A Multi-state Professional Corporation
Remember........"You
can have everything in life you want, if
you just help enough other people get what they want." -Zig Ziglar.
My Special Circumstance — Facts Are Important
Understanding the direction of the path, the past events, and the desired
result or position is crucial for your success.
Please assist by visiting with us so that we understand and know your
needs. Although you are the Captain and
control your circumstances, we are your navigators and must know about you.
My Special Circumstance — Facts Are
Important
My Special Circumstance —
Understanding My Plan.
Is This Strategy Suitable For Me?
Contact
Information
My Special Circumstance — Understanding My Plan
Preface – What This Is About
To help you to better understand the “Like-Kind Exchange” opportunity for deferring income tax on the sale of a building, a condensed and simplified explanation is furnished to you herein. Following the executive summary is a “Fact Sheet and Organizer” for your use in preparing for the exchange.
Executive Summary
Tax Killer
A sale will yield a gain or loss depending on
the amount realized on the asset and the taxpayer's basis for it.
Under the like-kind exchange rules of Code
Section 1031, an exchange of like-kind property will result in neither gain
nor loss recognition, and the new asset's basis will equal the old asset's
remaining basis, plus any cash paid to trade up.
The exchange will kill the tax for the current
trade. The strategy will defer all the
tax on the current transaction. If the
property acquired in the exchange is converted to cash in the future, there
will be tax due at that event.
Is This Strategy Suitable For Me?
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Simplified Decision Table |
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Circumstance |
Yes |
No |
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Is the real estate you intend to sell something other than your personal residence or real estate you recently acquired? |
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Do you intend to use the money received from the sale of your real estate to acquire new real estate which will not be used as your new personal residence or immediately resold? |
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Will you make a profit when you sell your real estate? |
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Do you want to defer paying income tax your profit? |
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If you answered yes to each of these
questions then you should seriously consider structuring your transaction as
an |
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1031 Exchange Process
Skip to... Basic Requirements for 1031 Exchange | Boot | Deferred Section 1031 Exchange | Tax Basis and Gain/Loss Realized | Cost of Exchange
Basic Requirements
for 1031 Exchange. A Section 1031 exchange allows you to exchange
certain property in
Boot. The basic idea in a 1031 exchange is to defer the recognition of taxable gain because you are exchanging property. This does not work if you are not exchanging like kind property. If you receive cash from the transaction, you are obviously not exchanging property since you are receiving money. Section 1031 therefore provides that when you receive (or have the right to receive) cash, that you will be deemed to receive "boot" and be taxable up to the lesser of either the boot received or the total capital gain on the transfer. Property which is not "like kind" will also be "boot". In a real estate exchange, personal property items such as furniture will be boot as to the real estate. Mortgage relief will also be included in "boot". For mortgage relief boot (but not for cash boot), it is possible to offset the boot by either assuming mortgage on the replacement property or by acquiring more replacement property than the amount of exchange proceeds.
The receipt of money or property that is not
like-kind to the property relinquished in addition to the receipt of
replacement property is the receipt of boot and results in the recognition of
at least a portion of any gain.
The actual or constructive receipt of money or non-like-kind property after the transfer of the relinquished property but before the receipt of the replacement property may disqualify the transaction from non-recognition treatment.
Deferred Section 1031 Exchange. Although a simultaneous exchange is possible, most exchanges are done using an exchange intermediary ("exchange company") so that the first part of the exchange can close without waiting for the replacement property to be acquired. The intermediary is substituted for the owner so that the exchange company actually deeds the property to the first buyer. The exchange company is paid the money from the sale and holds that money until the owner finds suitable replacement property and signs an agreement to buy that property. At that point, the exchange company is substituted so that it buys the replacement property with the funds it is holding.
There are now detailed
One variation in a deferred exchange is to "direct
deed" the exchange and replacement properties; i.e., you would convey
directly to the buyer of the exchange property and would receive title directly
from the owner of the replacement property. The advantage is that you can
avoid the second conveyance tax on both the exchange property and the
replacement property. Since the
Deferred exchanges involve two deadlines with
which you must comply. The first is the 45-day deadline in which you must
identify the replacement property. The identification is made to the
exchange company and must be in writing signed by the taxpayer. You may
identify more than one property and if you are not sure that you can get a
property, you may identify alternate properties. However, under the
The second deadline is a bit
trickier. You will have the shorter of 180 days or the time when you
timely file your Federal income tax return in which to close the purchase of
the replacement property. If you need the additional time to complete the
acquisition (past
There are no
extensions on either of these two deadlines, so you must be sure to comply.
