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What to Expect
Bob Calongne • September 30, 2020
With a Section 1031 Tax-Deferred Exchange
Turn on a “hot water” spigot and you should expect hot water—you probably don’t need a discussion of chemistry, hydraulic mechanics, thermodynamics or kinetic energy. And if you aren’t sure how to safely use hot water, then you might need to ask a “consultant”.
So what can you expect if you “sell” real estate investment property with a 1031 exchange? Simple, you won’t have to pay a bunch of dollars in taxes for a long time if ever. That’s the short of it. Let’s turn the spigot and see…
Taxes are owed on your gains when you “sell” but IRS Code Section 1031 gives you an incentive to promptly re-invest in other investment property. It gives you a recipe, a prescription, a “safe harbor” procedure to absolutely avoid the federal tax using a choreographed “exchange”.
You win at least three ways with the 1031 exchange:
- If you avoid or just delay tax payment for years it is much better than paying now
- If you invest the tax money during the delay it can earn you substantial gains
- Huge non-tax investment opportunities become open to you…
And, YES, there are ways to take out cash in 1031 exchanges and still pay no or less tax.
With 1031 you don’t sell and buy, rather you exchange your “relinquished property” for “replacement property”. A like-kind exchange of property of equal value is just not a taxable transaction—no federal tax is due. You file a simple IRS Form 8824 to carry your tax basis forward from the property “given up” to the property “received”. They call it “tax-deferred” because no taxable transaction occurs until and unless in the future you sell the “replacement” property. And that might never occur—you do another 1031 exchange, again and again or you could die. Upon your death the tax code provides for a “stepped-up” tax basis (to increase the property's tax basis to its value at the time of death) so your heirs might then sell with no taxable “gains”. You could even create a family land bank. Ask your consultant to call The 1031 Exchange Center if he or she wants information on that.
Three-party Exchange
You must use an IRS “qualified intermediary” (a “QI”). So instead of selling to SMITH then buying from JONES, you sign an exchange agreement with a QI then the QI first
sells your property to SMITH and uses those funds to second
buy from JONES and third transfers it in exchange to you.
QI sells...QI buys...You and QI exchange
Reverse Exchange
You sign an exchange agreement with QI's "affiliate" (an LLC) which first
buys from JONES and “parks the title” (holds it in the name of that affiliated LLC until you are ready to sell) and you might lease it as tenant until second
(within 180 days) QI sells your property to SMITH so as to third
complete the exchange to you.
QI affiliate buys and holds...QI affiliate sells...You and QI affiliate exchange
The 1031 Exchange Center Tips
Are you a real estate investor looking for ways to optimize your tax position while expanding your property portfolio? One powerful strategy at your disposal is the partial exchange transaction, a key component of a broader concept known as a tax-deferred exchange in real estate. We as an intermediary in this field, will delve into the world of partial exchange transactions, shedding light on how they can benefit your real estate investments. Understanding the concept A partial exchange," is a subset of a tax-deferred exchange in real estate , particularly under Section 1031 of the Internal Revenue Code. The primary goal of a partial exchange is to allow investors to defer capital gains taxes when exchanging one property for another. What sets it apart is that it permits investors to receive some cash or non-like-kind property (referred to as "boot") in addition to the like-kind property they acquire. How Does a Partial Exchange Work? A partial exchange follows a structured process: Identification of Properties: Just like a standard 1031 exchange, the process begins with the identification of the relinquished property (the property you're selling) and the replacement property (the property you're acquiring). This step is critical to the success of the exchange. Boot Consideration: In a partial exchange, investors may receive cash or non-like-kind property, referred to as boot, in addition to the like-kind property they acquire. The amount of boot received is taxable. Investors must decide how much boot they are willing to receive based on their tax strategy. Tax Deferral: The primary objective of a partial exchange is to defer capital gains taxes on the sale of the relinquished property by investing in like-kind property of equal or greater value, even if they choose to receive some boot. Benefits of a Partial Exchange Tax Savings: By using the partial exchange strategy, investors can defer capital gains taxes and allocate them towards the acquisition of a more valuable like-kind property. Enhanced Flexibility: The partial exchange allows investors to retain a portion of the sale proceeds in cash or non-like-kind property, offering greater flexibility in managing their financial resources. Strategic Investments: Investors can strategically choose properties that align with their investment objectives, even if it means receiving some boot in the transaction. Property Diversification: Diversification can be achieved by retaining some boot to invest in non-like-kind properties that complement their real estate portfolio. Key Considerations Investors considering this kind of tax-deferred exchange in real estate should keep the following considerations in mind: Tax Implications of Boot: While boot can provide flexibility, it's important to understand the tax implications of receiving it, as it may be subject to capital gains taxes. Identifying Replacement Property: Identifying suitable replacement properties within the IRS's strict timeframes is crucial to the success of a partial exchange. Qualified Intermediary: Working with a qualified intermediary like us is essential to ensure that the exchange complies with IRS regulations and guidelines. In conclusion, A partial exchange transaction is a valuable tool for real estate investors aiming to defer capital gains taxes while enjoying flexibility in managing their financial resources. By understanding how this strategy works and its associated benefits and considerations, investors can make informed decisions that align with their investment goals. When used diligently with the help of an intermediary like us, the 1031 Exchange Center, LLC a partial exchange can enhance your real estate investment journey and contribute to your long-term financial success. Contact us today to speak with our experts and get started on your path to tax savings and financial flexibility in your property portfolio. We're here to guide you through the process and help you make the most of your investments.
Are you a real estate investor looking to maximize gains while minimizing tax liabilities? If so, you've likely heard of a construction exchange 1031 , a powerful tool within the world of real estate transactions. As a qualified intermediary in 1031 exchange, we will attempt to explore the fundamentals of this strategy and how it can help you defer taxes through a deferred exchange while focusing on the construction 1031 exchange aspect.
A tax-deferred exchange does not mean you'll have to eventually pay the tax
The 1031 Exchange Center LLC is an IRS Qualified Intermediary that is not permitted to give legal or tax advice. Please consult with your legal or tax advisors concerning your specific case. But for a complimentary confidential evaluation, please click the button below.