| |
| |
|
|
Real Estate |
|
What is Tax-Deferred Exchange?
Under Section 1031 of the Internal Revenue Code, owners of real estate held for investment or use in a trade or business can swap their property tax-free for "like-kind" real estate. Exchanges are made for people wanting to stay invested in real estate, increase their leverage and to avoid paying hefty taxes upon the sale of property. Like Kind - Apartments Non Qualifying Properties - Personal Residences Reason to Exchanges - Restoring Depreciation that will soon expire - by exchanging one property for anotherof greater value. - To upgrade size and/or quality of investment. An exchange can be utilized to combine the equity of one or more properties into a larger singular investment. - To change investment location. An exchange can be executed in anticipation of markettrends to maximize appreciation potential. 7 Steps for a Successful 1031 Tax Deferred Exchange Step 1: Consult with your tax and financial advisors to determine if a tax deferred exchange is appropriate for your circumstances and compatible with your investment goals. Step 2: Listing the Relinquished Property for sale with a licensed real estate broker. During the first step the Exchanger will list the Relinquished Property with a real estate broker. The broker/agent will disclose the intent to complete an exchange in the listing agreement. Step 3: Offer, Counter Offer and Acceptance. The Exchanger enters into a contract with the Buyer for the sale/exchange of the Relinquished Property. The broker/agent discloses the Seller/Exchanger's intent to exchange into the Purchase Agreement and Receipt for Deposit. Step 4: Open escrow for the Relinquished Property and coordinate with the Facilitator. The Facilitator prepares the exchange agreement and coordinates with the escrow holder to close escrow as Phase I of a tax deferred exchange. Important: The exchange agreement must be in place and signed by all parties prior to close of escrow. Additionally, all earnest money deposits should be placed with the title company. Step 5: Replacement Property Identification. After closing escrow for the sale of the Relinquished Property, the Exchanger must identify all Replacement Property within 45 days from day after close of escrow. Step 6: Contracting for the Replacement Property. After closing on the Relinquished Property the Exchanger has 180 days to acquire the Replacement Property. With the help of his or her agent the Exchanger enters into contract to purchase the Replacement Property from the Seller. In the contract to purchase the agent discloses the Exchanger's intent to complete the exchange and obtains the Seller's cooperation. Step 7: Open escrow for the Replacement Property. The Facilitator prepares the Phase II Exchange Agreement and coordinates with the Replacement Property Escrow holder. The funds held in trust by the Facilitator are placed in escrow and the Replacement Property is purchased by the Facilitator from the seller. The Facilitator then transfers the Replacement Property to the Exchanger and the transaction is closed as Phase II of a delayed exchange. Identification of Replacement Property Regardless of the number of relinquished properties transferred by the Exchanger as part of the same exchange, the maximum number of replacement properties that the Exchanger can identify is as follows: 3 Property Rule: Three properties without regard to the fair market values of the replacement properties. Or 200 Percent Rule: Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the Exchanger. Exception 95 Percent Rule: Any number of replacement properties identified before the end of the identification period and received before the end of the exchange period, but only if the Exchanger receives before the end of the exchange period identified replacement property the fair market value of which is at least 95 percent of the aggregate fair market value of all identified replacement properties. Glossary of Terms Accommodator: A principal involved in the exchange transaction who agrees to assist the exchanger to effect a tax-deferred exchange. Same as Facilitator or intermediary. Accommodating Party: In an exchange of properties there is always a person or entity that steps in to accommodate or facilitate the exchange transaction. Depending on how the transaction is structured, the accommodating party may incur additional liability in their efforts to assist in the exchange. Acquisition Property: Replacement property Actual Receipt: When the Exchanger actually receives the funds from the sale of the Relinquished Property. Receipt of cash by the Exchanger before he receives the Replacement Property may be enough to destroy the tax deferred treatment of the transaction. Adjusted Basis: Generally speaking the adjusted basis is equal to the purchase price plus capital improvements less depreciation. Transactions involving exchanges, gifts, probates and receiving property from a trust can have an impact on calculating the property's adjusted basis. The taxpayer's C.P.A. or tax advisor is the party to look to for these types of questions. Boot: Boot is any type of property received or given up in an exchange that does not meet the like kind requirement. Generally speaking, receiving boot will trigger the recognition of gain