Free Webinar: 1031 Exchange Investor Essentials

Register here for this October 18th webinar from 5:30 p.m. to 6:30 p.m. ET.

Not sure what to make of all the buzz about 1031 Exchanges? Let me introduce you to this powerful section of the IRS tax code and walk you through its legality and benefits.

Confused by what you have heard about all the requirements? Intimidated by the deadlines? I’ll help eliminate the fear factor with clear and concise information.

Think this option doesn’t apply to you? I’ll provide 1031 exchange options for when the replacement property is identified first or requires renovation.

Whether you have 50 properties or are new to real estate investing, I encourage you to join me for one hour and learn how 1031 Exchanges can accelerate your portfolio growth.

Register here for this October 18th webinar from 5:30 p.m. to 6:30 p.m. ET.

Can You Exchange a Hotel for a Restaurant with a 1031?

A 1031 exchange is a useful way for investors to defer capital gains taxes while reinvesting their proceeds. In order to carry out the exchange in a proper manner you will need to make sure that your replacement property is of “like kind.” Seeing that a 1031 exchange is also called a “Like-Kind Exchange,” it is reasonable to assume that it is very important to ensure that the new property is of like kind. But what does like kind mean in regard to a 1031?

Like kind essentially means that the replacement property must be used for investment purposes only. Primary residences do not qualify. A replacement property can be any type of real estate as long as it is being used for investment purposes. You can exchange a hotel for a restaurant. A warehouse for a farm. Even oil and gas interests for a single-family home.

Why do Fix and Flips Not Get Along With 1031 Exchanges?

I have said it before, and I will say it again; a 1031 is all about the intent. A 1031 exchange is designed to help investors exchange investment real estate while deferring capital gains tax. To qualify as investment real estate a property must be held for productive use. Productive use is a rather broad phrase that essentially means “The land must be doing something.” It could be used for renting, appreciation, agriculture, etc. It just has to be clear that the intent of the land is for productive use.

A fix and flip is a property that is bought to be sold. There is no intent to hold the property for productive use. As such it will not qualify for a 1031 until it can be proven that the real estate in question is for more than just selling. If you really want to carry out a 1031, your local tax guru might have a few ideas on how you can demonstrate your intent to hold your property for investment.

Does a Vacation Home Qualify for a 1031 Exchange?

A 1031 exchange is all about intent. In order for real estate to qualify for a 1031 exchange, the property must clearly be for investment purposes. A multifamily home that is being rented out is a clear example of a piece of real estate that is being used for investment purposes. A vacation home that is rented out for people to stay in is another example of an investment property.

But one of the reasons to own a vacation rental is to use it yourself. And family members will certainly be asking you to let them stay for free. Free stays from family members and personal trips to the lake house count as “personal use.” So how do you know when you’ve crossed a line and turned your investment property into a second home. Luckily, the IRS has a clarifying “Safe Harbor” rules. A vacation home qualifies for a 1031 if;

(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange (the “qualifying use period”)

(b)  Within the qualifying use period, in each of the two 12-month periods immediately preceding the exchange,

(c)  The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(d) The period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental. For this purpose, the first 12-month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day) and the second 12-month period ends on the day before the first 12-month period begins (and begins 12 months prior to that day).

It is always a good idea to check with your local tax expert to ensure that your property meets all the requirements listed above

Can You Exchange One Property into Multiple Properties With a 1031 Exchange?

One of the most powerful aspects of a 1031 is its ability to truly broaden your investing horizons. Rather than simply exchanging one property for another, investors have the potential to diversify and place their tax deferred proceeds into multiple investment properties. Turning one piece of real estate into two or three is not a bad way to start building an investing empire.

It is also good to remember that “like kind” in a 1031 does not mean that the properties you are exchanging have to be exactly the same. You can exchange a residential apartment complex for an industrial warehouse. You are limited only by your imagination and desire to diversify. Though, it is also wise to see what your local tax expert advises.

Keeping The Right Name On The Paper In A 1031 Exchange

A 1031 exchange has very specific title and taxpayer requirements. Whoever the taxpayer was on the old property has to be the taxpayer for the new property. In general terms, it means that if you own a piece of property and sell it via a 1031 exchange, then you have to be the buyer of the new property.

Furthermore, any tax-paying entity that owns real estate can do a 1031 exchange, whether it is a corporation, a partnership, an LLC, a trust, or an individual. Individual members of these tax-paying entities, however, cannot solely carry out a 1031 exchange on a property owned by said organizations. The organization is the taxpayer, not the individual. The deed to a property might be in the name of a single member of an LLC. But, if it has chosen to be taxed as a sole proprietor, then all activity for the property owned by that LLC is reported on the individual (or joint) tax return of the single member. In that event, guess what? — The individual is really the taxpayer for 1031 purposes even though the deed is held by the LLC.

