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Tips To Know About 1031 Exchanges

Tips To Know About 1031 Exchanges 1500 1001 Bernstein Financial Services

1031 Exchanges are derived from a person by the name of Starker, a taxpayer who said to congress, “I have a rental here. I want a rental over there, don’t make me pay tax on the sale.” So Congress eventually passed a law that said, okay.

You can sell your rental property to further gain into another piece of land or another piece of rental property, as long as you follow some very important rules.

These rules are as follows, generally:

You cannot receive any cash out of the deal. That would be called “boot taxable”.

You can’t be relieved of debt along the way. In other words, the loan on the next one cannot be less than the first one.That would be called “boot taxable”. So there would be a gain that comes across and some of it might be taxable if you don’t do it right.

Oftentimes I’ll get a question, “Hey mike, I want to sell my rental for five hundrend thousand, pay off my two hundred thousand dollar loan, get three hundred thousand. I’ll take all the three hundred thousand and buy a rental property worth three hundred thousand. I didn’t get anything. Is that okay? No, you relieved of two hundred thousand debt in that example.

So basically, if you can remember if you start with five hundred thousand dollar value, you need to end up with five hundred thousand of value.

If you do that you’re gonna usually be just fine. You can do more and add in more loan or more money but you can’t do less. Well, you can but if you do less, you’ll start reporting gain.

Also people say, “well can I refinance in the middle because I want to get cash out.” Well, there’s a way to do it, you just can’t do it during the event. So refinance it first, then do your exchange. Or do the exchange, get the new property, and then refinance it.

Some other items people indicate to me, “Mike, I really don’t want to buy another rental. I want to buy a vacation home or a main home. Well you’re not supposed to do that the intent matters; but, there’s a way to get it done. Eventually, if you plan properly and you sell your rental property, and you buy a rental property. Next, you’ll need to run it out for a couple of years. Congress pretty much said if you’re gonna run it out for a couple years, you know this ain’t your home residence. You try to move into it, they’re gonna agree it was a deferral. Technically the coach says the intent was not to rent it out or not to make it a rental property intent. It was to be a residence and they can prove it, the exchange will be not allowed.

From the date you close the sale property you have 45 days to designate or identify the new property or properties.

You have 180 days from the close of the sale to close on the new property. You don’t meet those, the exchange is no good.

Also you can’t touch the money in between. That means, you have to use an accommodator. If you sell the property, get the money, buy the new property, you’ve violated the rules it has to go to an accommodator. The accommodator holds the money and they disperse it to the new escrow for the new property. So it might seem a little cumbersome and it costs a little bit extra money to do the exchange rules. Not that hard really when you concentrate on it and if you’re going to defer a lot of gain it’s well worth worth the money. Now if you say to me, “Mike but I do want to get a little cash out.” Well that’s fine to pay a little tax on part of the gain if you can manage it. So talk to your tax advisor and get an accommodator involved.

There is such a thing called a reverse starter, where you can buy first then sell your property. It’s called doing a reverse way because be very careful talk to the accommodator talk to prepare to get it to happen right so you don’t mess it up.

There’s a little bit of extra tax work done especially if you’re going to defer from two to one or from one to three. Timing is very important and there’s allocations that have to be made.

Now you know a little bit about it don’t try and do it on your own.