1031 Property Exchange - Investment Properties: 1031 Exchanges
If you are selling an investment property and planning on re-investing then the 1031 exchange is right up your alley. A 1031 exchange is basically a tax shelter allowed by the IRS where you sell an investment property and then re-invest the profit from that sale into another property. Now, keep in mind that you [...]
Introduction to Reverse 1031 Exchanges Pursuant to IRS Revneue Procedure 2000-37
Investors can acquire a like-kind replacement property before disposing of the current relinquished property by structuring a reverse 1031 exchange transaction pursuant to Revenue Procedure 2000-37. Investors may be concerned about the possibility of not being able to locate, identify and acquire suitable like-kind replacement properties within the required deadlines …
Starker Exchanges Can Be Tricky
Q I have owned and rented a house down south since 1989 and plan to sell it as part of a section 1031 Starker exchange. I am seriously considering buying a beach house in Virginia, which I intend to rent during the summer months, as well as using it for 14 days or fewer during the year.
1031 Exchange Boot
Although it is not used in the Internal Revenue Code, the term ?Boot? is commonly used in discussing the tax implications of a 1031 Exchange. Boot is an old English term meaning ?Something given in addition to.? ?Boot received? is the money or fair market value of ?Other Property? received by the taxpayer in an exchange. Money includes all cash equivalents, debts, liabilities or mortgages of the taxpayer assumed by the other party, or liabilities to which the property exchanged by the taxpayer is subject. ?Other Property? is property that is non-like-kind, such as personal property, a promissory note from the buyer, a promise to perform work on the property, a business, etc.
There are many ways for a taxpayer to receive ?Boot?, even inadvertently. It is important for a taxpayer to understand what can result in boot if taxable income is to be avoided.
The most common sources of boot include the following:
Cash boot taken from the exchange. This will usually be in the form of "Net cash received", or the difference between cash received from the sale of the relinquished property and cash paid to acquire the replacement property(ies). Net cash received can result when a taxpayer is "Trading down" in the exchange (i.e. the sale price of replacement property(ies) is less than that of the relinquished.) Debt reduction boot which occurs when a taxpayer?s debt on replacement property is less than the debt which was on the exchange property. As is the case with cash boot, debt reduction boot can occur when a taxpayer is "Trading down" in the exchange.
Sale proceeds being used to pay non-qualified expenses. For example, service costs at closing which are not closing expenses. If proceeds from the sale are used to service non-transaction costs at closing, the result is the same as if the taxpayer had received cash from the exchange, and then used the cash to pay these costs. Taxpayers are encouraged to bring cash to the closing of the sale of their property to pay for the following: Non-transaction costs: i.e. Rent perorations, Utility escrow charges, Tenant damage deposits transferred to the buyer, and any other charges unrelated to the closing.
Excess borrowing to acquire replacement property. Borrowing more money than is necessary to close on replacement property will not result in the taxpayer receiving tax-free money from the closing. The funds from the loan will be the first to be applied toward the purchase. If the addition of exchange funds creates a surplus at the closing, all unused exchange funds will be returned to the Qualified Intermediary, presumably to be used to acquire more replacement property. Loan acquisition costs (origination fees and other fees related to acquiring the loan) with respect to the replacement property should be brought to the closing from the taxpayer?s personal funds. Taxpayers usually take the position that loan acquisition costs are being paid out of the proceeds of the loan. However, the IRS may take the position that these costs are being paid with Exchange Funds. This position is usually the position of the financing institution also. Unfortunately, at the present time there is no guidance from the IRS on this issue which is helpful.
Non-like-kind property which is received from the exchange, in addition to like-kind property (real estate).
Boot limitationsExchangers are advised to follow the following guidelines:
- Always to trade "across" or up, but never trade down in order to avoid receipt of boot, either as cash, debt reduction or both. The boot received can be off-set by qualified costs paid by the Exchanger.
- Always to bring cash to the closing of the replacement property to cover loan fees or other charges which are not qualified costs. (See above)
- Not to receive property which is not like-kind.
- Not to over-finance the replacement property, since financing should be limited to the amount of money necessary to close on the replacement property in addition to exchange funds which will be brought to the replacement property closing.