Tax Basis and Gain/Loss Realized. You should determine your tax basis in the exchange property. The potential gain (or loss) on the exchange is the difference between the sales price of the exchange property (less selling expenses) and the tax basis. If Section 1031 applies, that gain or loss is not recognized unless there is "boot". If "boot" exists, then a portion of the gain or loss will be recognized. If the "boot" is cash, the gain or loss will be recognized to the extent of the cash. If "boot" is mortgage relief, the gain or loss will be recognized up to the "net boot" amount. When you do a 1031 exchange, your tax basis in the replacement property will be the same as your basis in the exchange property plus an amount equal to additional payments made to acquire the replacement property and amount of mortgage assumed. This means that you may have little or no depreciation on the replacement property since you cannot take depreciation in excess of your tax basis.
Cost of Exchange. The exchange company
will charge you a fee for services. The typical fees involve a minimum
charge which may be increased by a percentage of the exchange property sales
price. There is usually an additional charge if more than one replacement
property is involved and there may be a monthly charge for each month that the
exchange remains open. The exchange company should have a schedule showing
those fees. The typical charges for a single exchange property and single
replacement property would be about $500. In addition, the company may
keep all of the in
Caveats
1. Calendar and monitor the time limits
2. Prepare for cash required for your closings
3. Study the appraisals and fair market values carefully — both for your property being sold and for any property being acquired. Appraisals are only opinions. Usually the opinions are biased. Sometimes with malicious intent. Protect yourself. Comparable sales are usually limited in quantity to a few comparisons. Those chosen can be chosen to increase or decrease a property’s appraised value — and this can work for you or against you.
4. Investigate
the target property to be acquired carefully and ask
5. Contracts should be prepared for potential liens on property purchased
6. Work
with
7. Fund investment accounts for the tax deferred if you plan to sell the property received in the future
Actions I Must Complete
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Step 1 |
Discuss your
exchange with Choose a realtor and
discuss Establish dates for
identifying property you will accept in the exchange Choose legal counsel Choose an exchange
intermediary |
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Step 2 |
Make sure that the real estate contracts have the 1031
terminology in the contract that allows for the assignment & indicates
your intent to do an exchange. Sample Terminology for Real Estate
Contracts: “Both the Seller and the Buyer hereto agree
to cooperate with each other in a manner necessary to enable either party to
qualify for a IRC Section 1031 tax-deferred exchange at no additional cost or
liability to either party. Either party’s rights and obligations will be
assigned to “name of intermediary” to facilitate such exchange.” |
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Step 3 |
New property must be
identified within 45 days of the closing of the old property. |
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Step 4 |
Acquisition of the new property must be completed within 180
days of the closing of the old property. |
Bob Parrish CPA PC has several educational sessions available if you would find a need for any of them:
1. Choosing locations
2. Preparing for closing costs – buyer’s and seller’s responsibilities
3. Styles of titles (types of ownership)
4. Bargaining
5. Mortgages
6. Finding money in retirement plans and IRA’s
7. Understanding the appraisal process — how it can affect your equity, how you can control the process, or find another appraiser
8. Preparing property for sale
Fact Sheet and Organizer
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Information Required |
Information - or attached hereto? |
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Property Sold |
Property Acquired |
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Special Transaction |
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Description of Property |
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Use of Property Sold |
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Legal Descrip, State and County |
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Address |
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Owner of Property |
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For property you currently own - Date Acquired |
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Method of Acquisition & Date Acquired |
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Basis |
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Trade Date |
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Expenses of |
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Property Tax Role FMV |
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Appraisal FMV |
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Recent Comparable Sales Amounts |
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Proof The IRS Requires
Normally the laws will require substantiation of the
following:
1.
Property given in the exchange
1.
Ownership
2.
Acquisition details, including how it was acquired,
date of acquisition, amount paid, records of depreciation or non-recognition of
income. If the property was acquired in any transfer that was not a
purchase, other information will be required.
3.
Description and use of the property
4.
Date of the sale
5.
Copy of closing statement
6.
Copy of records of exchange from the intermediary
7.
Perhaps property tax receipts or records
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Property received
1.
Ownership
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Description and use of the property
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Date of the purchase
4.
Copy of closing statement
5.
Copy of records of exchange from the intermediary -
for example, date the property was identified, date of the possession, etc.
6.
Perhaps property tax receipts or records