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Considering a Tax-Deferred 1031 Exchange?
Turner Realty's 1031 exchange real estate services specialists help investors locate 1031 exchange properties and prime investment property in East Central Georgia and West Central South Carolina. We understand the time constraints associated with identifying 1031 exchange real estate and we are pleased to help our buyers find replacement investment properties quickly. How do we help?
Why 1031 Exchange?Any Real Estate property owner or investor of Real Estate, should consider an exchange when he/she expects to acquire a replacement "like kind" property subsequent to the sale of his existing investment property. Anything otherwise would necessitate the payment of a capital gain tax, which can exceed 20-30 percent, depending on the federal and state tax rates of your given state. To make it easy to understand, when purchasing a replacement property (without the benefit of a 1031 exchange) your buying power is reduced to the point, that it only represents 70-80 percent of what it did previously (before the exchange and payment of taxes). Below is a look at the basic concept, which can apply to all 1031 exchanges. From the sale of a relinquished real estate property, we should understand this concept so that we can completely defer the realized capital gain taxes. The two major rules to follow are:
The extent that either of these rules are violated will determine the tax liability accrued to the person executing the Exchange. In any case which the replacement property purchase price is less, there will be a tax responsibility incurred. To the extent that not all equity is moved from the relinquished to the replacement property, there will be tax. This is not to say that the (1031) exchange will not qualify for these reasons. Keep in mind, partial exchanges do in fact, qualify for a partial tax-deferral treatment. This simply means that the amount, of the difference (if any), will be taxed as a boot or "non-like-kind" real estate property. THE 1031 Exchange RuleA property transaction can only qualify for a deferred tax exchange if it follows the 1031 exchange rule laid down in the US tax code and the treasury regulations. The foundation of 1031 exchange rule by the IRS is that the properties involved in the transaction must be "Like Kind" and both properties must be held for a productive purpose in business or trade, as an investment. The 1031 exchange rule also lays down a guideline for the proceeds of the sale. The proceeds from the sale must go through the hands of a "qualified intermediary" (QI) and not through your hands or the hands of one of your agents or else all the proceeds will become taxable. The entire cash or monetary proceeds from the original sale has to be reinvested towards acquiring the new real estate property. Any cash proceeds retained from the sale are taxable. The second fundamental rule is that the 1031 exchange requires that the replacement property must be subject to an equal or greater level of debt than the property sold or as a result the buyer will be forced to pay the tax on the amount of decrease. If not he/she will have to put in additional cash to offset the low debt amount on the newly acquired property 1031 Exchange Rules and TimelinesThere are two timelines that anybody going for a 1031 property exchange should abide by and know. The Identification Period: This is the crucial period during which the party selling a property must identify other replacement properties that he proposes or wishes to buy. It is not uncommon to select more than one property. This period is scheduled as exactly 45 days from the day of selling the relinquished property. This 45 days timeline must be followed under any and all circumstances and is not extendable in any way, even if the 45th day falls on a Saturday, Sunday or legal US holiday. The Exchange Period: This is the period within which a person who has sold the relinquished property must receive the replacement property. It is referred to as the Exchange Period under 1031 exchange (IRS) rule. This period ends at exactly 180 days after the date on which the person transfers the property relinquished or the due date for the person's tax return for that taxable year in which the transfer of the relinquished property has occurred, whichever situation is earlier. Now according to the 1031 exchange (IRS) rule, the 180 day timeline has to be adhered to under all circumstances and is not extendable in any situation, even if the 180th day falls on a Saturday, Sunday or legal (US) holiday. 1031 Exchange Accommodators & Qualified IntermediariesA Qualified Intermediary (QI) is responsible for performing the following activities in a 1031 Exchange:
The Qualified Intermediary can actually perform all these without ever taking title to either of the properties. The Qualified Intermediary is responsible for properly filling out the appropriate tax forms for the client. In a typical exchange the Qualified Intermediary (QI) typically provides three different documents:
The 1031 exchange agreement is a contract between the client and the Qualified Intermediary that sets out the rules and guidelines. This must be followed in order to complete the 1031 exchange. The assignment of the "sales contract" to the Qualified Intermediary must also be in place. This is in place because, in theory, the Qualified Intermediary steps into the client's position and sells the property. The third document the Qualified Intermediary provides is a notice to the party on the other side of the transaction advising that the transaction is indeed a 1031 exchange. The purpose of notification to the other party is to prove, without doubt, that the 1031 exchange was in place at the closing. An exchanger must be particularly aware of selecting a knowledgeable (QI) before going into the transaction. There are thousands of (QI) providing "like-kind" 1031 exchange services today. Most of the Qualified Intermediary don't have the necessary insurance, financial backing, bonding, transactional structure, and internal safety controls that should be required of them. Even most exchange funds are often grossly under-insured, under-protected, and are at risk. In today's risky economic climate, choosing a financially secure, 1031 (QI) with the financial strength, resources, safeguards, and financial backing is critical for the safe completion of a 1031 "like-kind" exchange transaction with a Qualified Intermediary. 1031 Exchange Real Estate Investment OptionsThe types of real estate that qualify for a 1031 exchange under IRC Section 1031 include most real property held for investment. Some examples are:
Sometimes called a like kind exchange, a 1031 involves the exchange of real property for real property. Thus, any combination of real property types can be exchanged. For example, a warehouse can be exchanged for an apartment building, a motel can be exchanged for raw land, or a bed and breakfast can be exchanged for a retail building. Also, an investor might opt to exchange one large investment property for several smaller investment properties. To discuss replacement properties that are currently available, contact us with your 1031 exchange requirements. Also, we can provide details on listings found in the Augusta MLS and the Athens MLS. |
 Turner Realty, LLC118 Humphrey StPO Box 247 Lincolnton, GA 30817 706-359-3930 |
In a typical sale of investment or commercial property, the owner can be taxed on any capital gains realized by the sale. However, the 1031 exchange rule allows an investor to defer payment of capital gains tax by disposing of one investment property and exchanging into another without incurring immediate tax liability. Thus, the earning power of the tax deferred dollars continues to work for the investor through the new investment property.