|
CONNECTING THE WORD |
||
|
|
HAWAII INTERNATIONAL REAL ESTATE, LLC |
|
|
Phone: (808) 778-3716 • Fax: (808) 859-5414 • E-mail: info@HawaiiRealEstatePortal.com • 1888 Kalakaua Avenue, C 312, Honolulu, HI 96815 |
||
1031 Tax-Deferred Exchange
A 1031 Exchange otherwise known as a 1031 tax-differed exchange is a strategy or method of disposition one qualified investment property then proceeding with acquisition of another investment property also qualified within a specific time frame. While there are many reasons to complete the disposition of investment real estate through 1031 tax-deferred exchange process, the overhelming reason is the tax-deferral available through a property conducted exchange. Other reasons generally stated for completed a 1031 exchange include thee following: 1) A geographical problem, such as job transfer of business relocation; 2) A cash flow problem, such as moving from a property with a break-even cash flow to a property with a positive cash flow; 3) A lack of diversity problem, such as having all of having all of your equity in one property; 4) A management problem, such going from properties with intense management (apartment properties), to properties with less management (net leased industrial properties). This page primarily focuses on a 1031 tax-deferred exchange and here you will find specific and basic guidelines regarding to a 1031 exchange. For more specific information and legal advice on a 1031 exchange you have to contact your legal attorney. With careful tax planning and the advice of counsel you may be able to differ the tax and invest your newly saved money into additional properties.
Links and Info |
|
Financial Info |
|
Community Life |
|
Resource Center |
|
My Forum |
|
My Library |
|
All About Me |
|
Communication |
Basics of 1031 Exchange |
What Investment Properties Can Participate in 1031 Exchange |
|
Any investment real property held by exchanger maybe exchanged for any investment real property. It is irrelevant how the previous owner was using the property being acquired; it is the intent of the exchanger that determines the classification of the asset in the hands of the exchanger. |
1031 Exchange Time-Frames |
|
A 1031 exchange MUST BE COMPLETED not more than 180-day after transfer of exchanged property. If the replacement property is not acquired within 180-day period than this property will disqualify a portion or all of the 1031 exchange. The 180-day period during which the taxpayer has to acquire a replacement property is further broken into two time periods The taxpayer has 45 days to identify the replacement property. Properties must be identified prior to the 45th day, but not the 45th day, the final identification must be made. The taxpayer must close on the proerty to be acquired within 180-days after transfer of exchanged property. The above time lines cannot be extended. If the 180th day falls on a weekend or holiday, the dates are not extended. |
The Three-Property Rule |
|
The taxpayer has to identify three properties, regardless of their value in relation to the value of the exchanged property. |
The 200-Percent Rule |
|
The taxpayer can also identify more than three properties, but the market value of the total properties identified MUST BE no more than 200 percent of the market value of the exchanged property. |
Maner of Identifying Replacement Property |
|
Replacement property is identified only if it is designated as replacement property in a written document signed by the taxpayer and hand delivered, mailed, telecopied, or otherwise sent before the end of the identification period to either. Description of Replacement PropertyReplacement property is identified only if it is unambiguously described in the written document or agreement. Real property generally is unambiguously described if a legal description, street address, or distinguishable name (e.g.. the Apartment Building Name) describes it. |
Reverse 1031 Exchange (Reverse Starker) |
|
The reverse 1031 exchange occurs when the investor makes an offer which is contingent on the sale of the exchanged properties. Here the exchanger acquires the replacement property first, then sells the exchanged property and claims that a 1031 tax-deferred exchange has been completed. This transaction meets the time requirements of Section 1031 because the replacement property is owned by the investor prior to the relinquishment of the exchanged property the 45-day and 180-day time limits have been met. There are not no specific IRC sections authorizing a reverse 1031 exchange, many attorneys, accomodators and title companies are working with these transactions. Consult your attorney for specific details. |
Safe Harbor Rules |
|
During a 1031 exchange period, the taxpayer cannot receive property that is considered not like-kind. Receipt of nonlike-kind property is considered CASH and is not qualified for a 1031 tax-deferred exchange. So that the investor is not considered to be in constructive receipt of nonlike-kind property, the regulation give the taxpayer several guidelines which it calls SAFE HARBOR RULES:
|
Paper Trail |
|
It is important for the taxpayer to create a paper trail establishing the intent to complete a 1031 exchange in the documents used in the transaction. Consult your attorney or escrow company for specific details. |
