Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange I
This is Part 14 of my Real Estate Investing Series. You can view the first 13 Parts here:
Are you planning for your Future? Real Estate Investing – Part 1
Starting at Home! Real Estate Investing – Part 2
Maintain Your Leverage! Real Estate Investing – Part 3
Picking Your Investment Property – Real Estate Investing – Part 4
Location * Location * Location – Real Estate Investing – Part 5
Cash Flow Analysis – Real Estate Investing – Part 6 A
Cash Flow Analysis – Real Estate Investing – Part 6 B
Cash Flow Analysis – Real Estate Investing – Part 6 C
Cash Flow Analysis – Real Estate Investing – Part 6 D
Passive Losses – Real Estate Investing – Part 7
Gross Rent Multiplier – Real Estate Investing – Part 8
Capitalization Rate – Real Estate Investing – Part 9
Comparable Pricing – Real Estate Investing – Part 10
Rates of Return – Real Estate Investing – Part 11
Growth or Income – Real Estate Investing – Part 12
More on Rate of Return – Real Estate Investing – Part 13
Tax Strategies – Real Estate Investing – Part 14A
Tax Strategies – Real Estate Investing – Part 14B
Now we are going to look at one of the main ways to defer Capital Gains taxes in order to maximize your investments, and possibly reduce or avoid all the Capital Gains Taxes at some point with the use of the Tax Strategies Discussed in Part 14B.
A 1031 Exchange is when you Exchange one Property for Another Property of Like Kind and not pay Capital Gains Tax on the Sale. For this series we are going to focus on the Real Property Aspects of the 1031 Exchange and how it relates to and can help you with Property Investments.
You decide to sell an investment property, but still want to keep your investments in real estate. (Why you might want to do this we will cover latter.)
Here is the Bare Bones of What you do:
- Consult with a Real Estate Professional and your other advisers first. This can be a lot more complex than I am describing here. A short consultation ahead of time can help you avoid problems down the line and make sure you obtain the goals you want.
- Sell the Property you want to sell.
- You do not touch the funds. The funds go to a Qualified Intermediary (That you took care of in Step 1).
- Within 45 Days of the sale of the property you must identify possible replacement properties. Generally speaking you can identify the replacement properties in 3 ways:
1) Pick any Three properties you think you may want to buy to replace it.
2) Pick as many replacement properties as you want, but the value of all those properties combined can be no more than 200% of the value of the sold property.
3) Pick as many replacement properties as you want, but you must buy 95% of the value of those properties.
For most small investors # 1 will be the way to go. - Purchase the replacement property within 180 of the sale of the first property.
- The Replacement Property must cost more (to avoid taxes).
- All of the equity funds from the sale of the first property must be used to purchase the replacement property (to avoid taxes), except for qualified expenses.
That is it in a Nut Shell, but you should have a bunch of questions and there are many other minor rules and details I will cover in the next post in the series.
Looks like I have a lot more to read here, but I always like some good advice where I can find it my friend.