Real Estate Investor 1031 Exchange Options

Most Real Estate Investors have heard of the 1031 Exchange.

Did you know there are 17 different tax minimization solutions for reducing, deferring, or completely eliminating the tax bill on the sale of a Primary Residence, Second Home, Investment Property, Business, Stocks, Bonds, Crypto, Artwork or almost any highly appreciated asset?

In this series of posts we will discuss the 17 Real Estate Tax Minimization Options available to you in five categories. Our first category is the 1031 Exchange with three options to choose from.

Category 1: 1031 Exchange

The 1031 Exchange has three types of exchanges. The Forward Exchange, Reverse Exchange, and Improvement Exchange.

The IRC 1031 Exchange is a method of transferring property so that the proceeds of the transfer can be used to acquire another property of like-kind without paying capital gains taxes.

Like-Kind property transfers can be for any type of investment property. The only significant stipulation for exchange properties is that the real estate must be used for a business or investment purpose (not a primary residence or second home).

Properties that cannot be traded via a 1031 exchange include speculative or flipped properties, stock in trade, or developed lots. Second homes may or may not fall under the non-exchangeable property list depending on the local state tax laws and the property’s usage but generally are not eligible.

A successful 1031 Exchange has the following requirements.

1.      The seller must buy a replacement property of equal or greater value.

2.      The seller must identify one or more replacement properties in 45 days.

3.      The seller must close on at least one of the identified properties in 180 days.

4.      The replacement property purchase must replace the equity and the mortgage of the relinquished property.

5.      The depreciation schedule of the relinquished property is carried forward to the replacement property. There is no reset of the depreciation schedule unless new cash is added to the purchase.

There are several other rules that may apply to your transaction, but the list above applies to all transactions. Note: If you start a 1031 Exchange with a buyer and the deal falls through, you can sell to a new buyer but you must start a new 1031 Exchange because each transaction is between a specific buyer and seller.

We will briefly discuss each Exchange Type separately below.

1.     Forward Exchange: Simple, Easy, and Inexpensive

A Forward Exchange (also called1031 Exchange) occurs when the investor sells their relinquished property first, then buys a replacement property later. This is the simplest type of1031 Exchange.

The investor (seller) must establish the Forward Exchange prior to the close of escrow on the relinquished property, then identify one or more replacement property options within 45days. Always remember to tell the Exchange Accommodator by emailing them a complete ID form before the 45 day window ends.

Next the seller must close on one of the identified properties before the 180 day window closes. All funds from the sale of the relinquished property can be used to purchase one or more replacement properties.

If any funds remain with the Exchange Accommodator after the 180 day window passes (often referred to as boot), those funds are returned to the seller and are taxable.

There are more details to consider but these are the basics of a 1031 Forward Exchange. Our website, StartAnExchange.com, has more information and educational materials on the Forward Exchange and more ways to save when exiting a Forward Exchange.

2.     Reverse Exchange: Buy Now, Sell Later, Pay No Taxes

A Reverse Exchange occurs when the investor buys their replacement property first and sells their relinquished property after the replacement property is purchased (the reverse of a Forward Exchange).

We accomplish this by establishing a Reverse Exchange prior to the close of escrow on the purchase of the replacement property. The Exchange Accommodator places the replacement property in an LLC. The investor (buying first in this case) must come up with their own cash or financing prior to the purchase, deposit it in the LLC account provided by the Exchange Accommodator, then close escrow.

Once escrow closes on the replacement property, the investor is locked into the Reverse Exchange process. There is no 45 day identification period because the replacement property has already been purchased.

The relinquished property must be sold within 180 days to successfully complete the Reverse Exchange. All funds from the sale pass to the Exchange Accommodator. These funds can be used to payoff the loans against the purchase of the replacement property or can be returned to the investor. Any funds greater than the purchase price of the replacement property is considered boot and is taxable.

3.     Improvement Exchange: Sell one property, buy another and improve it.

An Improvement Exchange occurs when the investor wants to sell a property, buy another property and use any extra cash to improve that new property. This solution can be used in several different ways. For example, in combination with a Forward Exchange, Reverse Exchange, or improving a property that was recently purchased.

We accomplish this by establishing an Improvement Exchange prior to the close of escrow on the relinquished property in a Forward Exchange or as part of a Reverse Exchange. The Exchange Accommodator places the funds from the close of the Relinquished property into an LLC.

These funds are distributed to vendors via one time or installment payments. The investor must never pay for anything with cash or their personal credit card because these cannot be reimbursed. All funds must be used within 180 days from the relinquished property close of escrow.

Any funds left in the LLC account after 180 days is returned to the investor, considered boot and is taxable.

If you'd like to pay less in taxes, schedule a complimentary consultation with a Tax Strategist at DeferTax.com today! Call 877-829-7927 or book an appointment here…

Summary:

The 1031 Exchange is a simple but powerful tool that can be combined with other real estate or tax minimization transactions.

The Forward Exchange is the simplest transaction and the Exchange Accommodator can do most of the work for you. The Reverse Exchange and Improvement Exchange are much more complex and require an investment of your time to properly execute them.

These are complex strategies and should be explored with the help of an expert who places your best interests first. Let’s face it, if someone has one or two options, they are not a tax strategist. They are a salesman trying to sell you their product.

We have over 40 tax minimization options on our platform. We are nationwide educators and keynote speakers on Tax Minimization. We are also real estate investors, business owners, homeowners, and high income earners. We use the strategies we recommend!

Once you pick theright strategy that is right for you, we connect you with our network of vettedproviders that are “best in class” in the industry. How do we know that? We usethem ourselves. You can work with one of them or someone else. It is entirelyup to you.

I hope you found this document informative. We have moredetailed content and videos on this tax strategy at DeferTax University. Click hereto learn more.

Our exploration of tax minimization will continue withCategory 2, the Delaware Statutory Trust in our next post.

Our website, StartAnExchange.comThe easiest place on the internet to Start an Exchange, has moreinformation and educational materials on the 1031 Exchange and more ways tosave when exiting an exchange.

Our website, DeferTax.com, has more information andeducational materials on over 40 tax minimization options for a primaryresidence, second home, investment property, business, stocks, crypto, andordinary income tax reduction.

If you'd like to pay less in taxes, schedule a complimentaryconsultation with a Tax Strategist at DeferTax.com today! Call 877-829-7927 or book an appointment here…

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