What is a 1031 Exchange?
Any business or investment property can be exchanged for a "like-kind" property or properties. Like- kind does not refer to characteristics, but rather nature of investment. A professionally structured 1031 exchange allows an investor to sell their property, to reinvest in a new property, and to defer a capital gains tax. The 1031 exchange extends portfolio growth and increases return on investment. This tax deferment also enables real estate investors possible management relief.
Southern California has a wide range of quality and grade of apartments that allow you to diversify and prioritize. At Apartment Advisors INC., we specialize in the 1031 exchange, providing you a direct tax deferment approach that enables you to achieve maximum monetary gains long term.
What is Section 1031 and why is it useful to investors?
Section 1031 is part of the federal tax code that allows you to postpone paying tax on the capital gain of selling your property, if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. This tax deferment allows you to invest and increase your cash flow by postponing the capital gains tax until the final sale of your investment property.
Who can do a 1031 tax deferment?
A 1031 requires an exchange of two like kind business or investment properties. This does not include personal homes or primary residences. An exchange does not have to be, however, between two apartment complexes. The exchange must only be between business or investment properties.
How does the exchange work?
The simplest form of an exchange would be a simultaneous swap of two business or investment properties. A deferred exchange allows you 180 days after the sale of your property to complete the exchange. Within the first 45 days of the 180, you also must identify up to three like kind properties that you are looking to purchase.
Why hire Apartment Advisors?
At Apartment Advisors INC., 1031 exchanges are all we do. Apartment Advisors work to advance your investment potential using expertise and experience.
1031 Rules: The Basics
Same Taxpayer: The taxpayer who sells is the tax payer who must buy.
Property Identification: This is the big one… the replacement property must be identified within 45 days of the close of escrow.
1. Three Property Rule - Identify any three properties
2. Two Hundred Percent Rule - Identify four or more properties as long as the combined value of those properties does not exceed 200 percent of the relinquished property
3. 95 Percent exception rule; (rarely used) - If value exceeds 200 percent , than 95 % of what is identified must be purchased.
Purchase of the Replacement: Close of escrow for the replacement property must be within 180 days of the relinquished property.
To avoid paying taxes… The price of the replacement property is equal to or greater than the relinquished property. Note: You can trade down, however you pay taxes on the difference between what you sold and what you purchased.
Debt must be equal to or greater than the debt in the relinquished property.
1031 Rules: Hold Time & Intent
1031's are meant to be a vehicle for investment purposes. The replacement and relinquished properties must be investments (not second homes). Though there is no hold time in the 1031 code, the Internal Revenue Service looks to determine whether the property was acquired immediately before the exchange. Was it purchased to fix and flip or held for productive use or investment? Time is one of many factors that supports the intent to hold for investment. The shorter the time, the more substantial the facts should be to support the intent. Additional supportive facts are whether the property is itemized on Schedule E or Schedule A. Investment properties are listed on Schedule E. Was the property rented? Does the level of personal use exceed 14 overnights per year? If so, the character may resemble a second home.
Triple Net Leases
A triple net lease requires the tenant to pay some or all of the property expenses which would normally be paid by the property owner, in addition to the rent fee under the lease. Triple nets have become popular investments for those seeking steady income with relatively low risk. This long-term investment offers no management responsibilities on the part of the investor.
Delaware Statutory Trust s
DST's benefit investors who are looking for a professionally managed, potentially institutional quality property. A DST can be acquired by large investment capital or by pooling money with up to 100 investors. Most DST's are not sole-ownership investments.
Charitable Remainder Trusts
A CRT allows investors to convert assets to an irrevocable trust in which an IRS approved charity is a trustee of. The charity would then manage or invest the property so it produces income which is paid to the investor. After the payment period set forth by the investor is over, the property goes to the charity.