| |
| |
|
Real Estate Information |
|
|
|
What is Tax-Deferred Exchange?
Under Section 1031 of the Internal Revenue Code, owners of real estate held for investment or use in a trade or business can swap their property tax-free for "like-kind" real estate.Exchanges are made for people wanting to stay invested in real estate, increase their leverage and to avoid paying hefty taxes upon the sale of property. Like Kind - Apartments Non Qualifying Properties - Personal Residences Reason to Exchanges - Restoring Depreciation that will soon expire - by exchanging one property for anotherof greater value. - To upgrade size and/or quality of investment. An exchange can be utilized to combine the equity of one or more properties into a larger singular investment. - To change investment location. An exchange can be executed in anticipation of markettrends to maximize appreciation potential. 7 Steps for a Successful 1031 Tax Deferred Exchange Step 1: Consult with your tax and financial advisors to determine if a tax deferred exchange is appropriate for your circumstances and compatible with your investment goals. Step 2: Listing the Relinquished Property for sale with a licensed real estate broker. During the first step the Exchanger will list the Relinquished Property with a real estate broker. The broker/agent will disclose the intent to complete an exchange in the listing agreement. Step 3: Offer, Counter Offer and Acceptance. The Exchanger enters into a contract with the Buyer for the sale/exchange of the Relinquished Property. The broker/agent discloses the Seller/Exchanger's intent to exchange into the Purchase Agreement and Receipt for Deposit. Step 4: Open escrow for the Relinquished Property and coordinate with the Facilitator. The Facilitator prepares the exchange agreement and coordinates with the escrow holder to close escrow as Phase I of a tax deferred exchange. Important: The exchange agreement must be in place and signed by all parties prior to close of escrow. Additionally, all earnest money deposits should be placed with the title company. Step 5: Replacement Property Identification. After closing escrow for the sale of the Relinquished Property, the Exchanger must identify all Replacement Property within 45 days from day after close of escrow. Step 6: Contracting for the Replacement Property. After closing on the Relinquished Property the Exchanger has 180 days to acquire the Replacement Property. With the help of his or her agent the Exchanger enters into contract to purchase the Replacement Property from the Seller. In the contract to purchase the agent discloses the Exchanger's intent to complete the exchange and obtains the Seller's cooperation. Step 7: Open escrow for the Replacement Property. The Facilitator prepares the Phase II Exchange Agreement and coordinates with the Replacement Property Escrow holder. The funds held in trust by the Facilitator are placed in escrow and the Replacement Property is purchased by the Facilitator from the seller. The Facilitator then transfers the Replacement Property to the Exchanger and the transaction is closed as Phase II of a delayed exchange. Identification of Replacement Property Regardless of the number of relinquished properties transferred by the Exchanger as part of the same exchange, the maximum number of replacement properties that the Exchanger can identify is as follows: 3 Property Rule: Three properties without regard to the fair market values of the replacement properties. Or 200 Percent Rule: Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the Exchanger. Exception 95 Percent Rule: Any number of replacement properties identified before the end of the identification period and received before the end of the exchange period, but only if the Exchanger receives before the end of the exchange period identified replacement property the fair market value of which is at least 95 percent of the aggregate fair market value of all identified replacement properties. Glossary of Terms Accommodator: A principal involved in the exchange transaction who agrees to assist the exchanger to effect a tax-deferred exchange. Same as Facilitator or intermediary. Accommodating Party: In an exchange of properties there is always a person or entity that steps in to accommodate or facilitate the exchange transaction. Depending on how the transaction is structured, the accommodating party may incur additional liability in their efforts to assist in the exchange. Acquisition Property: Replacement property Actual Receipt: When the Exchanger actually receives the funds from the sale of the Relinquished Property. Receipt of cash by the Exchanger before he receives the Replacement Property may be enough to destroy the tax deferred treatment of the transaction. Adjusted Basis: Generally speaking the adjusted basis is equal to the purchase price plus capital improvements less depreciation. Transactions involving exchanges, gifts, probates and receiving property from a trust can have an impact on calculating the property's adjusted basis. The taxpayer's C.P.A. or tax advisor is the party to look to for these types of questions. Boot: Boot is any type of property received or given up in an exchange that does not meet the like