Results Realty & Results Land Co. are your go to sources for extensive knowledge and experience with IRS Tax Code 1031 exchanges - both Forward and Reverse. A 1031 Exchange is a powerful wealth preserving tool that should be utilized when looking at selling an investment property.
The 1031 Exchange Rule
A 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 have 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 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.
QI - Qualified Intermediary - To execute an IRS Tax Code 1031 Exchange, you will need to designate a Qualified Intermediary. This Intermediary is usually a title company, sometimes it could be an attorney, but not all title companies or attorneys are QI's.
Relinquished Property - The property that you plan to sell to execute your IRS Tax Code 1031 Exchange.
Replacement Property - The property you plan to buy to execute your IRS Tax Code 1031 Exchange.
Identification Period of Replacement Property: The taxpayer must properly identify potential replacement properties within 45 calendar days. The identification must be made in writing and the property must be unambiguously described. The three rules of identification are:
Three Property Rule: A taxpayer may identify a maximum of three (3) replacement properties, without regard to the fair market value of the properties.
Two-Hundred Percent Rule: The taxpayer may identify any number of properties if the aggregate fair market value does not exceed two-hundred percent (200%) of the aggregate fair market value of the relinquished property.
Ninety-Five Percent Exception: The taxpayer may identify any number of properties without regard to the combined fair market value, if the properties acquired amount to at least ninety-five percent (95%) of the fair market value of all identified properties
Like Kind Property - Relinquished and replacement properties must be "Like Kind" (or similar).
Basis - What the relinquished property's original property value is. The basis always follows the property.
Forward 1031 Exchange - The relinquished property sells first, then the QI uses those funds to fund the replacement property.
Reverse 1031 Exchange - The replacement property is purchased first, then the relinquished property is sold.
The above terminology explains the basics of 1031 Exchanges and within those basics are many other rules and requirements that must be meticulously followed. For a complete analysis and planning of a 1031 Exchange, call Alan Howard - Owner, Broker of Results Realty & Results Land Co. at 620-465-3499 or email at email@example.com. Alan has assisted dozens of clients with 1031 Exchanges with a variety of complexities that are unique to 1031 Exchanges. Let Alan help you retain your wealth and assure you of a smooth, professional transition.
COMMON MISTAKES AND MISCONCEPTIONS OF 1031 EXCHANGES
The most common mistake made by sellers is trying to sell their property themselves. They close the transaction and then look for another property but don't properly file the appropriate 1031 Exchange paperwork. We have seen many individuals end up paying thousands more in capital gains taxes from selling property themselves. We know that an agent is not always needed to find a buyer, but having a qualified professional prepare the contract can potentially save you thousands in capital gains taxes in the long run.
The second common mistake made with 1031 Exchanges is that the seller engages an agent or agency that has little or no experience with 1031 Exchanges. If a mistake is made by excluding the proper 1031 Exchange wording before the transaction is complete, you cannot utilize an exchange. For example, we recently had an individual contact us about exchanging a property they were in the process of purchasing from a licensed broker. They had expressed an interest in a 1031 Exchange. Results Realty was then hired to sell his relinquished property (this is an example of a Reverse 1031 Exchange). The transaction was completed but, neither the broker nor the title company had followed through with the 1031 Exchange wording. Sadly, once the transaction closed, the opportunity was gone even though it was the mistake of the realtor/title company. Unfortunately, this mistake happens more than it should.
The third common mistake sellers make is following poor advice from uninformed professionals. Through the years, we have seen many sellers miss out on opportunities because they have been poorly advised from either a CPA or attorney. Unfortunately, just like real estate agents, not all CPAs and attorneys have the knowledge to execute a 1031 Exchange, let alone advise and plan for one. Through the years, we have seen many individuals choose not to exercise an exchange because they were misled into thinking that 1031 Exchanges are just too complicated to "waste their time on" by their CPA or attorney. For those individuals who decide to face the unique challenges of a 1031 Exchange, they will find that the benefits of deferred capital gains taxes will far outweigh the time that one takes and the rewards will last a lifetime.
If you choose to experience the benefits of a 1031 Exchange, please allow the skilled professionals at Results to use our knowledge and years of experience to guide you through the process from start to finish.
Call Alan at Results Realty & Results Land Co. -620-620-465-3499 or email, firstname.lastname@example.org to schedule your confidential analysis of your property exchange and goals.