When you work in a profession as long as I have you acquire “institutional knowledge.” This knowledge helps me resolve  a client’s real estate issues faster.  I’m always being asked questions like: Can you help me with investment property? I want to start buying rental property; can you help me?  What are tax shelters? How does this affect my taxes? Of course, I can help you select a solid property “but” helping you with the legalities and tax consequences are obviously out of my realm of authority.  I do know that directing you to professionals that are responsible is the key to a successful ending.  For clarification purposes: I am not a lawyer or a CPA and I don’t want to be. But, I work with many lawyers and CPA’s in my business.  Preserving your capital is paramount and the IRS has a wonderful tool to help you.  It is called a 1031 Exchange. Here is its definition:

For tax purposes, a 1031 exchange is a real estate transaction involving the sale of one property with the tax on the capital gain deferred because of the qualified purchase of another like-kind property in exchange. For 1031 exchange purposes, the term like-kind property is interpreted as any type of investment property, rather than property owned for personal use.

Example:  You own a rent house and want to sell it because it has appreciated substantially in the past two years. You can exchange it for one or more like properties without paying any capital gains taxes, but only if you follow the IRS rules explicitly and use a 1031 exchange. 

A 1031 exchange is one of the most frequent transactions I get involved with.  In order to understand this process I sat through several classes and asked a million questions and here are the basics:

IRS RULES FOR EXCHANGERS

1. Real Property Use. Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.

2. 45 Day Identification Period.  You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.

3. 180 Day Exchange Period. From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45-day list. Again, there are no exceptions to this deadline

4. Qualified Intermediary (QI) The IRS mandates that you use a QI to prepare the legal documents for your exchange.  The QI must also hold your money, so that you do not have access to it.  A segregated account is the only safe way for a QI to hold this money.

5. Proper title holding.  You must purchase and take title to your new property exactly as you held title to your old property.

6. Reinvestment Requirement.  To defer all of you capital gain tax, you must buy a property equal or higher in value than the one you sold.  Also, you must reinvest all of the cash proceeds from your sale.

Just like everything else in this world the regulations, court cases, and IRS rulings that apply to your exchange are ever-changing.  It is important to choose a QI that understands these laws, and carefully monitors new legal developments.

Questions to ask a Qualified Intermediary:

1.                  How many exchanges have you/your company done?

2.                  Do you have a list of recent clients I may call for references?

3.                  Are you published in any trade journals?

4.                  Are the funds deposited in a reputable FDIC-insured financial institution?

5.                  Are my funds kept in a segregated account and not co-mingled with other clients?

6.                  Do you have a fidelity bond on your company?

7.                  Is there a way to see the activity on my account on a daily basis?

8.                  Is my exchange clearly documented so as to meet all IRS requirements?

9.                  Do you coordinate with all parties involved in the transaction?  ie. Realtor, CPA, Attorney and Title Company.

I have used a few companies and have been pleased with their service. If a 1031 Exchange sounds like something you need - call me. 480-251-7380  I’d be more than glad to share them with you or any questions about how this might help you.  If I don’t have the answer – I’ll make sure I get one for you.