Learn the Secret of 1031 Exchanges

Are you tired of capital gains taxes leeching away your profit margin? Discovering the secret of 1031 exchanges will allow you to increase the profits on your real estate investments by avoiding paying these taxes. Best of all, you can accomplish this legally! These transactions are known as 1031 exchanges because, to legally avoid capital gains taxes, or sharing profits with the federal government, investors must meet every condition listed in Section 1031 of the Internal Revenue Code. Because these requirements are quite complicated, wise real estate investors will use an accountant, and possibly a tax attorney, as well, to review each sell to make sure that it complies with these conditions.

Although the stipulations are quite detailed, the process is simple for even a new investor to understand. To comply, you must first make a sale. Identify an agent, known as the intermediary or accommodator, which will help you make the exchange. Within 45 days after closing, you must identify another property for which you wish to make the exchange transaction. Be aware, however, that the transaction for this property must be completed within six months. In addition, all of the proceeds from the first sale must be used to make the second purchase.

The property purchased must be valued as highly or more highly than the first. Finally, the investor must hold at least as much debt against the second property as he or she did against the first. If you want to be a savvy real estate investor, you will quickly learn the secrets of 1031 exchanges. You can continue to use these tax-free changes until you stop exchanging properties for investment. If you plan properly, you should never have to worry about paying these taxes. Keep the profits from your real estate investments for yourself; stop donating them to Uncle Sam!

Tax Deferral 1031 Exchanges and Cost Segregation

Tax deferral through 1031 exchanges, or tax-free exchanges of real estate, have become a popular method of tax deferral of capital gains taxes. Almost by definition, individuals who utilize the 1031 exchange option are reluctant to pay taxes that can legally be avoided. 1031 exchangers have asked if they can receive tax deferrals and enhance depreciation. The short answer is yes.

A complete answer needs to consider the remaining cost basis for the property that has been exchanged. If the remaining cost basis is minimal then tax deferral is minimal and, it is probably not financially feasible to utilize cost segregation. If the remaining cost basis (plus the amount of additional cash contributed) is at least $500,000, tax deferral is increased and it is worth reviewing whether cost segregation makes sense.

The total value of the new property is proportionally allocated to the remaining cost basis of the 1031 exchange property (and any additional basis from new investment). For example, if the five-year property is 10% of the value of the new property, and the remaining cost basis is $3,000,000, a value of $300,000 ($3,000,000 x 10%) would be allocated to the five-year property.

One interesting issue is whether five-year property in the new property is considered personal property. To gain the tax deferral benefits, a 1031 Exchange must involve like-kind property. For example, if you sell a house and purchase a lake house, boat and jet ski as your exchange property, the boat and jet ski would be considered "boot", taxable as ordinary income and the owner does not receive any tax deferral. The boat and jet ski are considered "boot" since they are personal property and the property that was sold was real estate.

Since five-year property is referred to as personal property in IRS documentation, there has been confusion regarding this issue. The IRS defers to state law regarding whether items are real property or personal property for the purpose of determining whether there is "boot." Carpet and vinyl tile are both significant five-year life components. While they are considered personal property for depreciation purpose, they are considered real property by state law (in most states). Hence, they are not considered "boot." and the owner can experience tax deferral.

Tax deferral from cost segregation is effective for 1031 exchange purchases provided the remaining cost basis is at least $500,000. Exchange buyers can defer taxes and reduce taxes on the old property and increase depreciation for the new property

Cost segregation produces tax deferrals and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.

City:

Baltimore, MD
Houston, TX
Bridgeport, CT
Dallas/Ft. Worth, TX
Hartford, CT
San Francisco, CA
Washington, DC
Las Vegas, NV
Memphis, TN
Tampa, FL
Albany, NY
St. Louis, MO
Tulsa, OK
Columbus, OH
Santa Rosa, CA
Fresno, CA
Detroit, MI
Ft. Lauderdale, FL
Cincinnati, OH
Cleveland, OH
Scranton, PA
Indianapolis, IN
Albuquerque, NM
Wichita, KS
Milwaukee, WI
Stockton, CA
Little Rock, AR
Bakersfield, CA
Oklahoma City, OK
Nashville, TN

Cost segregation produces tax deductions and tax deferrals for virtually all property types.

Property Type:

Regional mall
Truck terminal
School
Manufacturing/processing
Retail
Shopping center
Cold storage facility
Tennis club
Country club
Medical office

Almost every industry, including the following, can generate cost-efficient tax deductions and tax deferrals by using cost segregation.

Industry:

Arts, Entertainment, and Recreation
Laundry facilities
Furniture stores
Paper manufacturing
Machinery manufacturing
Metal manufacturing
Computer and electronic manufacturing
Golf courses and country clubs
Textile mills
Truck transportation

1031 Exchanges - The Legal Way To Defer Investment Property Capital Gains Tax

With the booming property prices of recent years, more and more people are finding themselves facing a large tax bill when they come to sell their investment properties. However, did you realize that there is a perfectly legal way of deferring payment of such taxes by utilizing the advantageous 1031 tax code that was introduced by the IRS in the early 1990s?

A 1031 exchange is a way of deferring payment of capital gains tax on certain types of real estate. Normally when an investment or business property is sold, capital gains tax has to be paid. However, with 1031 exchanges, by replacing the old property with a like kind property, within set time limits, payment of capital gains tax can be avoided.

Under the 1031 exchange real estate rules, a seller must have held a property for at least one year and a day for it to qualify. Another requirement is that both old (relinquished) and new (replacement) 1031 exchange properties must be of a likekind - either rental properties, vacant land, trade, business or investment properties.

1031 exchanges must be completed within strict time limits. There is a 45 day Identification Period from the transfer of the old property, in which a replacement property must be identified. The 1031 exchange rules stipulate that the exchange must be completed within the 180 day Exchange Period.

The 1031 exchange real estate issues are complex, so it is imperative to seek professional advice from a tax advisor or qualified intermediary who can assess your specific circumstances and explain other issues such as the reverse 1031 exchange or TiC rules. With careful financial planning, you can reinvest your capital gains in future real estate investments, thereby allowing you to leverage your money more efficiently and to reap greater financial benefits.