SECTION 1031 EXCHANGES AND COST SEGREGATION STUDIES LIKE YOU NEVER HEARD ABOUT THEM BEFORE

PART II OF V...By the way, appreciate your Certified Public Accountant because they have to know all of these things off the top of their heads. Their expertise in managing the complexities of depreciation is invaluable. And just so you know my credentials, I was a practicing Certified Public Accountant for over 50 years before getting into commercial real estate full-time over six years ago. When I taught Accounting, we always took the cost basis of the property, divided it by the number of years in the useful life, and took straight-line depreciation. For income tax purposes, you are allowed to take ACCELERATED depreciation on certain assets, giving you more depreciation up front, yielding a larger income tax deduction, reducing your income tax, and increasing your cash flow! Please read this paragraph over and over again and commit it to memory because it’s really important!!! No one, and I mean NO ONE, likes to pay income taxes. Everyone will go to great lengths to not pay income taxes. Because of this, investors who invest in Commercial Real Estate, defined by me as any real estate that generates income, will use SECTION 1031 of the INTERNAL REVENUE CODE. This section says that if you are selling Commercial Real Estate and you are purchasing another “replacement property”, the replacement property: Must cost the same or more than the sales price of the property sold. Must be identified within 45 days of the sale date. Must have a consummated purchase within 180 days of the sale date.By using SECTION 1031, you defer the gain on the property sold, and you do not pay income taxes currently. But very few people, if anyone, will tell you that you have to reduce the cost basis of the asset acquired by the deferred gain on which you are not currently paying income taxes, and by reducing the cost basis of the assets acquired, reducing your future depreciation. Believe it or not, you will pay more income taxes because you will take less depreciation. In all of my years as a Certified Public Account and a Commercial Realtor, no one, and I mean NO ONE, has ever explained it like that. But it is what it is (I know what I wrote, and I meant to write that), and you have to look at the good points of using SECTION 1031 and the drawbacks as well. As I wrote before, no one wants to pay income taxes, and SECTION 1031 allows the Commercial Real Estate Investor to defer income taxes for years and years. That’s because you can keep using SECTION 1031 over and over again.There is one incredibly wonderful benefit of using SECTION 1031. If you do one SECTION 1031 exchange after another, when the owner passes away, the heirs get the assets that they inherit at FAIR MARKET VALUE, which we will call full price, and they can start the depreciation cycle all over again. I guess that is the ultimate in income tax planning. Believe it or not, you can plan for that and make it work to your advantage.My name is Paul Levine, and you can call me at (818) 298 – 4000 after 10 AM Pacific Time Monday through Friday and, yes, even on the weekends. You can also send an email to me at [email protected] , and I will always try to answer you in a timely manner.