There is an easy rule to help you avoid trouble in all of this: Look at the tax returns and you won’t go wrong!

6 Requirements for Carrying Out a 1031 Exchange

If you want to carry out a successful 1031 exchange, there are six requirements you will need to fulfill. All six must be met for your exchange to be recognized by the IRS. Here is a helpful little summary to get you started.

1.   The Intent to Hold for Investment

Your primary residence cannot be exchanged with a 1031. But any real estate that is demonstrably being held for business, investment, or productive use in a trade can be exchanged.

2.   45-Day Identification Rule

From the day you close the sale on your old property, you have 45 days to identify a replacement property or properties. You must compile a legible list of your selected properties for the IRS. At the end of the 45-day period, the houses on your list are final and no more changes can be made.

3.   180-Day Exchange Period Rule

From the closing on the sale of your old property, you only have 180 days to complete the whole exchange. Or until your next required tax filing, whichever comes first. Make sure you time your exchange carefully.

4.   Qualified Intermediary (QI) Requirements

Finding a QI is vital to the success of your 1031. You must find a QI before selling your old property. If you sell your property before you find a Qualified Intermediary, then you cannot exchange that property using a 1031.

5.   Title/Taxpayer Requirements

The person who pays the taxes before the exchange must pay the taxes after the exchange. If a married couple jointly holds title to the old property, they must both hold the title jointly on the new property as well.

6.   Reinvestment Requirements

If you wish to defer all taxes, then you must reinvest all your proceeds. Money that is removed from the exchange becomes taxable to the IRS while the rest remains sheltered in the exchange.

This list should help you get an idea of what it will take to carry out a 1031. With an experienced Qualified Intermediary and respect for the rules, your 1031 should go smoothly.

To learn more about how you can utilize the power of a 1031 Exchange visit The 1031 Investor.

What Happens If I Can’t Complete My 1031 Exchange?

A 1031 is a great low risk method for deferring capital gains tax. But what happens if you can’t complete your 1031 exchange? Long story short; as soon as your 1031 falls through your sale becomes a taxable event to the IRS. An exchange can collapse for several reasons; failing to identify a replacement property during the 45-day period, failing to purchase a property off your 45-day list by the end of the 180-day period, and failing to complete the exchange before your next tax return. If you bought every property on your list and still have money left over, those funds become taxable to the IRS while the rest is sheltered in the exchange.

Sometimes life just happens and you can’t complete your 1031 exchange. You can’t find the right property, or the property you want falls through, or you’re handed one of those “uh-oh” moments. Fortunately, there is no penalty for starting a 1031 exchange and not completing it, other than paying the tax that would have normally been due. The 1031 exchange can be an inexpensive way to “kick the can down the road” to see what might be available. And while there are no repercussions for not completing a 1031, completing a successful exchange will help you maximize your real estate investing.

To learn more about how you can utilize the power of a 1031 Exchange visit The 1031 Investor.

What Information do you Need to Structure a 1031?

Starting a 1031 exchange is as simple as giving your Qualified Intermediary your name, address, and the address of the property you are selling. The QI is the one who makes or breaks it with the fine details. In fact, the QI is a required part of your 1031 exchange and they must be in place prior to the closing of the sale of the old property.

If you are a real estate investor, the structure of a 1031 exchange should be almost invisible to you. An exchange uses all the same professionals that would normally be involved in the selling of a property; title companies, attorneys, real-estate agents, etc. And they conduct themselves in the exact same way; they close the sale of the property and purchase of the new property or properties. The 1031 is an added on piece that enfolds into that process making it very easy for an investor to initiate when using the right Qualified Intermediary.

The key to ensuring that your exchange goes smoothly and has all the information that is needed is an experienced Qualified Intermediary. The QI is the one who will be signing the documents, placing the proceeds into a qualified, insured, trust account, and ensuring that the sales follow the strict protocols of sec. 1031. The QI must be referenced in specific places on the settlement statements and all parties must be notified that a 1031 has transpired.

To learn more about how you can utilize the power of a 1031 Exchange visit The 1031 Investor

canstockphot

Equal or Up

If you’re looking to defer capital gains taxes with a 1031 exchange it is important to know the ins and outs so that you can get the most out of your real estate investing. One rule that every investor would be wise to remember is the “Equal or Up” rule. Equal or up means that if you want to completely defer all of your capital gains taxes there are two things you will need to do valuation wise

1. You must purchase at least as much as you sell. This is the contract price less the closing costs of the net sale but before the mortgage is paid off. In other words your net sales price.

2. You must use all of the proceeds (the amount left after the mortgage is paid out of the net sale) in the next purchase or purchases.

However, if you want to purchase less than what you sold or if you want to take some cash out you may. This will make your exchange a partial exchange. Meaning that the amount you take out or buy down is taxable as gain. The rest remains safely nestled and tax deferred in the exchange.