Your source for…Your source for…Internal Revenue Code 1031 Tax Deferred Exchanges.Internal Revenue Code 1031 Tax Deferred Exchanges.

What is a 1031 Tax Deferred Exchange?

What is a 1031 Tax Deferred Exchange?

The code allows you to sell (Relinquished Property) one or moreInvestment properties and buy (Replacement Property) one or moreproperties through a Qualified Intermediary (QI). The sellercannot touch or control the funds.

The QI documents must be signed prior to closing of theInvestment property being sold.

The property can be anywhere in the US.

The code allows you to sell (Relinquished Property) one or moreInvestment properties and buy (Replacement Property) one or moreproperties through a Qualified Intermediary (QI). The sellercannot touch or control the funds.

The QI documents must be signed prior to closing of theInvestment property being sold.

The property can be anywhere in the US.

Property sold and purchased must be property held as an Investment

property.

Property sold and purchased must be property held as an Investment

property.Most CPA’s say 2 years would probably survive an audit, however, many accountants and CPA’s say 2 years means a year and a day or being on your tax return the last 6 months of one year and the lst 6 months of another year.

Most CPA’s say 2 years would probably survive an audit, however, many accountants and CPA’s say 2 years means a year and a day or being on your tax return the last 6 months of one year and the lst 6 months of another year.

Clients must act on the advise of their Tax Preparer.

The basic rules if your client does not want to pay any capital gains tax are as follows:The basic rules if your client does not want to pay any capital gains tax are as follows:

• Buy property sale price to sale price equal or greater• Buy property sale price to sale price equal or greater

• Put a Mtg./loan on the new equal to the balance of the Mtg./loan on the old or greater as long as you don’t pull cash out.

• All the cash from the sale into the purchase

• Come into title as title was held on the property sold.

If you buy down or have a Mtg/loan for less there will be tax consequences. Client must consult with their Tax Preparer to determine amount of tax.

Like for like means Investment for Investment. Vacant land for rental house, rental house for Apt. building, Apt.

Building for commercial, industrial etc.

Like for like means Investment for Investment. Vacant land for rental house, rental house for Apt. building, Apt.

Building for commercial, industrial etc.

ExchangeExchange• For Property with More Cash Flow• To Increase Appreciation Potential• To Change your Depreciable Base• To Reduce Risk• For Asset Simplification• To Multiply Your Investment• To Delay Recapture

Partial Exchange:Partial Exchange:

Multi-family property with owner living in one of the units.Determine percentage value of Investment portion (consult with tax preparer) and claim the Primary Residence Exclusion on the balance.

Multi-family property with owner living in one of the units.Determine percentage value of Investment portion (consult with tax preparer) and claim the Primary Residence Exclusion on the balance.

Rules To IdentifyReplacement Property

Rules To IdentifyReplacement Property

Three Property Rule - The Exchanger may identify three (3) properties of any value; or200% Rule - The Exchanger may identify any number of properties if the total fair market value of what is identified does not exceed 200% of the sale price of the relinquished property; or95% Rule - If the Exchanger identifies more properties than are permitted under the two rules above, the Exchanger must acquire 95% of what was identified.

Three Property Rule - The Exchanger may identify three (3) properties of any value; or200% Rule - The Exchanger may identify any number of properties if the total fair market value of what is identified does not exceed 200% of the sale price of the relinquished property; or95% Rule - If the Exchanger identifies more properties than are permitted under the two rules above, the Exchanger must acquire 95% of what was identified.

The General Rule For Replacement Property.

What Are The IRS Identification Rules?

Sale price is equal to or greater than relinquished property.

How Is The Identification Made?How Is The Identification Made?1.The identification must be made to a party to the exchange

(i.e., the Qualified Intermediary)

2. Identification must be in writing and signed by exchanger. (We furnish a form to the taxpayer on close of the relinquished property)

3. The identification must include street address or legal description.

4. It must be delivered, within 45 days of the close ofrelinquished property.

IRC 1031 DELAYED EXCHANGE PERIODSIRC 1031 DELAYED EXCHANGE PERIODS

IDENTIFICATION PERIOD:

Begins on the date the taxpayer transfers (closes) the sale of Relinquished Property and ends at midnight on the 45th day thereafter.

EXCHANGE PERIOD:

Begins on the date the taxpayer transfers (closes) the sale of the Relinquished Property and ends at midnight of the 180th day. Exchanger must file an extension on there tax return if replacement property does not close in time to file. There are are no extensions for the 45th or the 180th day and there are no extensions for Saturdays, Sundays, or Holidays.

IDENTIFICATION PERIOD:

Begins on the date the taxpayer transfers (closes) the sale of Relinquished Property and ends at midnight on the 45th day thereafter.

EXCHANGE PERIOD:

Begins on the date the taxpayer transfers (closes) the sale of the Relinquished Property and ends at midnight of the 180th day. Exchanger must file an extension on there tax return if replacement property does not close in time to file. There are are no extensions for the 45th or the 180th day and there are no extensions for Saturdays, Sundays, or Holidays.

ADDITIONAL RULES IN CALCULATING EXCHANGE PERIODS:

ADDITIONAL RULES IN CALCULATING EXCHANGE PERIODS:

(1) If several Relinquished Properties are to go “into one Exchange”’the Identification Period and the Exchange Period are determined by the closing date of the FIRST Relinquished Property.

