| Under Section 1031 of the Internal
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| | from the sale of the Relinquished
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| Revenue Code, owners of real estate held
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| | Property. Receipt of cash by the
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| for investment or use in a trade or
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| | Exchanger before he receives the
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| business can swap their property tax-free
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| | Replacement Property may be enough to
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| for "like-kind" real estate.
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| | destroy the tax deferred treatment of the
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| Exchanges are made for people wanting to
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| | transaction.Adjusted Basis: Generally
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| stay invested in real estate, increase
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| | speaking the adjusted basis is equal to
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| their leverage and to avoid paying hefty
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| | the purchase price plus capital
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| taxes upon the sale of property.Like
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| | improvements less depreciation.
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| Kind- Apartments
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| | Transactions involving exchanges, gifts,
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| - Rental Houses
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| | probates and receiving property from a
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| - Retail Properties
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| | trust can have an impact on calculating
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| - Commercial
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| | the property's adjusted basis. The
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| - Raw Land
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| | taxpayer's C.P.A. or tax advisor is the
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| - Office Buildings
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| | party to look to for these types of
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| - Industrial
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| | questions.Boot: Boot is any type of
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| - RanchesNon Qualifying Properties-
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| | property received or given up in an
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| Personal Residences
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| | exchange that does not meet the like kind
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| - Dealer Property
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| | requirement. Generally speaking,
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| - Partnership Interests
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| | receiving boot will trigger the
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| - InventoryReason to Exchanges-
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| | recognition of gain and taxes. If the
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| Restoring Depreciation that will soon
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| | Exchanger receives boot, they will be
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| expire - by exchanging one property for
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| | taxed. Boot added or given up by the
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| anotherof greater value.- To upgrade size
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| | Exchanger does not necessarily trigger a
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| and/or quality of investment. An exchange
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| | taxable event. In a real property
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| can be utilized to combine the equity of
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| | exchange, boot received is any type of
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| one or more properties into a larger
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| | property received by the exchange which
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| singular investment.- To change
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| | is not real property held for investment
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| investment location. An exchange can be
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| | or productive use in a trade or
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| executed in anticipation of markettrends
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| | business.Cash Boot: Cash Boot consists of
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| to maximize appreciation potential.7
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| | cash and nonqualifying property. A car, a
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| Steps for a Successful 1031 Tax Deferred
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| | boat or receipt of the beneficial
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| ExchangeStep 1: Consult with your tax and
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| | interest in a promissory note are all
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| financial advisors to determine if a tax
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| | examples of Cash Boot.Mortgage Boot:
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| deferred exchange is appropriate for your
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| | Mortgage Boot consists of the secured
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| circumstances and compatible with your
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| | debt given up and received as part of the
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| investment goals.Step 2: Listing the
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| | same exchange. If the exchanger increases
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| Relinquished Property for sale with a
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| | the amount of debt on the Replacement
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| licensed real estate broker. During the
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| | Property verses the Relinquished
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| first step the Exchanger will list the
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| | Property, they have given mortgage boot.
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| Relinquished Property with a real estate
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| | If the exchanger decreases the amount of
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| broker. The broker/agent will disclose
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| | debt on the Replacement Property verses
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| the intent to complete an exchange in the
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| | the Relinquished Property, they have
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| listing agreement.Step 3: Offer, Counter
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| | received mortgage boot. Generally
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| Offer and Acceptance. The Exchanger
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| | speaking, mortgage boot received triggers
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| enters into a contract with the Buyer for
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| | the recognition of gain and it is
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| the sale/exchange of the Relinquished
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| | taxable, unless offset by Cash Boot added
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| Property. The broker/agent discloses the
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| | or given up in the exchange.Constructive
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| Seller/Exchanger's intent to exchange
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| | Receipt: Even if the Exchanger does not
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| into the Purchase Agreement and Receipt
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| | actually receive the proceeds from the
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| for Deposit.Step 4: Open escrow for the
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| | disposition of the Relinquished Property,
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| Relinquished Property and coordinate with
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| | the exchange will be disallowed if the
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| the Facilitator. The Facilitator prepares
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| | Exchanger is treated as having
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| the exchange agreement and coordinates
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| | constructively received the funds.Delayed
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| with the escrow holder to close escrow as
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| | Exchange: Also called non-simultaneous,
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| Phase I of a tax deferred exchange.
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| | deferred and Starker. A delayed exchange
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| Important: The exchange agreement must be
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| | is a tax deferred exchange where the
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| in place and signed by all parties prior
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| | Replacement Property is Received after
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| to close of escrow. Additionally, all
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| | the transfer of the Relinquished
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| earnest money deposits should be placed
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| | Property. In a delayed exchange the
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| with the title company.Step 5:
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| | Exchanger must identify all potential
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| Replacement Property Identification.
