By Mario J Raso, JD, ABR,EMS THE SIMULTANEOUS REAL ESTATE EXCHANGE: Can't sell it, Exchange it!. If you can't sell your property then exchange it. Exchanging is about benefits....when one party has something you want and you have something they want, then exchange your property for his property. Exchanging goes way back in time when farmers, merchants, traders, and everyday people exchanged property for what they wanted without cash. Section 1031 of the IRS code allows the deferment of taxes when exchanging property that is held by the exchanger for investment purposes or "productive use in their trade or business". There are generally four types of real estate exchanges: The deferred exchange, the simulantanous exchange, the reverse exchange and the build-to-suite exchange. However, the most popular exchange used by most professional exchangors is the simultaneous exchange. The simultaneous exchange allows you to exchange your property concurrently (at the same time in escrow) regardless of what type of property it is. The simultaneous exchange can done as a IRC Section 1031 Exchange as explained above with or without a Qualified Intemediary or can be accomplished as a basic "You buy mine, I'll buy yours" sale exchange of non-IRC Section 1031 property. Depending on how you intented to hold your property, If it is not property held for investment purposes or "productive use in your trade or business" then you may not get the Section 1031 tax deferment of the IRS code benefit. You may want to talk with your tax advisor about this. This blog is not intented to go into the detailed essentials of a Section 1031 exchange. However, property that is your personal residence can be exchanged for other property and may still qualify for the IRC Section 121 Exclusion of Gain from Sale of Principal Residence provision which states: "Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more". Thus, A personal residence can be exchanged for another personal residence. This sometimes referred to a swap, trade, or "you buy my house and I will buy your house". In this economy, exchanging your property for another property, even personal property, (again talk to your tax advisor about the tax implications) is an excellent way to achieve your goals. If you already bought another house to live in and you still have your other home that you cannot sell, then exchange it for something else. If your propety has debt then exchange the equity for property that is free and clear, for example vacant land or a smaller home. Remeber, that even though cash allows you to buy whatever you want in this economy, it is still a depreciating asset. There are tremendous benefits with property exchange. Exchanges bring motivated people together in a mutually beneficial way, including the solution to selling and buying in today's market with minimal logistics and costs. In summary, if you can't sell your property, exchange it. Exchanging is about benefits. A simultaneous exchange can be accomplished to bring mutual benefits to all parties concerned. A win-win situation for all concerned. TIERRA Realty & Investments Investment & Exchange Strategies 520-749-1995 800-780-7276 www.eTierraRealty.com mjraso@MarioRaso.com Mario J. Raso, TIERRA Realty & Investments, does NOT give tax or legal advice. The information contained herein should not be relied upon as a substitute for tax or legal advice obtained from a competent tax and/or legal advisor. Compliments of: ASSET PRESERVATION INCORPORATED SALE vs. AN EXCHANGE “ANALYZE THE BENEFITS BEFORE SELLING” The benefits of IRC Section 1031 exchanges can be tremendous! Investors are often able to defer thousands of dollars in capital gain taxes, both at federal and state levels. If the requirements of a valid §1031 exchange are met, capital gain recognition will be deferred until the taxpayer chooses to recognize it. This essentially results in a long term, interest-free loan from the IRS. AN EXAMPLE An investment property owner sells a rental property for $400,000. The owner originally purchased the property for $200,000. There is $200,000 of debt and the property has been fully depreciated. The capital gain is approximately $350,000 (assuming 75% of the property is depreciable). If the investor does not do an exchange, federal capital gain taxes would be: $150,000 (depreciation recapture) x 25% = $37,500 $200,000 (capital gain balance) x 15% = $30,000 $350,000 Capital Gain Taxes Owed $67,500 The state taxes owed (where applicable) would need to be added to the federal taxes due. Assuming the property owner sold in California, the following additional taxes would need to be paid: State level (CA) 9.3%, $350,000 x 9.3% = $32,550 Total Capital Gain Taxes (Fed. & State) $99,050 The next comparison analyzes the value of the new property that could be acquired in a sale versus an exchange. The comparison assumes an investor makes a 25% down payment and finances 75% of the property (75% loan-to-value ratio). SALE vs. AN EXCHANGE Sale Exchange Equity $200, 000 $200, 000 Capital Gain Tax $ 99, 050 $0 Cash to Reinvest $100, 950 $200, 000 ASSUMING A 75% LOAN-TO-VALUE New Property $403, 800 $800, 000 This example illustrates that the real power of a tax deferred exchange is not just the tax savings – it is the increase in purchasing power generated by this tax savings! ADVANTAGES OF AN EXCHANGE 1. Preservation of equity 2. Maximize return on investment 3. Increased cash flow from larger properties ASSET PRESERVATION INCORPORATED National Headquarters 800-282-1031 Eastern Region Office 866-394-1031 A National IRC §1031 “Qualified Intermediary” © 2006 Asset Preservation, Inc. Asset Preservation, Inc. does NOT give tax or legal advice. The information contained herein should not be relied upon as a substitute for tax or legal advice obtained from a competent tax and/or legal advisor. |