Internal Revenue Code Section 1031 provides that no gain or loss will be recognized on the exchange of any type of business use or investment property for any other business use or investment property. 1031 Exchanges are not really exchanges in the context of two-party barter. Instead, they are typical sales and purchases that involve the same exact ingredients as any other sale or purchase, without the capital gains. The only real difference is the investor is increasing his selling and buying power by electing to avoid the drain of taxes under Section 1031 regulation; No other aspects of the transaction are affected.
Anyone who is thinking about selling a business use or investment property should consider affecting a 1031 Exchange. An Exchange offers the astute investor an opportunity to reinvest the federal capital gains that would normally be handed over to the IRS and put that money to work for himself. You work too hard to simply pay the tax without carefully considering this reinvestment option. Essentially, 1031 Exchanges should be thought of as an interest free loan from the IRS; one in which the principal may be increased through subsequent exchanges and may never require repayment if you plan properly.
Section 1031 of the Internal Revenue Code relates to the disposition of property that is held for use in productive trade or business or held for investment. If performed properly, code section 1031 provides an exception to the rule requiring recognition of gain upon the sale of property. The current Federal tax rate (maximum) on long term capital gains is 15%, plus any applicable state taxes. Long term capital gains are not taxed as ordinary income.
lt is applicable when the property in question falls within the "like kind" definition and the principal intends to BUY another property of "like kind" within 180 calendar days following the close of escrow from the SALE, and when the Investor has a recognizable gain. Remember, under the delayed exchange parameters, there is a maximum of I80 calendar days to purchase replacement property.
If the principal is not sure prior to closing the sale property. it is a clever idea that the transaction is structured as an exchange rather than a sale. Otherwise, if the escrow is closed without the exchange protocol in place, the principal will have receipt of proceeds and cannot perform an exchange. If the exchange is "set up", The principal has the option of deferring taxes.
After an exchange, has been "set up", by contacting a Qualified Intermediary prior to closing a sale, the Seller, Exchanger, may identify up to three (3) potential properties they MAY intend to acquire, within 45 days of the close of the "sale" escrow.
One can list or identify more than 3 properties; however these properties cannot haw an aggregate value of 200% or more of the sale property. If more than three (3) properties are identified, and the value exceeds 200% of the sale price, then you must close escrow on 95% of the identified properties. Escrow must close, on at least one of the identified properties (or all of the properties if using the 95% rule}, within 180 calendar days from the date of the close of the sale escrow. Be sure to check with your legal and/or tax advisor.
You cannot take cash out of an exchange without creating a taxable event. If an Exchanger elects to take some of the equity out of the sale proceeds in the way of cash or a note, this is called "BOOT" and is taxable. However, to avoid taxable boot, an Exchanger can opt to refinance after the exchange transaction is completed.
It is possible under the current IRS section 1031 rules, to continue to exchange properties, using all of your equity, thus increasing your portfolio Net Worth much faster than were you to sell properties, pay the taxes, and then acquire another property with the remaining equity. For an exchange to be 100% tax differed, the Exchanger must acquire replacement property that is of equal or greater valve and spend aII of the net proceeds from the relinquished property. Many specific requirements must be satisfied in order to complete the exchange properly.
Net lease properties are like all-weather tires. They are good investments in both good and bad economic times and in hot and cold real estate markets. Here’s why: a single-tenant net lease investment is guaranteed by the lease at pre-set rental rates. As an owner, you know exactly who will be a tenant in your building, how long that tenant will be there and exactly how much rent they will pay. That means you will derive a predetermined income from your investment, as long as the tenant is occupying the asset and current with the terms of their lease.
Many people consider single tenant net lease properties as bond-like investments because of their stable, predictable returns. Because tenants commit to long-term leases, there is less re-leasing risk. Moreover, single-tenant, net-leased investments can be tailored to an investor’s risk/reward expectations by choosing tenants with different credit profiles. For example, some tenants are rated by national credit ratings agencies while other tenants have only their previous financial performance to recommend them.
Unlike traditional real estate investments whose valued is determined exclusively by the real estate itself, a single tenant net lease property’s value is determined by a combination of factors including the tenant’s credit, the length of the lease and rental escalations over the term, and, last but not least, the real estate. In markets where the real estate experiences wide valuation swings, a single tenant net lease property will maintain its value because of its bond-like, long-term lease and the credit tenant guaranty for the lease.
While there are fewer risks related to investing in single tenant net lease properties, as compared to more speculative real estate investments, tenants with non-investment grade credit profiles offer higher levels of risk. But that risk typically provides higher returns as well. And investors always need to think about the “re-leaseability” of a property if the tenant were to vacate the space.
The most important reason is to be able to defer potentially taxable gain one may realize from a sale of the property. This way one may be able to use ALL OF THEIR EQUITY to acquire another property, instead of the amount of equity left over after paying applicable Federal and State income taxes on their gain. Additionally, the ability to go from one type of property to another allows an investor to utilize these other concepts: Leverage, Diversification, Cash Flow, Consolidation, Management relief, and possibly Increase their Depreciation.
lt is possible, under the current IRS Section 1031 rules, to continue to exchange: properties, using all of your equity, thus increasing your portfolio Net Worth much faster than were you to sell properties, pay the taxes, and then acquire another property with the remaining equity. For an exchange to be 100% tax differed, the Exchanger must acquire replacement property that is of equal or greater value and spend all of the net proceeds from the relinquished property. Many specific requirements must be satisfied in order to complete the exchange properly,