Tax efficient investing

What is a 1031 Exchange? It is a way to leverage your gains. It allows sellers of investment or business-use real estate to defer paying capital gains, and depreciation recapture taxes, when they use the proceeds of the sale to purchase one or more additional pieces of investment or business-use real estate.

IRS Code 1031 helps investors because deferring tax results in more money to invest in new property. Generally, any real property can be exchanged, provided it is held “for productive use in a trade or business” or for “investment” and is exchanged for property of “like-kind” that will also be held for one of these same purposes. To qualify for tax deferral, sellers must comply with the strict timelines and rules set forth, and proceeds of the sale should be placed with a third party known as a Qualified Intermediary, until the purchase.

There are 4 types of Exchanges:

1. Simultaneous Exchange occurs when two properties are exchanged simultaneously.
2. Forward Exchange, occurs when a property is sold (Relinquished Property) and another property is purchased (Replacement Property) within 180 days.
3. Construction Exchanges, or Build-to-Suit Exchanges, occur when the taxpayer uses the funds from the sale of the Relinquished Property to construct improvements on the Replacement Property.
4. In a Reverse Exchange, the Replacement Property is purchased before the sale of the Relinquished Property.

It’s pretty obvious why a 1031 is a valuable tool for real estate investors. Instead of paying taxes, increase your down payment and your buying power to acquire a more expensive replacement property. The flexibility of a 1031 allows you to exchange one property for several others, or consolidate multiple properties. Cash flow and overall income can both be increased through a 1031 tax-deferred exchange.  For example, a vacant parcel of land that generates no cash flow or depreciation benefits, can be exchanged for a commercial building that does.

It’s easier than you think to save tax on capital gains. A 1031 Exchange can be done in 5 steps:

1. ​While contemplating the sale of an investment property, contact our TFG Accounting and Tax Professionals beforehand about a 1031 Exchange instead.
2. Enter into a contract and open an escrow account on the relinquished property.
3. Identification period of 45 days after the closing of intent to “exchange.”
4. Finalize the exchange with the replacement property within 180 days.
5. Enjoy a fully tax deferred transaction!

FAQs:

What Qualifies As A Like-Kind Property?

Properties must be of the same nature or character, even if they differ in grade or quality. Here are a few examples of a like-kind exchange:

• A vacant property for an industrial building
• An apartment building for a medical complex
• A hotel for a shopping center
• A retail property for a multi- or single-family rental
• An office building for interest in a Delaware Statutory Trust (DST)

Can I Pull Proceeds Out After The Sale Of The Relinquished Property?

No, the full value of relinquished property must be reinvested; this includes the proceeds from the sale and the debt the investor had on the property.

How Do I Avoid/Defer Paying Taxes On Selling My Rental Property?

Investors can leverage a 1031 exchange to sell their rental property so long as the rental property meets all the requirements outlined by the IRS. For example, a rental property can be relinquished and fractional ownership in a DST may be acquired, deferring capital gains. If a property is sold and not exchanged, the sale will be taxable.

CONTACT US: A 1031 Exchange is a popular estate planning tool and wise choice if you are looking for a way to increase your cash flow, depreciation benefit, consolidate properties, or relieve yourself of a high maintenance situation. Understanding the rules and timing is key to a successful exchange and preserving your wealth. Turn to Fuoco Group CPAs and TFG Financial Advisors for the skilled guidance you need to navigate a 1031! Contact me, Paul Wieseneck, CPA, Tax Director & Financial Advisor, at 561-209-1102 or at PWieseneck@fuoco.com.

TFG Financial Advisors, LLC is a registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.