Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange II
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
Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange I
If you read the Bare Bones Summary on 1031 Exchanges in the last post you probably have some questions.
Let me anticipate and try to nail down a few of them:
- What if I do not identify the replacement properties in 45 Days?
Your screwed pay the Capital Gains Tax. - What if the 45th day falls on Sunday, Christmas Day, New Years, or any Holiday?
Better get the replacement properties identified ahead of time. The 45 Days includes all the above mentioned holidays, Sundays, etc . . . - What if I do not close on the replacement property within 180 Days?
See above. Same rules apply. Get it done ASAP. - What if I pay less for the replacement property than I sold the original property for?
You will have to pay some Capital Gains Tax based on the difference. - What if I take some of the equity (cash) from the sale of the original property?
You will pay Capital Gains Tax on a portion of the sale. - Can I use some of the equity (Cash) from the sale of the original property to cover some of the expenses?
Yes you can. Generally speaking you can pay fees directly related to the sale (real estate commissions, and other cost directly related to the sale.). You cannot use the cash for cost of ownership such as repairs, utilities etc . . This includes fixing the home up for sale.
The IRS in all of it's wisdom has not clarified rather or not loan expenses are qualified expenses. If in doubt do not use the funds for loan expenses. Depreciate the loan expenses. - What is a qualified property of like kind?
Real Property for Real Property in the US. You can sell a house to buy a vacant lot. You can build on the lot as part of the exchange. You can buy and upgrade (put improvements into the real property.) To avoid taxes you must have a greater overall acquisition than sale. - What if I already know the property I want but have not sold the property I currently own?
You can do a Reverse Exchange. Buy first and sell the Exchange property latter, but you better get it done in 180 days. Consult the pros first. - What if I want to sell a rental and buy a property for myself?
You should have the new property on the rental market before converting it to personal use in order to avoid the Capital Gains Tax. There is no hard and fast rule, but they recommend about 1 year to avoid Tax issues. - What if I want to sell several properties and use the equity from all three to buy one property?
You can do this, but the 45 and 180 Day Time Limit begins to run from the sale of the first property. I recommend that you try and time the sale of all of the properties for the same time (this could be hard). - What if I want to sell one property and buy two or more exchange properties?
Excellent move to diversify your portfolio and use your equity. Just make sure the combined value of the exchange properties is more than the sold property. - Can I keep my low California Property Tax Basis on the Sold Property?
NO! - What is my Basis (For Income Tax and Capital Gains) on the new property?
The Basis is carried over from the sold property. Here is a crude example but you should consult with tax pros.
In General you start with Property A as a rental and the Basis (cost) is $100,000.00. After 27.5 years you have about depreciated it out and sell property A for $500,000.00. You then do the exchange and buy Property B for $800,000.00.
Your Basis is $100,000.00 (which is already fully depreciated) plus $300,000.00 cost difference (which can be depreciated out) for a new cost basis of $400,000.00. - OK, Gene you have shown me the nuts and bolts of the rules, but how do I make this work for me?
Subscribe to my blog and wait for the next post in this series and I will let you know.
I still have to read the rest of these.