1031 Tax-Deferred Exchange

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					Essential Knowledge for
Tax Deferred Exchange
  Jason Pastucha, REALTOR 2008
         jasonp@kw.com
    Tax Deferred Gains in Exchange
   The payment of capital gains and recapture of depreciation
    taxes are indefinitely deferred in a qualifying 1031 exchange.
                            Sales Price

                                          CAPITAL GAIN (15% TAX)
    Purchase Price
                                          RECAPTURE (25% TAX)
                                          DEPRECIATION
                     GAIN

       BASIS                               ADJUSTED
                                            BASIS



             TIME
            IRC Section 1031
   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.
       Exchange Requirements
   1. The properties exchanged must be for
    business use or held for investment.
   2. The taxpayer must not get actual or
    constructive receipt of proceeds.
   3. Use of a Qualified Intermediary qualifies
    the exchange for Safe Harbor protection.
   4. 45 Day Identification and 180 Day
    exchange closing time requirements.
   5. Total deferment of taxable gain in an
    exchange requires a trade “up or equal” in
    both Equity and Fair Market Value.
                 Exchange Parties
   QI is assigned Exchanger’s contract rights

                         Contract Rights

                                     Qualified Intermediary
                Exchanger

                         Title In                    Purchase Funds


    Title Out                  Sale Proceeds

                 Buyer                                   Seller
Qualified Intermediary Safe Harbor
   QI holds funds from sale for purchase of
    replacement property.
   QI prevents constructive and actual
    receipt of sale proceeds by Exchanger.
   Exchange Agreement establishes the legal
    relationship between QI and Exchanger.

*Exchanger’s contract rights assigned to QI
Exchange Time Requirements
Non-simultaneous=Relinquish and Replacement



                           180 Day Exchange Period


45 Day Identification Period



 The 45 day identification and the 180 day acquisition timelines
 both begin on the closing of the sale of relinquished property
     “BUY to HOLD” = Exchange
   Intent at time of exchange controls.
   Investors buy with intent to hold property
    for income and appreciation benefits.
   “Buy to Sell” Dealer transactions do not
    qualify for 1031 Tax-Deferral.
   Pattern of regular, frequent, and
    continuous sales indicate “Dealer” status.
   Properties held for less than two years
    appear more like “Dealer” property.
  Tax Deferred in 1031 Exchange

                     $150,000 Sales Price

                                     CAPITAL GAIN (15% TAX)
                          $50,000
    Purchase Price
                                     RECAPTURE (25% TAX)
      $100,000            $30,000    DEPRECIATION

       BASIS              $70,000     ADJUSTED
                                       BASIS
                 Time

$80,000 Gains are Tax Deferred, $30k Recapture + $50K CapGains
           *Deferring payment of $15,000 in taxes
     Deferment of Taxable Gain
   Rule – To totally defer taxable gain
    in an exchange, taxpayers must
    trade up or equal in both Equity and
    Fair Market Value.
   Alternative – Mortgage relief or cash
    received is taxed to the extent of the
    gain realized (cash added offsets
    mortgage relief).

				
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posted:10/20/2011
language:English
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