Balanced Equities |
|
Only equity can be exchanged. To complete a successful 1031 tax-deferred exchange, the investor must exchange the equity in a piece of real estate and acquire equity in a piece of real estate. If equity is exchanged and an equal amount if equity is acquired, the 1031 exchange is totally tax deferred. |
Recognized Gain |
|
Section 1031 exchange allows an investor to transfer equity from one property to another and to have any realized gain recognized by the IRS. Any gain that is not recognized is unrecognized gain. If a piece of commercial or investment property were sold for cash and all cash received would be spent on a subsequent purchase or of a new property, the investor would have all of his gain recognized. For residential properties, the tax code allows individuals and married couples who meet minimum residency requirements to realize substantial amounts of tax-free gain when they sell their primary residency. |
Unlike Property (Boot) |
|
The term "unlike property" means property that is unlike real estate equity. IRC Section 1031 requires that you exchange solely for like-kind properties. If you exchange for unlike property, you have a taxable event. When the investor receives unlike property in a 1031 exchange, gain will be recognized because the investor has not exchanged like-kind property for like-kind. Unlike property comes in several forms is sometimes called "boot". |
|
Here some materials from "Investment Analysis for Commercial Real Estate (CI 104). CCIM Reference Manual." Printed 07/31/2007 were used . |
|
If you participate in a 1031 exchange program and if you need assistance with selling your exchanged property or with the identification of a relinquished property, please contact me and I will assist you in your business. |
If you are planning to participate in a 1031 Exchange program, contact me today and request my assistance with the disposition your exchanged property and/or identification of relinquished property for you next investment
Exchanging in a Down Market
A few years ago, many were seeing their real estate investments appreciate at incredible rates, and in turn, were doing 1031 tax-deferred exchanges to defer their capital gains liabilities into new investment properties. But in today's market, many investors see limited or no appreciation in their investment property. In times like this, does it make sense for an investor to sell their property and do a 1031 exchange? In many cases, the answer is "yes."
With almost all real estate sales involving improved property, there is the recapture of depreciation. Section 1250 of the Internal Revenue Code requires that depreciation be recaptured at the current rate of 25%, which is higher than the current long-term capital gains rate. For this reason, the ability to defer the recapture of depreciation may make a 1031 exchange very attractive.
There are even more reasons to consider doing a 1031 tax-deferred exchange in a down market:
- Portfolio diversification (i.e., selling one larger property to acquire numerous smaller properties at today's prices) or relocating investment properties to another area of the country with faster appreciation
- Exchange raw land which produces no income for an improved property which can be rented to create positive cash flow,
- Exchange into a property that can be used professionally. For example, selling a single-family rental property and purchasing a new property that can accommodate your business, or
- Exchange from fully depreciated property into to a higher valued property that can be depreciated further.
The value of a 1031 exchange is considerable, even in a down market. Leveraging the cash that would otherwise be forfeited in capital gains taxes and/or depreciation recapture makes sense in any market and a 1031 exchange is the vehicle to get it done.
Important Date to Remember!
For relinquished property transferred after October 17, 2008, the exchanger may need to obtain an extension of his or her tax return due date in order to receive the benefit of the entire 180-day exchange period. This will apply only in the event that the replacement property will not be acquired prior to April 15, 2009 (for calendar-year non-corporate taxpayers). Please consult your tax advisor for precise guidance on your particular situation.
Source: courtesy of First American Exchange Company.
|
If you know of anyone looking to buy or sell a home, I'd be honored to assist. The greatest compliment to me is your enthusiastic referral! Mahalo. |
||
|
Home Page | All Hawaiian Islands MLS Property Search | Featured Listings | For Salers | For Buyers | First Home Buyers | Buy Versus Rent | Short-Sale Properties | Distressed Properties | VA Approved Condos | Commercial vs Residential | Lender Info Interest Rates | Financial Calculators | Apply for a Loan On-Line | City and County | Local School Info | Oahu Weather | Schedule an Appointment | Schedule a Showing | Request Open House Schedule | Connect Me with Lender | My Forum | My Library | Glossary | About Me | Testimonials| My Privacy Statement | Forward to a Friend | Request More Info |
||
|
Copyright© 2009 • Hawaii International Real Estate, LLC • All Rights reserved • Evgeny V. Dafner, Realtor® • (808) 778-3716 • Evgeny@HawaiiRealEstatePortal.com |