This is the final post of this four-part series on 1031 exchanges.  Internal Revenue Code Section 1031 provides a great chance to deferring taxes and build wealth.  The Internal Revenue Code rules are complicated, so please consult your tax professional.  Let’s answer some Frequently Asked Questions.

Q:  How do I identify replacement property?
A:  The identification must be submitted in writing, unambiguously described, signed by the investor and delivered to the title company before midnight on the 45th day.  The title company will provide the necessary forms.

Q:  What happens if I change my mind and want to cancel my exchange?
A:  If you transfer the relinquished property and do not replace it with another, the sale will be a taxable event and any capital gain will be subject to federal and state capital gains tax.  If you decide to cancel the exchange after the title company has received exchange proceeds, access to those proceeds may be limited until certain time periods elapse.

Q:  What if I sell a property and then decide I want to make it part of a tax-deferred exchange?
A:  If you actually or constructively received proceeds from the sale, it may not be possible to include that property in a tax-deferred exchange.  If you have entered into a contract to sell, but have not closed, it mat be possible to carry out a tax-deferred exchange, provided you execute the proper exchange documents, identify the replacement property within 45 days of the closing and actually receive it within 180 days or before your tax return is due.  Consult your attorney and tax advisor to help you make that determination.

Q:  What is “boot”?
A:  Boot can be cash received from the sale of relinquished property or other non-cash consideration, including any property that is not “like-kind”, promissory notes or debt relief (mortgage boot).  If you receive boot in an exchange, it is likely that all or some portion will be taxed.

Q:  Can or should I do a tax-deferred exchange for my personal residence?
A:  No, your principal residence is not considered investment property and therefore, does not meet the requirements of Internal Revenue Code Section 1031.

Read Part 1

Read Part 2

Read Part 3

Please contact Michael Zimmerman if you have a specific question about 1031 exchanges or search for investment opportunities using my Honolulu home search.

This information is provided as a courtesy only, is not a warranty and should be independently investigated by buyers. This information is deemed reliable, but NOT guaranteed.  Consult your attorney and tax advisor before you exchange investment property.

As I wrote earlier, Section 1031 of the Internal Revenue Code provides a tremendous opportunity to build wealth by deferring taxes.  Within carefully defined limits, investors may carry forward gains made on one property into another property and defer capital gains taxes.  The 1031 exchange rules are complicated, so be sure to consult with your tax professional.  Let’s continue with some important points.

Reverse Exchange
This occurs when an investor wants to acquire replacement property prior to the closing of the relinquished property.  Warning:  reverse exchanges are much more costly and complicated than a normal 1031 exchange, so please consult with your tax professional and title officer prior to initiating this type of exchange.

Special Circumstances
If any of the circumstances listed below apply to your transaction, be sure to notify your real estate agent, your title officer and your tax professional.

• Disposing of property held by a partnership
• Disposing of property held in a living trust
• Exchanging property with a related party
• Receiving cash from the exchange
• Acquiring property of lesser value than the relinquished property
• Carrying back financing on the relinquished property (carry back note)
• Acquiring replacement property in the following tax year
• A reverse exchange transaction
• Improvements will be made to the replacement property (construction)
• Acquiring replacement property with spouse or others whom were not a party to the exchange
• Combination exchange (part investment property and part owner occupied)
• Residing in a state other than the relinquished property

Read Part 1

Read Part 2

Read Part 4

Please contact Michael Zimmerman if you have a specific question about 1031 exchanges or visit my web site to find investment opportunities using my Honolulu home search.

This information is provided as a courtesy only, is not a warranty and should be independently investigated by buyers. This information is deemed reliable, but NOT guaranteed.  Consult your attorney and tax advisor before you exchange investment property.

As I wrote in Part 1 of the 1031 Exchange series, Section 1031 of the Internal Revenue Code provides a remarkable opportunity to build wealth by deferring taxes.  Within carefully defined limits, investors may carry forward gains made on one property into another one, deferring capital gains tax, allowing full use of equity in the acquisition.  Let’s continue with the important points.

Fully Deferred Exchange
For an exchange to be fully tax-deferred, replacement property must be equal to or greater in value and equity than that of the relinquished property.  In addition, debt on the replacement property must be greater than or equal to the debt on the relinquished property, unless cash is added to offset debt.

Replacement Property
An investor may identify replacement property according to the following rules:

• 3-property rule – three properties, regardless of value
• 200 percent rule – any number of properties, as long as their combined fair market value does not exceed twice the value of the relinquished property
• 95 percent rule – any number of properties, regardless of their combined fair market value, as long as you acquire 95 percent or more of the total value of such properties

Read Part 1

Read Part 3

Read Part 4

Please contact Michael Zimmerman if you have a specific question about 1031 exchanges or visit my web site to find investment opportunities using my Honolulu home search.

This information is provided as a courtesy only, is not a warranty and should be independently investigated by buyers. This information is deemed reliable, but NOT guaranteed.  Consult your attorney and tax advisor before you exchange investment property.

A tax-deferred exchange enables real estate investors to preserve wealth by re-investing in “like-kind” assets.  When real property is sold, an investor may incur federal capital gains tax and, in some states, state tax as well.  A tax-deferred exchange allows investors to sell investment properties and acquire “like-kind” properties while deferring federal capital gains tax.  Many states with a capital gains tax offer a similar tax advantage.

Section 1031 of the Internal Revenue Code provides a remarkable opportunity to build wealth by deferring taxes.  Within carefully defined limits, investors may carry forward gains made on one property into another one, deferring capital gains tax, allowing full use of equity in the acquisition.  The Internal Revenue Code rules can be rather complicated, so be sure to consult with your tax professional.  Let’s cover some of the important points.

What is “like-kind”?
“Like-kind” does not mean “exactly the same” regarding exchanges of real estate.  A condominium rental unit may be exchanged for a single family rental or other real property like a retail center, office building, farm property or a leasehold interest in real estate of 30 years or more.  Most real property is considered “like-kind” to other real property.

Identification Period (45 Day Rule)
The replacement property must be identified within 45 days of the transfer of the first relinquished property.

Exchange Period (180 Day Rule)
The replacement property acquisition must be completed by the earlier of:  
(1) 180 days of the transfer of the first relinquished property or
(2) the due date of filing your federal income tax return for the year in which you transferred the first relinquished property, including filing extensions.

Weekends and Holidays
If the 45th day falls on a Saturday, Sunday, or holiday, the replacement identification should be completed on a preceding business day.  Similarly, if the 180th day falls on a Saturday, Sunday, or holiday, the exchange must be completed on a preceding business day.

Read Part 2

Read Part 3

Read Part 4

Please contact Michael Zimmerman if you have a specific question about 1031 exchanges or visit my web site to find investment opportunities using my Honolulu home search.

This information is provided as a courtesy only, is not a warranty and should be independently investigated by buyers. This information is deemed reliable, but NOT guaranteed.  Consult your attorney and tax advisor before you exchange investment property.