We are finishing up the first month of 2022 by bringing back some important pieces of investment knowledge that can help your investing grow this year. Onward to investing success and the 1031 Exchange!
To learn even more about the different investment directions that you can take, check out the Equity Advantage Video Library and subscribe to the Equity Advantage YouTube channel for more 1031 Exchange educational videos.
Partnership Exchanges
Partnerships take many forms. There are general partnerships, limited partnerships, joint ventures, joint tenancy, Corporations, LLCs, etc. The IRS recognizes a partnership as a single entity, a single person. This “person” may Exchange real estate, but the individuals who make up the partnership may not Exchange their individual shares. This creates a problem when one or more persons wish to break out of the partnership and go on their own without paying capital gains tax.
What are “Normal Transactional Costs” in a 1031 Exchange?
An investor’s final settlement statement of a relinquished or replacement property often contains a myriad of expenses. The IRS stipulates that in order for closing costs to be paid out of Exchange funds, the costs must be considered normal transactional costs. Given the range and amount of these expenses, investors and their classification are critical in calculating the net value and equity for reinvestment.
Determining Deal Status in a 1031 Exchange
Investors vs. Dealers in IRC Section 1031 Exchanges… What does that mean and which status do you fall under? The IRS makes a strict distinction between an investor and a dealer. An investor holds property for a period of time (usually longer than a year) and a dealer develops property or purchases property with the intent to make improvements and sell. Where an investor receives 1031 Exchange benefits, a dealer does not.
Many investors who buy and sell real estate want to know when they are crossing the line from being an investor to becoming a dealer, and dealer status is one of the largest “gray areas” of Section 1031. A dealer may have properties that are held for resale, but is also entitled to be an investor like anyone else.
How do I get started in a 1031 Exchange?
Getting started with an Exchange is as simple as calling your Exchange Facilitator. Before making the call, it will be helpful for you to have information regarding the parties to the transaction at had (for example, names, addresses, phone numbers, file numbers, and so on). During the phone call, the Exchange coordinator will ask questions about the property being relinquished and any proposed replacement property.
The initial discussion will vary dramatically from company to company with respect to the amount of detail requested. There is very little actual information required to structure a basic delayed Exchange. We at Equity Advantage take a more in-depth approach to the process; we like a proactive rather than reactive position. The more we understand our client’s objectives, the better equipped we are to help them achieve them. For this reason, we encourage our prospective clients to both ask questions and answer ours.
Is it OK to go down in value and reduce the amount of debt I have in the property?
An Exchange is not an “all or nothing” proposition. You may proceed forward with an Exchange even if you take some money out to use any way you like. You will, however, be liable for paying the capital gains tax on the difference (“boot”).
Is it possible to Exchange out of one property and into multiple properties?
It does not matter how many properties you are exchanging in or out of (1 property into 5, or 3 properties into 2) as long as you go across or up in value, equity and mortgage. The only concern with exchanging into more than three properties is working within the time and identification restraints of section 1031.
More Answers to your Questions »
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