kind requirement. Generally speaking, receiving boot will trigger the recognition of gain and taxes. If the Exchanger receives boot, they will be taxed. Boot added or given up by the Exchanger does not necessarily trigger a taxable event. In a real property exchange, boot received is any type of property received by the exchange which is not real property held for investment or productive use in a trade or business. Cash Boot: Cash Boot consists of cash and nonqualifying property. A car, a boat or receipt of the beneficial interest in a promissory note are all examples of Cash Boot. Mortgage Boot: Mortgage Boot consists of the secured debt given up and received as part of the same exchange. If the exchanger increases the amount of debt on the Replacement Property verses the Relinquished Property, they have given mortgage boot. If the exchanger decreases the amount of debt on the Replacement Property verses the Relinquished Property, they have received mortgage boot. Generally speaking, mortgage boot received triggers the recognition of gain and it is taxable, unless offset by Cash Boot added or given up in the exchange. Constructive Receipt: Even if the Exchanger does not actually receive the proceeds from the disposition of the Relinquished Property, the exchange will be disallowed if the Exchanger is treated as having constructively received the funds. Delayed Exchange: Also called non-simultaneous, deferred and Starker. A delayed exchange is a tax deferred exchange where the Replacement Property is Received after the transfer of the Relinquished Property. In a delayed exchange the Exchanger must identify all potential Replacement Properties within 45 days from the transfer of the Relinquished Property and the Exchanger must Receive all Replacement Properties within 180 days or the due date of the Exchanger's tax return whichever occurs first. Like-Kind Property: Refers to the nature of the property the Exchanger gives up or receives as part of the same tax deferred exchange transaction. In order to qualify as like kind the property given up or received must be held for productive use in a trade or business or held for investment to qualify as like-kind. Realized Gain: Refers to a gain that is not necessarily taxed. In a successful exchange the gain is realized but not recognized and therefore not taxed. Recognized Gain: Refers to gain which is subject to tax. When someone disposes of property at a gain or profit in a taxable transfer such as a sale, the gain is not only realized, but recognized and subject to tax. Relinquished Property: The property given up by the exchange to start the 1031 exchange transaction. This property usually passes through an accommodator before transferring to the ultimate Buyer. Reverse Exchange: An exchange where the Exchange acquires or gains control of the Replacement Property before disposing of the Relinquished Property. Simultaneous Exchange: Also referred to as a concurrent exchange. A simultaneous exchange is an exchange transaction where the Exchanger transfers out of the Relinquished Property and Receives the Replacement Property at the same time. Transfer Tax: A tax usually assessed by a city or county on the transfer of property. It may be based on equity or value. When structuring a multi-party exchange an exchange agreement will usually call for direct deeding to eliminate additional transfer tax. April 15th A taxpayer must identify replacement property within 45 days after the transfer of the relinquished property, and acquire the replacement property within the earlier of 180 days of the relinquished property closing, or the due date of the taxpayer's tax return.This means that 1031 escrows that close after Oct. 18 will not have the full 180 days to acquire the replacement property unless the taxpayer files an extension. Contact your CPA or tax attorney for advise. By Neda Dabestani-Ryba Neda Dabestani-Ryba is a licensed Realtor in Maryland. She is a member of the President's Circle of Top Real Estate Professionals. She can be reached at (800) 536-3806 or visit her website for more information: http://neda.dabestani.pcragent.com/Prudential Carruthers REALTORS is an independently owned and operated member of Prudential Real Estate Affiliates, Inc., a Prudential Financial company. Equal Housing Opportunity
MORE RESOURCES:
Google News |
|
|
|
RELATED ARTICLES
The Professional Investors Plan The art of using high-leveraged activities.Here I would like to make just a few suggestions that will hopefully save you from wasting years of hard effort only to learn in the end that had you invested using a better strategy, you would have realized more profit, happiness, satisfaction, control and free time as a result. Maintaining Small Town Charm In An Ever-Changing World Virtually any state in the country has the appeal of multiple small towns. Ask almost anyone who lives in small town why they are here and they'll tell you they enjoy the small town feeling while being close to all the conveniences of a larger city. 10 Ways To Find Investment Properties If you really want the best deals in investment properties, you have to increase your odds by finding more deals. Who is more likely to get a cheap apartment building, an