1031 Exchanges
Varga & Nickel Real Estate Group is happy to assist you with a 1031 Exchange.
Be sure to consult your tax accountant, to determine if a 1031 Exchange would be right for you.
A 1031 Exchange is done by a real estate investor. The point of the "exchange" of like-kind properties is to defer the realization of capital gains on the property that is sold (referred to as the "relinquished" property).
There may be some confusion as to what "like-kind" means in the context of a 1031 Exchange; it simply means any type of investment or business property. Therefore, you could sell an apartment building and buy an office building or a piece of vacant land. Unfortunately, the IRS does not allow people to "exchange" a residential property unless it is used for investment purposes (i.e. it is rented or leased out). Things can get a bit complicated if you want to try to use a second home, that you use yourself, but also sometimes rent out.
The purchased property (referred to as the "replacement" property) must be of equal or greater value than the relinquished property, or else you have to deal with "boot." Boot is defined as cash or other property (could be a mortgage) added to an exchange in order to make the value of the traded goods equal. Investors try to avoid the "boot" issue, as cash may be subject to tax and potential withholding, and there may be tax liability related to a mortgage.
What makes a 1031 Exchange a bit challenging sometimes is that the investor must identify one or more potential properties equal to the relinquished property within 45 days (you start counting the days on the day after escrow closed). If you identify more than three properties, then you can use the 200% rule, whereby the total fair market value of the combined properties cannot be more than 200% of the sales price of the relinquished property. Another rule is that the investor must close escrow on the replacement property within 180 days of the identification of said property, or before the filing date for the investor's income taxes.
Basic Types of 1031 Exchanges
Same Tax Payer
The name on the investor's tax return and the name on the title of the replacement property must be the same. The only exception to this rule is if you have a single member limited liability company (smllc), then the smllc can sell the property to the single member in their own name.
Be sure to consult your tax accountant, to determine if a 1031 Exchange would be right for you.
A 1031 Exchange is done by a real estate investor. The point of the "exchange" of like-kind properties is to defer the realization of capital gains on the property that is sold (referred to as the "relinquished" property).
There may be some confusion as to what "like-kind" means in the context of a 1031 Exchange; it simply means any type of investment or business property. Therefore, you could sell an apartment building and buy an office building or a piece of vacant land. Unfortunately, the IRS does not allow people to "exchange" a residential property unless it is used for investment purposes (i.e. it is rented or leased out). Things can get a bit complicated if you want to try to use a second home, that you use yourself, but also sometimes rent out.
The purchased property (referred to as the "replacement" property) must be of equal or greater value than the relinquished property, or else you have to deal with "boot." Boot is defined as cash or other property (could be a mortgage) added to an exchange in order to make the value of the traded goods equal. Investors try to avoid the "boot" issue, as cash may be subject to tax and potential withholding, and there may be tax liability related to a mortgage.
What makes a 1031 Exchange a bit challenging sometimes is that the investor must identify one or more potential properties equal to the relinquished property within 45 days (you start counting the days on the day after escrow closed). If you identify more than three properties, then you can use the 200% rule, whereby the total fair market value of the combined properties cannot be more than 200% of the sales price of the relinquished property. Another rule is that the investor must close escrow on the replacement property within 180 days of the identification of said property, or before the filing date for the investor's income taxes.
Basic Types of 1031 Exchanges
- Delayed: Investor first closes escrow on the relinquished property, then identifies the potential property, and then closes escrow on the replacement property.
- Simultaneous: When both the relinquished property and the replacement property are transferred on the same day.
- Construction/Improvement: If the replacement property has a lower value than the relinquished property, one can get rid of the cost difference by improving or doing construction on the replacement property. After selling the relinquished property, the investor, within 45 days, must identify the replacement property, and then supply a detailed plan, in writing, of the improvements to be completed. There is the possibility that improvements may require additional cash.
- Reverse: This is considered to be the most complex of the 1031 Exchanges. The investor purchases the replacement property as an all-cash deal, and then sells the relinquished property. The investor cannot be on the title of both properties at the same time.
Same Tax Payer
The name on the investor's tax return and the name on the title of the replacement property must be the same. The only exception to this rule is if you have a single member limited liability company (smllc), then the smllc can sell the property to the single member in their own name.
Norm Haley Real Estate135 W. Foothill Blvd., #4
Monrovia, CA 91016 DRE #00528924 |
Alex Varga DRE #01918433 Cheryl Nickel DRE #00898599 |