and taxes. If the Exchanger receives boot, they will be taxed. Boot added or given up by the Exchanger does not necessarily trigger a taxable event. In a real property exchange, boot received is any type of property received by the exchange which is not real property held for investment or productive use in a trade or business. Cash Boot: Cash Boot consists of cash and nonqualifying property. A car, a boat or receipt of the beneficial interest in a promissory note are all examples of Cash Boot. Mortgage Boot: Mortgage Boot consists of the secured debt given up and received as part of the same exchange. If the exchanger increases the amount of debt on the Replacement Property verses the Relinquished Property, they have given mortgage boot. If the exchanger decreases the amount of debt on the Replacement Property verses the Relinquished Property, they have received mortgage boot. Generally speaking, mortgage boot received triggers the recognition of gain and it is taxable, unless offset by Cash Boot added or given up in the exchange. Constructive Receipt: Even if the Exchanger does not actually receive the proceeds from the disposition of the Relinquished Property, the exchange will be disallowed if the Exchanger is treated as having constructively received the funds. Delayed Exchange: Also called non-simultaneous, deferred and Starker. A delayed exchange is a tax deferred exchange where the Replacement Property is Received after the transfer of the Relinquished Property. In a delayed exchange the Exchanger must identify all potential Replacement Properties within 45 days from the transfer of the Relinquished Property and the Exchanger must Receive all Replacement Properties within 180 days or the due date of the Exchanger's tax return whichever occurs first. Like-Kind Property: Refers to the nature of the property the Exchanger gives up or receives as part of the same tax deferred exchange transaction. In order to qualify as like kind the property given up or received must be held for productive use in a trade or business or held for investment to qualify as like-kind. Realized Gain: Refers to a gain that is not necessarily taxed. In a successful exchange the gain is realized but not recognized and therefore not taxed. Recognized Gain: Refers to gain which is subject to tax. When someone disposes of property at a gain or profit in a taxable transfer such as a sale, the gain is not only realized, but recognized and subject to tax. Relinquished Property: The property given up by the exchange to start the 1031 exchange transaction. This property usually passes through an accommodator before transferring to the ultimate Buyer. Reverse Exchange: An exchange where the Exchange acquires or gains control of the Replacement Property before disposing of the Relinquished Property. Simultaneous Exchange: Also referred to as a concurrent exchange. A simultaneous exchange is an exchange transaction where the Exchanger transfers out of the Relinquished Property and Receives the Replacement Property at the same time. Transfer Tax: A tax usually assessed by a city or county on the transfer of property. It may be based on equity or value. When structuring a multi-party exchange an exchange agreement will usually call for direct deeding to eliminate additional transfer tax. April 15th A taxpayer must identify replacement property within 45 days after the transfer of the relinquished property, and acquire the replacement property within the earlier of 180 days of the relinquished property closing, or the due date of the taxpayer's tax return. This means that 1031 escrows that close after Oct. 18 will not have the full 180 days to acquire the replacement property unless the taxpayer files an extension. Contact your CPA or tax attorney for advise. By Neda Dabestani-Ryba Neda Dabestani-Ryba is a licensed Realtor in Maryland. She is a member of the President's Circle of Top Real Estate Professionals. She can be reached at (800) 536-3806 or visit her website for more information: http://neda.dabestani.pcragent.com/ Prudential Carruthers REALTORS is an independently owned and operated member of Prudential Real Estate Affiliates, Inc., a Prudential Financial company. Equal Housing Opportunity
MORE RESOURCES:
Real-Estate - Google News |
|
|
|
RELATED ARTICLES
Buying Outer Banks (OBX) Investment Property So, you're thinking of purchasing a rental property at the beach. Historically, real estate investments have proven to be a wise investment strategy. 5 Hot Tips for Successful Real Estate Investment The last downturn of the global stock market saw millions of 'every day' investors having their fingers badly burned. Overnight life savings were eaten away, retirement funds went into decline and the economic forecast for all of us who had any money invested in stocks and shares was gloomy to say the very least. FSBO: For Sale By Owners Chapter One She reached the phone on its second ring. "This is Tami!" She confidently answered. Timing Is Everything When It Comes To Buying Homes The old adage that "timing is everything" especially applies to buying a new home. And trying to be at the right house at the right time and get it for the right price can be tricky. Property in Bulgaria - Huge Investment Potential Bulgaria is a truly magnificent country, located in Eastern