Many people who have owned investment property for any length of time may consider selling the property they have and buying a different property that could increase cash flow, depreciation write offs, and net assets.
The main thing that stops most investors from doing this is the fear of paying Uncle Sam thousands of dollars in depreciation recapture and capital gains tax. I work with investors who would be interested in moving to another property with better returns and increased benefits using the IRC 1031 Tax Deferred Exchange. The IRC 1031 is one of the last great tax deferral vehicles left in America today.
If you are interested in considering a 1031 Exchange you need to first determine the following:
- Confirm that the property you wish to sell (Relinquished property) was held as a rental or investment property and that you intend to do the same with the Replacement Property.
- Make sure the title to the Replacement Property will be held in the same manner as title was held on your Relinquished property and this is acceptable to your lender.
- Would you need to use the sale proceeds to make cosmetic or structural improvements on the Relinquished or Replacement Property understanding that the value of the replacement property must equal to or greater than the relinquished property.Will part of the proceeds be used to pay personal debt?
- Will additional parties be added to the title on the Replacement Property?
- Will all members on title to the Relinquished Property be participating in the exchange?
- Are you selling any of their property to or intending to buy property from a relative?
- Do you plan to offer seller financing on the sale of the Relinquished Property?
- Are you aware of the various types of exchanges that may meet your exchange objectives? (e.g. simultaneous, delayed, build-to-suit, and reverse exchanges).
As a Realtor I work with a qualified intermediary from a 1031 Exchange Company who can be very helpful in the process by advising on how the “answers” to these questions will determine the best means of planning the exchange and selecting the most appropriate structure. Of course, exchangers should always seek tax and/or legal advice prior to starting the exchange.
Please give me a call for more information or if you need a referral to an Investment Property Exchange Service.