investor that looks through the MLS listings and calls it a day, or the one that uses ten resources? Here are the ten:1. Before Selling Your Home Here are some important steps you should take before you put your house on the market:1. Home Loan Approval for your next HomeYou don't want to be signing a contract to sell your house before knowing if you are qualified to buy another. Build Your Retirement By Investing In Real Estate Most people buy one or two properties. One is their primary residence and sometimes they have a vacation home. Investment Property - Leveraging Rental Property Equity Owning investment property is a tremendous wealth building strategy. Thousands upon thousands of individuals have amassed great wealth by investing in rental properties. Selling Your Home - What Can Go Wrong With Pricing and Loans So, you're selling your home (house, townhouse, condo, apartment, land, lot, farm, ranch, etc.), what can go wrong? The sad fact is that a lot of things can go wrong. First-time Home Buyers - 100% Home Loans There is an increasing trend in South Africa that is seeing youths entering property market at a much earlier age. These youths are mostly first-time home buyers, applying for their first home loan, who have been renting for a short while and feel the need to invest in a property of their own. Tax Free Exchanges: Watch out for the New Residence Rules On October 22, 2004, President Bush signed tax legislation that contained a provision affecting Internal Revenue Code section 1031 (the like-kind tax-free exchange rules).Under this new provision a taxpayer who exchanges under Internal Revenue Code section 1031 into a rental house as a replacement property for a previous investor property and later converts it to his or her primary residence, is not allowed to exclude gain under the principal residence exclusion rules of Internal Revenue Code section 121, unless he/she sells the property at least five years from the date of its acquisition. Buying New Construction...How Do I Begin? The prospect of shopping for a new construction residence can be quite daunting, but the rewards of owning a brand new home out-weight the disadvantages if you know the potential pitfalls. The following are important considerations: Overall Dollar Budget, Location, Cost Per Square Foot, Finishes, Upgrades, Parking and Delivery Date. Property Investing Secrets 6 Property Investing Secrets:What No One Ever Tells You-How Real Estate Agents Size Up BuyersHere is the most important rule you must know about property investing: present yourself with confidence to the real estate agent. If you're property investing and trying to buy your first property and you have never really dealt with a real estate agent, you're probably not going to get a bargain. Lease Purchasing Is The Perfect Home-Based Business Some call it the 30 second commute. We call it wonderful. Destin Florida Triples In 3 Years Do you want to see something that is absolutely amazing? Let me show you what has happened in Destin, Florida over the last 3 years. Back in August of 2002, the median price of a home selling in Destin was $229,000. For Sale By Owner: The Inside Scoop On Selling Your Own Home If you're thinking about selling your home perhaps the 'for sale by owner' signs posted on neighborhood lawns have intrigued you. When you browse the newspaper listings you see ad after ad boasting 'for sale by owner' as an added incentive for buyers and you envy the owners that are confident enough to try it. Understanding Real Estate Terminology Purchasing a home can be a complicated and confusing process, especially for first-time buyers. Throughout the process, first-time home buyers will encounter a variety of unfamiliar real state terms. Fixtures Fixtures, related to real estate, are items that were originally personal property but are now attached to the property itself. This becomes the toughest issue when tenants attach fixtures to a property. 10 Frequently Asked Short Sale Questions 1. What happens to the seller's credit rating when they allow an investor to short sell their property?What typically happens is the loan will show up as "paid" on their credit report; however there will be a notation that says "settled for less than originally owed" or something along these lines. Real Estate Bubble Adding Price and Risk to Location, Location, Location Mantra Real estate investors familiar mantra location, location, location are nervously replacing the second and third locations with price and risk. As home prices rise to new levels daily and worries that some markets homebuyers are jumping into might start to loose air, their appetite for risk is creating some sleepless nights. Selling by Owner Tips Do strangers scare or intimidate you? If you're planning to try to sell your home yourself, you'll have to get used to it. You'll also be opening yourself up to potentially dangerous situations and legal liabilities. 18 Easy Steps to Buy a Bargain House What is a "distressed" property? What is "bargain" real estate?A distressed property is one with a distressed seller. Job loss or transfer, divorce, death, pending foreclosure, and lack of money cause sellers to sell fast for less.
|
| home | site map |
| © 2006 |
