What benefit is offered by a 1031 exchange? The payment of capital gains taxes may be deferred if investment properties are "relinquished and acquired" rather than sold and purchased. With a 1031 exchange, dollars which otherwise would be used to pay taxes--and are, therefore, gone forever--may be re-invested in the replacement property.
Regulations for a 1031 exchange specify that:
1. All properties involved in an exchange must be business or investment properties. A personal residence does not qualify.
2. The transaction must be an "exchange" rather than a sale of property for money followed by a purchase.
3. The exchanged properties must be "like-kind" properties. "Like-kind" properties are all types of real estate held for business or investment. They need not be of the same type, quality or number. For example, you would be permitted to exchange an apartment building in the city for two parcels of vacant land in the country.
Any "non-like-kind" property, usually cash or debt relief, is called "boot". Boot is taxable.
The most common form of exchange is a deferred exchange. A deferred exchange occurs when there is a gap in time between the date when one property is relinquished and the date when another property is acquired.
To fulfill the requirements of a deferred exchange, a qualified intermediary oversees the exchange and on behalf of the taxpayer. Strict regulations govern the procedures, documentation, participants, methods and time frames for identifying the property or properties to be exchanged, and the time frame for completing the exchange.
If you are considering an exchange, seek professional advice from your attorney or tax accountant, and contact me for professional assistance in locating excellent investment properties in Hawaii.
Keller Williams - Vancouver, WA
It is always interesting to me when I have had people who own rentals that do know what a 1031 exchange is.
The "J" Team
Apr 13, 2007 07:03 PM
Anonymous
The best way to defer capital gains is to use 1031 exchanges, but as this article describes, "It's a tedious process and not many people know how to work the deal."
Defer'Em is one of the best resources for being able to understand the confusion - boot, taxable gain, deferred gain, and new cost basis - and it has a tool you can use to generate IRS Form 8824 for reporting Like-Kind Exchanges on your tax return. Defer'Em is a guided approach that helps you optimize deferrals using all deductible closing costs and exchange fees, and it also generates an Exchange Report which will help you visually understand all the elements of your 1031 exchange.
Another tool that is very useful is Depreciate'Em, which accelerates depreciation by segmenting deductions, resulting in substantial tax savings. I came across both of these tools when I was reading a Forbes.com article about how landlords often miss major savings.
It's really nice to find resources like these that can help you learn and take advantage of tax-saving opportunities. I had a lot of difficulty understanding depreciation and 1031 exchanges, and even more difficulty reporting them, but tools like these make it very simple for anyone to do
Jul 04, 2007 08:54 AM
#3
Exeter 1031 Exchange Services, LLC - San Diego, CA
1031 Tax-Deferred Exchange Expert
Anonymous
Thanks, this is great for those who cannot understand what 1031 exchange is. Did you know that currently, Hawaii's tax is 7%, but you don't need to use the "%" in your calculation. Further, this formula does not include the 3.8% Medicare tax, effective January 1, 2013, which applies to Adjusted Gross Income (AGI) over $200K for singles, $250K for couples.
See my blog for more on this subject. http://commercialinvestmentstrategies.com/
Dec 07, 2012 11:46 AM
#5
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