Why Consider a 1031 Exchange?
There are many advantages to structuring your transaction as a 1031 Exchange. Some of the reasons of Why are as follows
1.Defer taxes ( up to 35-40% of the gain) 2.Greater Purchasing Power 3.Improve Cash Flow 4. Diversify or Consolidate a Real Estate Portfolio 5. Build & Preserve Wealth 6. Greater Appreciation Potential7. .Switch Property Types 8.Expand into other Real Estate Markets Nationally 9.Estate Planning for heirs.
There are three requirements for the 1031 exchange in order defer the capital gains on long term investment property (personal primary/short-term/flipped property does not qualify):
1) Obtain replacement property equal or greater in value (gross sale price less real estate commission, escrow/closing fee, title policy fee and recording fee)
2) Obtain debt equal or greater. In lieu of a mortgage/loan, cash can be injected into the purchase to meet this requirement. If there is no debt on the relinquished property, then requirement has been met.
3) Roll all equity and proceeds into replacement property
The Exchanger will recognize a taxable consequence if the replacement property(ies) is 1) of lesser value or 2) debt relief that is not offset by new debt or 3) receives “boot” (i.e. cash, non like-kind property).
The Exchange Fee for one sale (relinquished) property under $3,000,000.00 and one replacement property is a flat fee of $950.00. If the exchanger has additional property in the same exchange, each additional property is a flat fee of $250.00. These fees can change but these are as of 2018 fees, we can check on the fees for your specific circumstance before the transaction.
In the Delayed Exchange Structure, the Exchanger has 45 days from the transfer of the sale (relinquished) property to identify replacement property and up to 180 days to purchase any of the identified replacement property.
The same taxpayer or ownership entity needs to close and take title to the replacement property as was on the relinquished property.
The exchange company will need the following in order to prepare the necessary IRC Section 1031 exchange documentation, which must be present prior to or at closing:
1) Escrow/Closing Officer’s contact information
2) A copy of the fully signed contract
3) A copy of the title commitment/abstract report
4) Entity formation documentation, if applicable (for LLCs, Partnerships, Corporations)
5) Cell number for each Seller/Exchanger (in order to receive documents via DocuSign)
6) Email address for each Seller/Exchanger (in order to receive documents via DocuSign)
FIRPTA:
If the taxpayer is a foreign person, please consult with your tax advisor and analyze if FIRPTA applies to you and your transaction and determine if you are considered a “Foreign Person” who is selling a U.S. real property interest.
Related Party:
Related parties are defined in IRC §267(b) and §707(b)(1) as persons or entities bearing a relationship to the Exchanger, such as certain members of a family (brothers, sisters, spouse, ancestors and lineal descendants); a grantor and fiduciary of any trust; two corporations which are members of the same controlled group; and corporations and partnerships with more than 50% direct or indirect common ownership in the entities.
It is more likely for an exchange to be disqualified when acquiring a replacement property from a related party. The IRS looks at the related party and the investor party as one economic unit, and does not like to see the investor get tax deferral while the related party cashes out. An exception to this has been when the taxpayer acquires a replacement property in an exchange from a related party who is also doing an exchange.
Closing Costs on the Replacement Property Purchase:
Please be aware that any loan fees paid for with exchange funds may create taxable boot as they are considered to be costs of acquiring a new loan, rather than direct costs of acquisition of the Replacement Property.
There are other terms and conditions and each one has a little bit different rules, but this give you great information to get the ball rolling if this is something that you as an investor should explore. Always consult your tax advisor for your own circumstances.
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