031 exchange on their real estate are still free to do so.

If you want to see what else is covered in the “Tax Cuts and Jobs Act of 2017” follow this link to read the full tax plan.

2018 Tax Plan is Drawing Northeastern Homebuyers to Florida

Florida has always enjoyed sunnier weather than the frozen Northeast. And after the 2018 tax plan, Northeasterners are noticing that the Sunshine State has a much friendlier property tax and no personal income tax. According to Business Insider, a resident from Massachusetts who would have had to pay over $14,000 in property and personal income tax can save almost $7,000 by relocating to Florida.

The expected influx of Northerners as a result of the tax changes follows the larger trend of homebuyers migrating south. To read more on that visit Homebuyers Heading South.

 

Multi-Member LLCs and 1031s?

When it comes to 1031s, it is all about whose name is on the original tax return. This goes for LLCs as well as individuals. Multi-member LLCs follow the same rules as everyone else. The name on the original tax return must be the name on the title of the replacement property. If an LLC is multi-member, they probably file taxes as a partnership. Each LLC can sell the property it owns and do a 1031 to buy a replacement property. If you find a replacement property that is big enough, then each LLC could sell and buy a % of the larger replacement as a tenant in common.

Example – each LLC owns a property that is worth $500,000. They could both sell and 1031 each into a 50% tenant in common interest of a property worth $1 million.

Once the LLCs have completed their exchanges, they could simply remain as tenants in common. Or could work with their accountants to dissolve one or both and leave the property in one LLC with the same membership interest allocation.