Invest in Jacksonville Florida Real Estate
Jacksonville is located in Northeast Florida in Duval County; Jacksonville sits at the crossroads of two interstate highways and it is the largest city in the contiguous United States in land area, a major port, the insurance and financial center of the state, a site of U.S Navy bases and the home of the National Football League?s Jacksonville Jaguars.
The Jacksonville metropolitan area is ranked 14th largest city in the United States with more than 1.3 million residents which includes three beach cities the Clay, Baker, Nassau and St. Johns counties just maybe the most diverse metro area in all Florida and though sprawled as it is across the whole corner of northeast Florida.
The Jacksonville, Florida real estate market offers a wide range of housing options. From beach front homes and condominiums. To family neighborhoods and luxury country homes that are only a short drive from downtown. The wider Jacksonville area includes the smaller communities of Fanning Springs, Orange Park, Palm Coast, Saint Augustine, and West to Gainesville. Surrounding counties include; Duval, Clay and St. John's County Florida.
It is the best place for real estate investors to invest an area that has a great quality of life a low cost of living, a mild breezy climate, lots of sun and white sandy beaches. Add in the fact that you can enjoy all the benefits that a big city has to offer, like pro sports-shopping, first class restaurants, arts and culture, and real diversity.
Jacksonville and its six neighboring counties is just that place. In addition the job-employment picture is good here. What if your tastes run to living in a rural community or maybe you like a metropolitan or downtown setting? Then the Jacksonville area is also it. Another great spot just outside Jacksonville city is Neptune Beach and Jacksonville Beach. These areas are filled with unique shops, restaurants and music venues. What a great place to spend an evening or go to on the weekends and even though these are popular places, there are no parking meters.
Many areas are quiet and rural, and hark back to an older Florida with little village of Green Cove Springs, with brick streets and lakeside venue, and a spring-fed spa that dates back to the days when this part of Florida was a resort at the end of the train line or Black Creek, where pirates hid out after raids on the Spanish Armada five centuries ago.
All in all, the Jacksonville area is a great blend of big city life yet rural life and plus, it is very affordable for the investors planning to invest such a great place like this.
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1031 Exchange - Investment Properties: 1031 Exchanges
If you are selling an investment property and planning on re-investing then the 1031 exchange is right up your alley. A 1031 exchange is basically a tax shelter allowed by the IRS where you sell an investment property and then re-invest the profit from that sale into another property. Now, keep in mind that you [...]
Pros and Cons of 1031 Exchange
Pros of 1031 Exchange:
The taxpayer may dispose of property without bringing upon oneself any immediate tax liability. This allows the taxpayer to keep the earning power of the deferred tax dollars working for him in another investment. In effect, this money can be considered an interest-free loan from the IRS. There is no interest paid on the outstanding loan balance and there is no specific due date.
The loan will be abolishing upon the death of the taxpayer, which means that the taxpayer's estate never has to repay the loan. The taxpayer who is entitled by law gets a stepped-up basis on inherited property; that is, their basis is the fair market value of the inherited property at the time of the taxpayer's death. A subsequent sale by the heirs will be taxable only to the extent of the difference between the stepped up basis and the net sale price.
1031 exchange is highly advantageous to the taxpayer as it enables the taxpayers to sell income, investment or business property and replace with like kind replacement property without having to pay the capital gain taxes on the transaction. Section 1031 of IRS is the basis of tax-deferred exchanges. The ?safe-harbor? Regulations was issued by the IRS in 1991, which established approved procedures for 1031 exchanges. With the issue of this regulations tax deferred changes became easier, affordable and safer than before.
Cons of 1031 exchange:
The main disadvantage of 1031 exchange is that it offers a reduced basis for depreciation in the replacement property. The tax on the replacement property is calculated on the basis of the purchase price of the replacement property minus the gain, which was deferred on the sale of the relinquished property as a result of the exchange. Thus the taxpayer needs to pay tax also on the deferred gain if he cashes out of his investment.
The taxpayer may incur increased transactional costs for entering into and completing an Exchange. Typical costs include possible additional escrow fees, attorney's fees, accounting fees, and the Qualified Intermediary's fees.
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