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

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.

Can Oil and Gas Be Exchanged With a 1031?

A 1031 is all about exchanging real estate. But what is defined as “real property” by the IRS and various states isn’t limited to just houses and condos. A fun fact, for instance, is that oil and gas can qualify as real estate.

The production of oil and gas involves access to the property that the resources are on and the rights to extract those resources from the land. This means that while the oil and gas are on the property they are treated like real estate and can be exchanged. Mineral, Water rights, and timber function in the same way, though whether they are considered real estate varies from state to state.

The beautiful part of this is that with a 1031 like-kind exchange, oil and gas can exchanged for any other real estate. If you’re tired of collecting royalty payments in cold cold Ohio, why not exchange it for a vacation rental in sunny Florida? A 1031 exchange has the power to free you and broaden your investment portfolio.

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.