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| | Replacement Properties within 45 days
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| After closing escrow for the sale of the
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| | from the transfer of the Relinquished
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| Relinquished Property, the Exchanger must
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| | Property and the Exchanger must Receive
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| identify all Replacement Property within
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| | all Replacement Properties within 180
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| 45 days from day after close of
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| | days or the due date of the Exchanger's
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| escrow.Step 6: Contracting for the
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| | tax return whichever occurs
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| Replacement Property. After closing on
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| | first.Like-Kind Property: Refers to the
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| the Relinquished Property the Exchanger
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| | nature of the property the Exchanger
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| has 180 days to acquire the Replacement
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| | gives up or receives as part of the same
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| Property. With the help of his or her
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| | tax deferred exchange transaction. In
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| agent the Exchanger enters into contract
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| | order to qualify as like kind the
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| to purchase the Replacement Property from
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| | property given up or received must be
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| the Seller. In the contract to purchase
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| | held for productive use in a trade or
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| the agent discloses the Exchanger's
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| | business or held for investment to
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| intent to complete the exchange and
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| | qualify as like-kind.Realized Gain:
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| obtains the Seller's cooperation.Step 7:
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| | Refers to a gain that is not necessarily
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| Open escrow for the Replacement Property.
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| | taxed. In a successful exchange the gain
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| The Facilitator prepares the Phase II
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| | is realized but not recognized and
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| Exchange Agreement and coordinates with
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| | therefore not taxed.Recognized Gain:
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| the Replacement Property Escrow holder.
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| | Refers to gain which is subject to tax.
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| The funds held in trust by the
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| | When someone disposes of property at a
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| Facilitator are placed in escrow and the
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| | gain or profit in a taxable transfer such
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| Replacement Property is purchased by the
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| | as a sale, the gain is not only realized,
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| Facilitator from the seller. The
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| | but recognized and subject to
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| Facilitator then transfers the
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| | tax.Relinquished Property: The property
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| Replacement Property to the Exchanger and
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| | given up by the exchange to start the
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| the transaction is closed as Phase II of
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| | 1031 exchange transaction. This property
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| a delayed exchange.Identification of
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| | usually passes through an accommodator
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| Replacement PropertyRegardless of the
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| | before transferring to the ultimate
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| number of relinquished properties
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| | Buyer.Reverse Exchange: An exchange where
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| transferred by the Exchanger as part of
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| | the Exchange acquires or gains control of
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| the same exchange, the maximum number of
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| | the Replacement Property before disposing
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| replacement properties that the Exchanger
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| | of the Relinquished Property.Simultaneous
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| can identify is as follows:3 Property
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| | Exchange: Also referred to as a
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| Rule: Three properties without regard to
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| | concurrent exchange. A simultaneous
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| the fair market values of the replacement
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| | exchange is an exchange transaction where
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| properties.Or200 Percent Rule: Any number
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| | the Exchanger transfers out of the
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| of properties as long as their aggregate
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| | Relinquished Property and Receives the
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| fair market value as of the end of the
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| | Replacement Property at the same
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| identification period does not exceed 200
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| | time.Transfer Tax: A tax usually assessed
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| percent of the aggregate fair market
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| | by a city or county on the transfer of
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| value of all the relinquished properties
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| | property. It may be based on equity or
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| as of the date the relinquished
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| | value. When structuring a multi-party
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| properties were transferred by the
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| | exchange an exchange agreement will
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| Exchanger.Exception95 Percent Rule: Any
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| | usually call for direct deeding to
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| number of replacement properties
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| | eliminate additional transfer tax.April
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| identified before the end of the
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| | 15thA taxpayer must identify replacement
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| identification period and received before
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| | property within 45 days after the
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| the end of the exchange period, but only
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| | transfer of the relinquished property,
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| if the Exchanger receives before the end
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| | and acquire the replacement property
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| of the exchange period identified
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| | within the earlier of 180 days of the
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| replacement property the fair market
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| | relinquished property closing, or the due
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| value of which is at least 95 percent of
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| | date of the taxpayer's tax return.
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| the aggregate fair market value of all
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| | This means that 1031 escrows that close
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| identified replacement
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| | after Oct. 18 will not have the full 180
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| properties.Glossary of TermsAccommodator:
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| | days to acquire the replacement property
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| A principal involved in the exchange
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| | unless the taxpayer files an
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| transaction who agrees to assist the
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| | extension.Contact your CPA or tax
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| exchanger to effect a tax-deferred
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| | attorney for advise.By Neda
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| exchange. Same as Facilitator or
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| | Dabestani-Ryba
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| intermediary.Accommodating Party: In an
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| | Prudential Carruthers REALTORSNeda
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| exchange of properties there is always a
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| | Dabestani-Ryba is a licensed Realtor in
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| person or entity that steps in to
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| | Maryland. She is a member of the
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| accommodate or facilitate the exchange
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| | President's Circle of Top Real Estate
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| transaction. Depending on how the
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| | Professionals. She can be reached at
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| transaction is structured, the
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| | (800) 536-3806 or visit her website for
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| accommodating party may incur additional
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| | more information:
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| liability in their efforts to assist in
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| | Prudential Carruthers REALTORS is an
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| the exchange.Acquisition Property:
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| | independently owned and operated member
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| Replacement propertyActual Receipt: When
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| | of Prudential Real Estate Affiliates,
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| the Exchanger actually receives the funds
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| | Inc., a Prudential Financial company.
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