The Klopfer Kinnear Group

HOME

1031 Exchange

Non-Tax Reasons to Exchange

1031 ExchangeThe Tax Deferred ExchangeThe tax deferred exchange, as defined in Section 1031 of the Internal Revenue Code of 1986, as amended, offers investors one of the last great opportunities to build wealth and save taxes. By completing an exchange, the investor (Exchanger) can dispose of investment property, use all of the equity to acquire replacement investment property of equal or greater value, defer the capital gain tax that would ordinarily be paid, and leverage all of the equity into the replacement property. Two requirements must be met to defer the capital gain tax: (a) the Exchanger must acquire like kind replacement property and (b) the Exchanger cannot receive cash or other benefits (unless the Exchanger pays capital gain taxes on this money).In any exchange, the Exchanger must enter into the exchange transaction prior to the close of the relinquished property. The Exchanger and the Qualified Intermediary enter into an Exchange Agreement, which essentially requires that (a) the Qualified Intermediary acquire the relinquished property from the Exchanger and transfer it to the buyer by direct deed from the Exchanger and (b) the Qualified Intermediary acquire the replacement property from the seller and transfer it to the Exchanger by direct deed from the seller. The cash or other proceeds from the relinquished property are assigned to the Qualified Intermediary and are held by the Qualified Intermediary in a separate, secure account. The exchange funds are used by the Qualified Intermediary to purchase the replacement property for the Exchanger. Important Considerations for an ExchangeExchanges must be completed within strict time limits. The Exchanger has 45 days from the date the relinquished property sale closes to identify potential replacement properties. The purchase of replacement property must be completed within 180 days after the closing of the sale of the relinquished property.Identification of potential replacement properties must be specific and unambiguous, in writing, signed by the Exchanger, and delivered to the Qualified Intermediary or another party to the transaction as permitted by Treas. Reg. Sec. 1.103(k)-1Â©(2) prior to the end of the 45-day identification period. The list of identified potential replacement properties cannot be changed after the 45th day; the Exchanger must acquire from the identified properties or the exchange will fail.To avoid payment of capital gain taxes, the Exchanger should follow three general rules: (a) purchase a replacement property with a value equal to or greater than the value of the relinquished property, (b) reinvest all of the exchange equity into the replacement property, and (c) obtain the same or greater debt on the replacement property as on the relinquished property. The Exchanger can replace debt with additional cash, but cash equity cannot be replaced with additional debt. The relinquished property must have been held by the Exchanger for business use or investment purposes and the Exchanger also must intend to hold the replacement property for business use or investment purposes. IRC Sec. 1031 does not apply to exchanges of stock in trade, inventory, property held for sale, stocks, bonds, notes, securities, evidences of indebtedness, certificates of trust or beneficial interests, or interests in a partnership.The Exchanger should always discuss the intended exchange with their legal or tax advisor.Source: Investment Property Exchange Services, Inc.Non-Tax Reasons to Exchange Non-Tax Reasons to ExchangeGenerally, investors complete tax deferred exchanges to defer the capital gains tax on the disposition of their investment properties. However, there are many additional underlying reasons an investor might want to exchange one property for another. The motives often fall along standard risk-reward or cash flow-appreciation scales. These are some of the typical non-tax motives to exchange:Exchange from fully depreciated property to a higher value property that can be depreciated.Exchange from property that cannot be refinanced. For example, moving from vacant land to improved property, which can support a new refinance loan, and will thereby give the investor the ability to obtain cash after the acquisition of the replacement property.Exchange from non-income producing raw land to improved property to create a positive cash flow from the rental income.Exchange from a property with maximized or minimal cash flow (an apartment building) to a higher cash flow property (a retail shopping center) to generate a larger cash flow.Exchange from a stagnant or slowly appreciating property to a property in an area with faster appreciation.Exchange for a property or properties that may be easier to sell in the coming years.Exchange to meet the investors location requirements. For example, the investor moves to another state and wants to have their investment property nearby for management purposes.Exchange to fit the lifestyle of the investor. For example, a retiree may exchange for a property requiring reduced management responsibility so they can do more traveling.Exchange from several smaller properties to one larger property to consolidate the benefits of ownership and reduce management responsibilities.Exchange from a larger property to several smaller properties. Exchanges can be used for estate planning purposes to divide an estate among several children or for retirement reasons.Exchange to a property the investor can use in his or her own profession. For example, a doctor may exchange from a rental house to a medical building to use for their practice.Exchange from a partial interest in on property to a fee interest in another property.Exchange from a management intensive fee interest in real estate to a professionally managed triple net leased property where the lease, including options, has 30 or more years remaining.Exchange to diversify and minimize risk to the investors real estate portfolio. For example, exchange from residential to commercial real estate or exchange into property located in other regions of the United States.Source: Investment Property Exchange Services, Inc.Matt McCuneThe information provided herein is supplied by various sources and is subject to change without notice. Although Crawford Hoying believes the information is reliable, it does not guarantee its accuracy or completeness and provides said information without warranties of any kind, expressed or implied.www.crawfordhoying.comPage 0Page 1Page 2Portfolio BooksThree Project PortfolioWorthington Meadows BooksCollege Park Books and RecordsAlkire Glen Books and Records