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1031 Tax Deferred Exchange
Why Make Uncle Sam Richer?
What Is A 1031 Exchange?
The term 1031 Exchange is defined under section 1031 of the IRS Code.
(1) It is a legal, IRS sanctioned strategy that allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long as another “like-kind property/properties” is purchased with the profit gained by the sale of the first property.
(2) Both the property that you give up (relinquished property) and the property you acquire (replacement property) must be property held for productive use in a trade or business or for investment. This is sometimes referred to by the IRS as the qualified purpose requirement.
A like-kind property must be an investment property (Non-Owner Occupied), not a personal property (Owner Occupied).
According to The IRS
“Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence does not qualify for like-kind exchange treatment.” (a second home or vacation home can qualify under strict IRS safe harbor guidelines)".
“Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, Commercial real property that is improved with an office building or unimproved vacant land is like-kind to a Residential rental house. One exception for real estate is that property within the United States is not like-kind to property outside of the United States”.
Why You Should Do A
1031 Exchange
1. Avoid Taxes Forever
A 1031 Exchange is a 100% LEGAL way for you to avoid paying ANY income taxes on any gains derived from your real estate investment properties. All gains generated from the sale of your relinquished investment property is rolled over to your new replacement property (s). There are an unlimited number of times you or your heirs can successfully rollover gain and postpone tax. Below are the estimated taxes you will avoid paying:​
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Federal Capital Gains Tax
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3.8% Medicare Tax
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State Capital Gains Tax
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Depreciation Recapture Tax
On average if you do not do a 1031 Exchange, 30% of profits generated from sale will be taxed! Doing a 1031 Exchange wipes out this tax bite!
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Example: You sell a $2,000,000 paid off asset
With 1031 Exchange-You’ll pay $0 taxes
Without 1031 Exchange- You’ll pays est. $600,000 in Taxes (30% of Gain)
2. Highly Liquid
When you do a 1031, you can pull cash out in 1 of 2 ways: 1) You can pay taxes (aka BOOT) & pull cash out directly from net sale proceeds of your Relinquished Property OR 2) You can be patient and pull TAX FREE CASH OUT of your Replacement Property(s) by mortgaging them after completion of 1031 Exchange, using a 60%-70% LTV Blanket Mortgage.
3. Higher Cap Rate
A 1031 Exchange is a proven plan to liquidate 1 asset in a high Tier Market & acquire multiple assets in lower tier markets that collectively generate a higher ROI. A typical 1031 client exchanges 1 commercial property with a low yielding cap rate for multiple residential rentals with higher yielding cap rates.
4. Proven Way To Fund Your Retirement
A typical 1031 client will fund their retirement by collecting $10,000 to $25,000 or more per month in positive cash flow via exchanging their commercial property for multiple residential rentals.
5. Powerful Estate Planning Tool
When you complete a 1031 Exchange ANY & ALL Capital gains taxes you owed on the sale of your highly appreciated investment property is eliminated upon your death and totally forgiven by the IRS. Your real estate investments will be bequeathed to your Heirs with a step up in basis on the date of your death. In essence, all of your gains are wiped out and your heirs start fresh from where you finished. Passing your real property assets on to your heirs with absolutely no tax bite is one of the most powerful estate planning tools in USA.
How Does A 1031 Exchange Work?
Step 1 - SBC Estates lists & sells your investment property
(aka "relinquished property")
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Must be non-owner-occupied investment property NOT Primary Residence
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Must be USA Real estate only!
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Must be MIRROR IMAGE: SAME SELLER NAME & SAME BUYER NAME
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Must be Long Term Holder, property can’t be a stock in trade “dealer” property (No Fix & Flippers)
Step 2 - Sale Proceeds are Parked with Qualified Intermediary (QI)
The QI handles the financial part of the exchange by taking receipt of the sales proceeds from the sale of original property (relinquished property) and distributes the proceeds to pay for replacement property(s).
Note: The QI must be a non-related disinterested third party. The QI cannot be your parents, children, relatives or anyone serving as your “agent” such as your attorney, CPA or your financial advisor.
Step 3 - SBC Estates Helps You Identify Replacement Property (s)
within 45 Days
The Internal Revenue Code requires that the new property be identified within 45 days of the closing of the sale of the old property. The 45 days commence the day after closing of Relinquished Property and are calendar days. If the 45th day falls on a holiday, that day remains the deadline for the identification of the new properties. No extensions are allowed under any circumstances. If you have not entered into a contract by midnight of the 45th day, a list of properties must be furnished to QI and must be specific. It must show the property address, the legal description or other means of specific identification.
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IRS Rules of Replacement Property Selection:
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Must be non-owner-occupied investment property NOT a Primary Residence
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Must be USA Real estate only!
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Deed must be MIRROR IMAGE: SAME SELLER NAME & SAME BUYER NAME
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You must buy from a NON-RELATED seller NOT family, friends or relatives
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200 Percent Rule: You can identify 4 or more properties as long as value does not exceed 200% of the property sold.
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3 Property Rule: You can identify any three properties regardless of value.
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95-Percent Exception Rule: If value exceeds 200%, then 95 percent of what you identified must be purchased.
Step 4 - Close on Identified Replacement Property(s) within 180 days
The property being purchased must be one or more of the properties listed on the 45 day identification list given to your QI. You can replace any replacement property prior to 45-day ID period. But after the 45-day ID period that’s it! This time frame runs concurrently, therefore when the 45 days are up you have only 135 days remaining to close. There are no extensions due to title defects or otherwise. Closed means title is required to pass before the 180th day. Any money or the fair market value of “Non Like-Kind Property” received by you in a 1031 exchange relinquished or replacement property closing is taxable (to the extent of gain realized on the exchange). This taxable income is commonly referred to as “Boot”. If you desire some cash out and are willing to pay some “Boot” or taxes this is OK, but mortgaging replacement properties TAX FREE post 1031 with no “Boot” or tax bite is a much better option for you.
Example: You do a $1,000,000 1031 Exchange & buy (5) $200,000 replacement properties. After completion of 1031 you can pull $600,000 to $700,000 TAX FREE CASH OUT of the 5 Replacement Properties by using a 60%-70% LTV Blanket Mortgage.
Save BIG On Taxes
Start Your 1031 Today
631-320-8690