(2) The Identification Period and Exchange Period are NOT extended to the next succeeding date if the last day fall on a Saturday, Sunday, or legal holiday.

(3) Property is treated as close when “legal title” is transferred. “Closing”in some States is not necessarily “recording of the Deed”.

Capital Gains Tax is paid on the Gain(many people think they pay on Equity)

Capital Gains Tax is paid on the Gain(many people think they pay on Equity)

$800,000.00 Sale price $800,000.00 Sale price$200,000.00 Pd. $500,000.00 Loan $600,000.00 Gain $300,000.00 Equity

In simple terms the CPA will add capital improvements and deduct depreciation. Sometimes clients have offsettingcapital losses, or suspended losses so it is imperative for the client to talk with their Tax Preparer for amounts.

PRIMARY RESIDENCE EXCLUSION:

$250K for a single person or $500K in gain for married people or Registered Domestic Partners.

PRIMARY RESIDENCE EXCLUSION:

$250K for a single person or $500K in gain for married people or Registered Domestic Partners.

Available on the house you live in every 2 years. If you sell before 2 years you pay tax unless you are selling for a reason that allows your CPA to prorate.

Exclusion on Second home available if you lived there 2 full years out of the last 5.

On an investment property, that you did a 1031 exchange into, it must have been your primary residence for 2 out of the last five years and as of Oct. 22, 2004, you must own the property for 5 years in order to claim your primary residence exclusion.

Please refer clients to the CPA to review the code regarding married individual’s eligibility, divorced taxpayers, widowed individuals, & hardship relief.

Representing the seller of the Relinquished Property:

Representing the seller of the Relinquished Property:

Determine on listing if it is a property the seller reports on their Income Tax Return as an Investment Property.

“Seller may do a 1031 Tax Deferred Exchange” in the Listing Agreement.

IRC 1031 Intent Language in the Real Estate Contract (Purchase/Sale Agreement)

Ask the closer/settlement agent/attorney/escrow officer to call us and be sure to call us to call the closer.

Representing the buyer of the Replacement Property:

Representing the buyer of the Replacement Property:

If the client does not want to pay any Capital Gains Tax what must they buy?

Sale Price must be equal or greater than the sale price on property sold.

How much of a loan do they obtain on the new property?

Loan/Mtg. Must be equal to or greater than the loan/mtg. On the property sold.

How must they take title to the Replacement property?

Title on the new property must be held the same as they held title on the Relinquished property (property sold).

Must all the cash from the sale go into the purchase? Yes

If Exchanger buys down or gets a Mtg/Loan for less or pulls cash out what happens?

Exchanger pays capital gains tax per their CPA or Tax Attorney

Representing the seller of the replacement property

Representing the seller of the replacement property

You receive an offer that states the buyer is doing a 1031 Tax Deferred Exchange and your seller agrees to cooperate at no cost or liability to the seller.

What Questions do you ask?

Has the buyers sale closed or when is it closing?

If not closed, has their buyers loan been approved and are all the contingencies removed?

If closed, who is the Qualified Intermediary (QI)? You must give the closer/settlement agent that information.

Ask agent representing the buyer to get you a copy of the buyers closing statement on their sale.

Commercial Building:Commercial Building:

Cost Segregation

Separation of the cost of tangible property, fixtures, air conditioning etc… If cost segregation was done on the relinquished property it may be imperative that cost segregation be done on the replacement property.

Questions and AnswersQuestions and Answers

What real property qualifies for a 1031 Exchange?

Relinquished and replacement properties must be property held for Investment.

What if the replacement property is new construction?

Make sure completion/closing takes place by the 180th day.

What questions would you ask if there is personal property included?

What value are you placing on the personal property? Should it be separated from the real property? Is the seller going to give the buyer a “Bill of Sale”?

What value are you placing on the personal property? Should it be separated from the real property? Is the seller going to give the buyer a “Bill of Sale”?

Questions and Answers Continued

Questions and Answers Continued

How long do you have to find a Replacement Property?

”Boot” is any excess money or unmatched property coming from the sale.What is Boot?

Basis plus capital improvements, less depreciation.What is “Adjusted Basis”?

The replacement property must close within 180 days from the closing of the first relinquished property.Exchanger must file an extension on their tax return if replacement property does not close in time to file there tax return. There are no extensions for Saturdays, Sundays, or Holidays.

When must the replacement property close?

Identification must be made within 45 days of the closing date of the relinquished property.

SELLER CARRY BACK;SELLER CARRY BACK;

Note is drawn in favor of QI and assigned to seller of relinquished propertyat the end of the exchange period

Payer (buyer of property) pays the note off during the 180 day exchange period.

Offer the note to the seller of the Replacement property.

Have the note purchased prior to the 180 day exchange period. (If seller has the money outside of the exchange to loan to the buyer and wants to use that money thereby taking the note out of the exchange so it is not taxable)

If the note is structured as an Installment sale, tax is paid as the principal is received and it does not preclude the owner from refinancing and paying the note off.

Important things to have your client get answers on from their CPA:

Important things to have your client get answers on from their CPA:

Cost of recapturing the depreciation is different on residential and commercial.Cost of recapturing depreciation on tangible personal propertyIt is imperative that your client seek the advice of their CPA or Tax Attorney, to determine tax consequences. Tax may be owed even when the sale price is less than what they paid after recapture of depreciation.