1031 Tax Deferred Exchange
The 1031 is an appreciation deferral method for those who have sold, or whom are considering selling, a property with significant appreciation levels.
What is a 1031 Tax Deferred Exchange?
The 1031 allows sellers to use the capital gain to their advantage by investing it into other forms of investment real estate, rather than paying taxes on it.
The IRS Tax Code allows investors to sell and purchase investment properties through a qualified intermediary (QI). “The 1031 Exchange is a tax deferral strategy for highly appreciated real estate”. During the process, the seller cannot touch or control the funds.
For Example:
Visualize an individual that is considering to sell a 4-plex valued at $1M where the owner owns it free and clear. This property will gross approximately $75,000/year and include near $25,000/year in expenses, headaches dealing with management related issues, and vacancy loss.
The owner, if he chooses to sell, could put that $1M into a property valued over $2.8M (at 35% down) with an after-debt cash flow of $78,000 plus a principal reduction of $30,600 for a total return of $108,600; which accumulated to a return of over 10%.
Why Exchange into a 1031 Tax Deferred NNN Real Estate Investment?
- To increase your income from the result of having a very highly appreciated property.
- If you have fully depreciated the property.
- If you have recently sold a property and owe a significant amount of capital gain from ownership.
- A potential alternative to get into larger, or other forms of investment real estate.
With the price of apartment buildings today, NOW is the best time to think about selling your labor intensive apartment building and purchase a non-labor intensive single tenant, NNN building through a 1031 Exchange for the following reasons:
- To increase your cash flow and earnings. For example, net returns on apartment buildings can be very low compared to the single tenant Triple Net deals that we can deliver, somewhere in the 5-10% range.
- To eliminate the day to day responsibilities of management or the cost of professional management.
- Guaranteed significant rental increases in the lease provide for advanced security.
- National credit tenants provide for safety to aid with security.
- Increase in depreciation basis.
Benefits of Commercial Real Estate:
Some argue that it is better to own commercial real estate for the following reasons:
- higher monthly cash flows.
- Continuing depreciation benefits.
- Far better monthly cash flow.
Benefits of a 1031 Exchange:
Many people have wanted to wait for the peak of the market to do a 1031 Exchange. For the past year and a half, many investors have maximized their income producing properties through a 1031 Exchange and acquired other forms of investment real estate. Those that continue to wait might not have another opportunity to maximize values for a long time if the market turns for the worse! Waiting could be a costly mistake.
Thanks to the credit tenant (NNN) investment option, investors can sell their income-producing property at great selling price, perform a 1031 exchange, and have the opportunity to double or triple their income.
Other Services
- Triple Net Lease (NNN)
- Financial Services
- 1031 Exchange
- Commercial Properties
- Residential Properties
Keep in mind...
There Are Some Rules to be Aware of:
The basic rules are the following: new property(s) have a price equal to or greater than the property(s) being sold, all of the cash from the sale must go to the purchase, and title must be held in the same name as the property sold.
The IRS has three basic rules regarding the identification of the replacement property:
- You may identify three properties of any value.
- You may identify any number of properties if the total fair market value of what is identified does not exceed 200% of the sale price of the sold property.
- If you identify more properties that are permitted under the above rules, you must acquire 95% of what was identified.
The IRS has established a 45 day time limit for identifying 1031 Properties, beginning at the close of escrow. The investor has 180 days to close on identified property, starting on the close of escrow of the property that they are deferring the gains from.
DISCLAIMER: It is imperative that you seek the advice of a CPA or tax attorney to determine all tax aspects of an exchange.
IMPORTANT DISCLOSURES: The direct or indirect purchase of real property involves significant risks, including market risks and risks specific to a given property. There are a number of significant tax risks and tax issues involved with the purchase of real property. Investors should consult their own tax advisors and legal counsel.
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Call one of our seasoned Investment Associates today to learn more about a 1031 Exchange!