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1031:
101
Tax-Deferred Real Estate Exchanges for Beginners
The
sheer number of investment vehicles available
to you these days is absolutely staggering. Stocks, bonds,
precious metals, commodities, options, derivatives, real
estate, etc., etc., etc. - it can make your head spin!
Now, all things being equal, none of these investments
are better than any other. If you know what you're doing,
you can make money in any of them.
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Curtis
Moore, Esq. is
a real estate developer and
a 1031 Qualified Intermediary
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However, for the average investor,
real estate presents an especially good choice. Most
people have some experience with real estate -- usually
the purchase of their house -- and it is relatively
easy to understand. Real estate is tangible. You can
see it, touch it, change it, and use it every day.
In addition, real estate can be a good source of cash
flow when you rent it. In fact, if you can get a tenant
to cover your mortgage, you are in great shape. It's
like free equity! Lastly, the taxes on the rents can
be offset by your mortgage interest and depreciation
-- both of which are great tax deductions against real
estate income. And, most importantly, as compared to
many investments, you are the one in charge of controlling
the future of your investment. Market dynamics affect
rents and value, of course.
Yet, making a wise choice in the initial purchase, managing the property well,
and selling at the right time can ensure excellent gains.
So, let's say you
decide to invest in real estate. You purchase a condominium that you rent to
a tenant. Five years later, you decide to sell it and buy a property for your
business. Because you made such a good decision on the location of the condo
and maintained the unit well, it appreciated in value. Well, if you were to
simply sell the condo, the IRS would tax the profits, or "capital
gains." The difference between the condo's sales price and what you originally
paid for it (plus improvements) will be taxed at 15%. If you took any depreciation
over the years, it will have to be "recaptured." Recapture is taxed
at 25%. And, there are State and Local taxes to consider, as well. It is not
uncommon for an investor to pay the government 30% of their profits. That can
be a lot of money! And, there's no reason to pay the government if you don't
have to.
But, fear not -- there is a solution called IRC Section 1031. Section 1031
is a provision in the U.S. Tax Code that allows an investor or business-owner
to sell their real estate and re-invest the money in another piece of property
without paying taxes.
(Actually, these taxes are postponed, or "deferred," until
you decide to cash-out of your real estate portfolio or not do another exchange).
Exchanges are easy! The first step to completing an exchange
is to contact a "Qualified
Intermediary" (or "QI") to handle your exchange. At the closing
of the Old Property, the QI will hold the cash proceeds from that sale in trust
on your behalf. The funds should be held in a separate bank account and not
commingled with other client funds held by the QI. Then, when you direct him
to do so, the QI will send those funds to the purchase of the New Property.
There are a few simple rules and time deadlines that you will have to keep
in mind throughout the exchange to properly defer all of the taxes. For instance,
the New Property will have to be equal to or greater in value to the Old Property,
you cannot pull any cash out of the closing of the Old Property, and others.
Your QI should be able to walk you through the rules. And, that's pretty much
it!
Real Estate empires have been created in this manner. The investor buys a small
rental or piece of land, and parlays this modest purchase into bigger and bigger
real estate investments. The best way to create this empire is to defer taxes
by utilizing 1031 Exchanges.
What
can The 1031 Exchange Experts do for you?
Nationwide, toll-free: 866-694-0204
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