REAL ESTATE Increasing the velocity of your money through real estate

The following article is the first of a series of articles about how to increase the velocity of your investment dollar through real estate.

1031 Real Estate Exchanges

A 1031 exchange is a tax-deferred real estate transaction that “swaps” one investment property with another investment property under very strict IRS rules for the timeline and deadlines that structure the transaction.

When most people hear the words 1031 exchange, they think it sounds daunting because they wonder “who would want to exchange directly with me?”

In Section 1031 of the tax code, the IRS has outlined specific guidelines for a 1031 exchange. If you are the owner of an investment property and want to climb the investment ladder, a 1031 exchange could be just the ticket for you.

The 1031 exchange allows you to continue your investment in real estate, while deferring taxes on any gain, so that you can climb the investment ladder faster. By not paying taxes at the time of exchanging up to a larger property, you are able to increase the velocity of your money and your investment growth.

What is a 1031 exchange?

A 1031 exchange is a transaction in which the IRS allows you to sell a real estate investment and replace it with another without paying capital gains tax on the gain of the first property at the time of sale.

This tax concept allows you to keep trading up without having to write a check to the government each time you trade up. Sometimes these exchanges are called “tax free” but they are actually “tax deferred”. Tax is finally paid when you no longer want to be a real estate investor and are ready to “cash out”.

If the property is passed on to the heirs of the investor, it will be subject to the estate tax rules at the time of death. To qualify for a 1031 exchange there is a list of requirements, and most are easy to comply with.

General rules for a 1031 exchange

The current rule reads that upon closing the sale of the first property, the owner has 45 days to locate the exchange property and 180 days to close on it. Therefore, it is wise to talk with both your CPA and your

Realtor® before selling and closing on your property. If 45 days after the closing of the sale of your old property you don’t have an exchange property selected, your exchange will be disallowed, and tax will be due. Those 45 days can pass very quickly.

The “like kind” rule of section 1031 of the code states that the properties exchanged must be “like kind”. This simply means that the investment must continue in real estate. For example, if you own vacant land, you can exchange it for an improved income-producing property such as an apartment building or an office building.

Must be qualifying property

Qualifying property is property held for investment or used in a taxpayer’s trade or business. Any “boot” received will be taxable. Boot is any property which is not “like kind”. If the seller desires some cash or debt reduction this is okay, as long the seller realizes some tax will be due. You don’t want to receive any boot if

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