WHAT IS A 1031 EXCHANGE?-REAL ESTATE FOR INVESTORS- Brought to You By CAROL LEE, REALTOR, OAK PARK AGOURA WESTLAKE HOMES FOR SALE

WHAT IS A 1031 EXCHANGE?- REAL ESTATE FOR INVESTORS
Brought to You By CAROL LEE, REALTOR, OAK PARK AGOURA WESTLAKE HOMES FOR SALE

This is a great real estate market for investors. Prices are down, and interest rates are still relatively low.

The term, "1031" refers to Internal Revenue tax code, section 1031. It refers to the tax code that allows a real estate investor to exchange one investment property (the relinquished property) for another, (the replacement property) and defer paying taxes on the gain. And remember, there is a difference between capital gains and equity. Wow! Can it really be that simple? Well, yes and no. There are set rules and guidelines that must be followed in order for the taxable gain to be deferred. If you make a mistake, well, the tax man cometh. ALWAYS CONSULT WITH YOUR CPA, ATTORNEY, AND/OR TAX ADVISOR!! I am none of those; I am a real estate agent and consultant!

So why would someone do an exchange? A few possible reasons:

•· Trade up for a bigger investment

•· Increase cash flow on a new investment

•· Trade fully depreciated properties for new ones, protecting cash flow.

•· Plan for retirement

•· Consolidation

It used to be that if one had an investment property, say a rental home, it could only be exchanged for another rental home. Now the IRS definition of property types that can be exchanged is investment for investment. You could sell a rental home, and buy a commercial building, within the guidelines of the exchange. There are, however, rules that must be followed. (Did I mention already to consult an attorney, CPA, or tax advisor?)

QUALIFIED INTERMIEDIARY.

To do a 1031, the IRS mandates that Exchanger must use a qualified intermediary (QI) - to avoid receipt of money or other property during the transaction. The QI holds the transactions proceeds during the transactions.

IDENTIFICATION PERIOD

There are timelines that must be followed. Once the relinquished property has closed escrow, the exchanger has 45 days to IDENTIFY the replacement property. Those 45 days starts counting upon close of escrow, and is 45 calendar days, not business days. Which means as soon as you are in escrow on the sale, start looking. If not earlier.

RULES FOR INDENTIFYING PROPERTY:

•ü THREE PROPERTY RULE: The exchanger may indentify three properties of any value

•ü 200% RULE: The Exchanger may indentify any number of properties if the total fair market value of what is identified does not exceed 200% or the sale price of the relinquished property.

•ü 95 % RULE: If the exchanger identifies more properties than are permitted under the two rules above, the Exchanger must acquire 95% of what was identified.

EXCHANGE PERIOD

The exchange must be completed by midnight of the 180^th day after the sale of the relinquished property. The exchanger may have to file an extension on their tax exchange if the replacement property does not close in time to file yearly taxes. However, there are NO EXTENSIONS on the time periods for the exchange!!

EXCHANGE RULES

•§ The property is of equal or greater value

•§ The mortgage is of equal or greater value

•§ The manner in which title is held on the replacement property is the same as title on the relinquished property.

On paper, it sounds more difficult than it is or needs to be. Use an experienced realtor®, like CAROL LEE, and we will make it a seamless transaction.

CALL CAROL LEE, Realtor, OAK PARK CA HOMES FOR SAKE, for 1031's and all your real estate needs.