What Is A 1031 Exchange, Investment Properties, Understanding Taxable Boot, and more - with Ute Heidenreich | Ep. 55

Welcome back to the Millionaire Real Estate Podcast! Today, we sat down with special guest Ute Heidenreich to discuss tax exchanges, investment properties, and more. 

 

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Tax Deferred Exchanges, 1031 Exchanges, Starker Exchanges, Like-Kind Exchanges all refer to the exchanges of real investment property of “like-kind” pursuant to Section 1031 of the Internal Revenue Code, which provides as follows: NO GAIN OR LOSS SHALL BE RECOGNIZED ON THE EXCHANGE OF PROPERTY HELD FOR PRODUCTIVE USE IN A TRADE OR BUSINESS OR FOR INVESTMENT IF SUCH PROPERTY IS EXCHANGED SOLELY FOR PROPERTY OF LIKE KIND WHICH IS TO BE HELD EITHER FOR PRODUCTIVE USE IN A TRADE OR BUSINESS OR FOR INVESTMENT Tax Deferred Exchanges permit deferral of capital gains tax obligations and depreciation recapture when an investor trades investment property for like-kind property. As an actual swap of properties with another investor is highly unlikely, the investor will use the services of a qualified intermediary like TOWNE 1031 EXCHANGE, LLC to accomplish a delayed exchange. Who can Exchange? Any tax paying entity is entitled to the benefits of Section 1031. Individuals, corporations, LLCs, partnerships, trusts, foreigners owning property in the US can all qualify. The taxpayer who sells the relinquished property must be the same as the taxpayer who purchases the replacement property. Reasons to Exchange 1031 Exchanges allow taxpayers to own the type of property that helps achieve their goals or solve their problems. It allows taxpayers to increase investment returns, meet business needs, simplify their life by consolidating properties or relieving management responsibilities, diversify portfolios or relocate investment properties. The Qualified Purpose The properties involved in the exchange must be held for a qualified purpose (primary residences, second homes exclusively owned for personal use, property held primarily for resale and developers’ inventory do not qualify). Other properties excluded from tax deferred exchanges are securities and partnership interests. The Like-Kind Requirement Property must be exchanged for property of like-kind. This requirement is easily met in real estate as all real estate is deemed to be like kind to other real estate – land can be exchanged for a rental duplex, an office building can be exchanged for a shopping center so long as they are located in the United States. As a result of the 2017 Tax Cuts and Jobs Act, 1031 exchanges are no longer available for personal property, such as equipment, art or livestock. Taxable Boot To fully defer the tax obligation the taxpayer must trade equal or up in value, in equity and in debt. Anything he receives that is not like-kind property will be deemed to be taxable boot (cash, other property, mortgage relief). The Process of an Exchange Using TOWNE 1031 EXCHANGE, LLC TOWNE 1031 EXCHANGE, LLC prepares the necessary documentation to evidence the exchange. The Exchange process is subject to a multitude of rules and regulations and TOWNE 1031 EXCHANGE, LLC will help guide taxpayers through the process. TOWNE 1031 EXCHANGE, LLC does not provide legal or tax advice. The exchange agreement must be signed before the closing of the relinquished property. It provides evidence of the intent to exchange, assigns the taxpayer’s interest under the sale contract to TOWNE 1031 EXCHANGE, LLC and instructs direct deeding of the relinquished property to the buyer. As a result of the contract assignment, TOWNE 1031 EXCHANGE, LLC becomes entitled to receive the net proceeds. Under the regulations it is essential that the taxpayer never takes control of the exchange proceeds. During the exchange period, TOWNE 1031 EXCHANGE, LLC will hold these exchange proceeds in a separate account for each taxpayer at TOWNEBANK. Deadlines The closing date of the relinquished property sets two clocks running: 45 days to identify and 180 days (the shorter of 180 days or the date the tax return is due, including extensions) to close on replacement property. The time deadlines refer to calendar days and there is no provision permitting extension to the next business day if a deadline falls on a weekend or legal holiday. TOWNE 1031 EXCHANGE, LLC will receive and acknowledge the identification of replacement property. Identification must be made in writing, contain an unambiguous description and be signed by the taxpayer. Identification Rules The identification of replacement property is limited as follows: The 3 Property Rule: Up to three potential replacement properties can be identified without regard to their value The 200% Rule: If more than three potential replacement properties are sought to be identified, then each property must be shown with its fair market value, and the aggregate fair market value of all identified properties cannot exceed 200% of the value of the relinquished property The 95% Rule: If more than three properties are identified and their aggregate value exceeds 200% of the value of the relinquished property, then the investor must acquire 95% of the identified value in order for the exchange to be valid. When the taxpayer has an agreement to acquire replacement property, TOWNE 1031 EXCHANGE, LLC will prepare the necessary documentation and will provide the exchange funds directly to the closing on the replacement property. Acquisition must occur before the end of the 180 day period. The benefits of an Exchange using TOWNE 1031 EXCHANGE, LLC Engaging TOWNE 1031 EXCHANGE, LLC as qualified intermediary results in the possibility of substantial tax savings and the ability to leverage funds otherwise used to pay taxes (capital gains, depreciation recapture) to acquire more desirable replacement property. The documentation used by TOWNE 1031 EXCHANGE, LLC was prepared by tax counsel to meet all requirements under Section 1031 and its regulations. The exchange proceeds will be held in separate accounts set up for each taxpayer at TOWNEBANK, one of Virginia’s top ranked community banks and the release of any funds will require the customer’s written authorization. TOWNE 1031 EXCHANGE, LLC’s president, Ute Heidenreich, Esq. has over twenty-five years of experience handling all aspects of tax-deferred exchanges and will provide personalized customer service in all exchanges handled by TOWNE 1031 EXCHANGE, LLC.  

 

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This episode is sponsored by CanZell Realty. CanZell is one of the fastest-growing virtual/hybrid companies with a focus on providing local leadership, revenue share opportunities, and top technology for agents. Learn how you can keep more of your commission and sell more real estate at joincanzell.com

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