We are pleased to share this guest blog provided to our readers by IPX1031, the largest and one of the oldest Qualified Intermediaries in the United States.
School is back in session and autumn is arriving. It’s a perfect time to review some key 1031 Exchange reminders:
1. 1031 is not a tax loophole. Section 1031 has been in the tax code for almost a century as a recognized method to defer taxes.
2. 1031 Exchanges allow taxpayers to defer federal capital gains tax, most state taxes, tax on unrecognized gain due to depreciation, and the net investment income tax imposed by the Affordable Health Care Act.
3. Does a 1031 Exchange make sense for you? Do a quick 5 Point Analysis.
4. .There are many non-tax reasons to exchange. 1031 Exchanges can be used to diversify or consolidate portfolios, to increase cash flow, reduce operating expenses, increase appreciation potential, obtain less management intensive property, relocate an investment and exchange for a property that can be used in the taxpayer’s business, and even as an estate planning tool.
5. As a general rule, to fully defer the payment of taxes, taxpayers should purchase Replacement Property with a value equal to or greater than the property that is being sold (Relinquished Property), reinvest all net proceeds from the Relinquished Property sale, and replace the value of any debt on the Relinquished Property that was paid off. This can be achieved by placing an equal amount of debt on the Replacement Property, adding additional cash (from outside of the exchange), or a combination of both. If the taxpayer purchases property of lesser value, doesn’t reinvest all the net proceeds, or fails to replace all of the value of the debt the difference is considered taxable boot and the exchange becomes a Partial Exchange with a partial tax deferral.
6. 1031 Exchanges follow strict time limits. Once the Relinquished Property (old investment property) is sold, taxpayers have a total of 180 days to acquire Replacement Property (exchange period). In addition, the taxpayer must identify potential Replacement Properties within the first 45 days of that 180-day period.
7. To avoid having a taxable event, taxpayers may not have actual or constructive receipt of the proceeds from their Relinquished Property(s) sale. A 1031 Exchange must be set up prior to the transfer of the Relinquished Property. This means you cannot start an exchange after you’ve already sold your property.
8. Exchanges between related parties are permitted, however, specific rules must be followed.
9. Partnerships and LLCs can utilize 1031 Exchanges.
10. Reverse Exchanges, where an Exchanger buys first and sells second, may give you the advantage to maximize your tax deferral. These are more expensive and complex than “regular” exchanges but often are useful when the new property needs to be purchased before the sale of the old property.
11. Unless taxpayers are “swapping real estate” without any money being transferred, a Qualified Intermediary (QI), like IPX1031, is required. A QI provides documentation, secures the taxpayer’s funds during the exchange period, and coordinates with the settlement agents. QIs are not regulated by the federal government nor by most state governments. Therefore, it is essential that taxpayers ascertain the competency of and security provided by a potential QI.
12. QIs like IPX1031 cannot give specific advice – only information. Always seek advice from your financial planner, tax attorney and CPA relating to your specific tax and investment goals and situation.
13. Start with the right QI. Choose one (like IPX1031) that has extensive experience, attorneys, CPAs and 1031 professionals on staff, provides financial security and insurance, and that has safeguards in place to protect exchange funds.
Contact the team at FGG1031 for more information!