1031 Exchange Workshop

"Nothing wrong with buying a house. The difference is, I use debt to buy it, and I pay no taxes. It's not the house, it’s not the stock, it’s not the bond, it’s not the ETF. It's your brains. So, I would rather use debt and pay no taxes.”

-?“Rich Dad Poor Dad” author Robert Kiyosaki

Paying no taxes is a top priority for real estate investors.? One of our favorite tools for paying no taxes is the 1031 exchange.? In reality, we are deferring capital gains taxes not completely eliminating them (until death), but it’s a great way to build your portfolio with non-taxed gains.?

“I.R.C. Section 1031 allows owners of business and investment real property to defer payment of capital gains taxes by reinvesting proceeds from the sale of a current owned property into a new like-kind property.”

We recently participated in a workshop session with IPE 1031 as presenting speakers.? IPE 1031 is a Qualified Intermediary Service (QIS) in West Des Moines, IA.? The number one lesson learned was that if you are even thinking about utilizing a 1031 exchange, you need to consult a QIS such as IPE 1031 to make sure you are following IRS rules.? Even a small error can result in a failed exchange that will bring your tax bill due.

The main reason for a 1031 exchange is the ability to use the entire equity amount of a sold property to acquire a more lucrative or appropriate investment.? The tax consequences are taken out of the equation generally allowing for investors to move into larger or more properties.

Two important rules of the 1031 exchange are:

45-day Identification Rule – Investors must identify replacement properties within 45 days of relinquishing the first property.

180-day Exchange Period Rule – Closing on all replacement properties must happen within 180 days of relinquishing the first property.

Common Misconception of the “like-kind” exchange

Nearly all types of real estate are considered like-kind so long as they are used for investment or use in a business.? Examples include rental properties, office buildings, strips centers, hotels, land and storage units.? You do NOT have to exchange an office building for another office building.

IPE 1031 provided us with 10 Red Flags for Exchanges.

1.????? The disqualified Qualified Intermediary

2.????? Not asking the Right Questions

3.????? Unassignable Real Estate Purchase Agreements

4.????? Trading Down in Value

5.????? Not Utilizing the Power of Reverse Exchanges

6.????? Not Documenting the Exchange

7.????? Prohibited Related Party Transactions

8.????? Flipper and Dealer Status

9.????? Settlement Statement Problems

10.? Partnership Issues

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“Buy til you Die!” – Stepped-up basis for heirs?

Heirs who inherit property through a taxpayer that utilized a 1031 exchange will acquire the property at a stepped-up basis.? The heir’s basis will be set at the fair market value of the property at the time of the taxpayer’s death.? This means that the amount of tax that was deferred over the life of the investment will be eliminated for the heir when they receive the stepped-up basis.

?As with most things IRS, there are plenty of exemptions, rules and criteria when you want to get creative with a 1031 exchange.? Please refer back to the #1 lesson learned and consult with your favorite Qualified Intermediary.? IPE 1031 was extremely professional and knowledgeable during the event and they can be reached at www.IPE1031.com or 515-279-1111.