Europe with an amazing coastline that stretches over 340km along the Black Sea, with a backdrop of one of the world's most magnificent mountain ranges and the beautiful and historic capital city of Sofia.Today Bulgaria not only offers one of Europe's most attractive and unspoilt holiday destinations it is also host to what will be one of the most dynamic and as of yet relatively untapped property and real estate markets. OPM - The Art of Leveraging Equity lender, hard money lender, private investor or what ever term one uses can be a great source of funds to do real estate transactions and the question of how to find them comes up often!There are numerous ways to do this, and no two investors are exactly alike, so it's important to be innovative and customize your proposal to the specific "hot buttons" for each funding source.One of the greatest advantages of real estate investing is the power of leveraging other people's money. Sellers, Are You Having A Hard Time Selling Your Home? Sue and Chuck DeFiore have the perfect solution for you - Lease Purchasing your home!What is Lease Purchasing?A Lease Purchase is a process that combines a basic rental lease with an agreement to purchase, or with an option to purchase the property. The Buyer (or Lease-Purchaser) pays to the seller a monthly payment that usually approximates a rental amount or a typical mortgage payment on the home. Real Estate Inspection - Do Your Own Why should you do your own real estate inspection? To get a better deal. It isn't necessary to learn building codes, and you probably should use a professional inspector in any case. The Secret To Marketing Your FSBO Home For Sale You're ready to put your home or land (house, townhouse, condo, apartment, farm, ranch, finished lot, raw land, etc.) on the market as a FSBO (for sale by owner). What Is Home Staging And How Does It Help To Sell My House Home staging is the concept of preparing a house for sale. This can involve everything from removing clutter, re-arranging furniture and in some cases re-decoration, ensuring that the house creates a great first impression and helps buyer's to feel that they could really live there. Reinventing Real Estate, Part 1: Online and Empowered Consumers Are Taking Charge and Paying Less For decades, the real estate world turned in a predictable manner. The roles of buyers, sellers and real estate professionals were fairly well defined and transactions followed a predictable path of yard signs, newspaper ads, open houses and miles of paperwork. Should You Sell Before the Housing Bubble Pops For the past several years housing prices have risen dramatically. With interest rates continuously moving up, and more and more people being priced out of the market, all signs point to an imminent housing market correction. How Long Your Mortgage Runs Determines How Much You Pay The first thing most of us think about when the time comes to take out a mortgage on a new home is the interest rate.That's both perfectly natural and very sensible. How to Research and Purchase a Good Investment Property How much do you really know about investment property? Accurate research and professional expertise applied to the purchase of an investment property builds a solid foundation for financial success. You may want to work with a REALTOR who can help to identify the great opportunities in investment properties in the area of your choice. Purchasing Property With No Money Down: My Personal Experience Have you ever seen those infomercials about buying houses with "No Money Down?" They are really well done. They have all kinds of people offering great testimonials about how they have gotten rich, buying rental properties, with absolutely no money out of their pocket. Buying a Home with Zero Down Payment in Irvine, CA Years ago, the only person that could buy a home in Irvine with zero down payment using a new purchase money loan were Veterans of War (called a VA loan). In the past several years, there has been an explosion of new loan programs designed to fit most any buyers circumstances. Foreclosure Home Deals Did you know that you can save tens of thousands of dollars on the purchase of your home by investing in a foreclosure or preforeclosure property? When you are trying to purchase a home for the first time, and you have limited resources and limited funds, it is particularly important that you get the most "bang for your buck".One way for a young family to get the most home for their money is to purchase a "distressed" property. Home Sellers Warning for Young Families If you're thinking about selling your home and moving up, do your homework before offering your home for sale. Read the following story to see what can happen to home sellers who don't do their math. Property Investing Secrets 9 Property Investing: Here Are Two Important Tactics You Must Do When Buying Real Estate Off The InternetYou can purchase property off the internet. The off line fundamentals of property investing apply on line. Buying and Selling Distressed Houses for Maximum Profit (Update) If you want to become a real estate investor, find a "fixer-upper" owned by an anxious seller. Finding distressed houses at bargain prices, fixing them up, and then selling them on a consistent basis can make you a multi-millionaire.
|
|||||||||||||||
