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Contact me now;
Scott Robinson
Robinson Realty
818 702-8079 main
818 554-1000 cell
Scott@RobinsonRealty.net
Scott Robinson
Robinson Realty
818 702-8079 main
818 554-1000 cell
Scott@RobinsonRealty.net
What are tax deferred exchanges?
Real Property
Often investors do not realize taxation on a personal residence is far different than taxation on an income or investment
property. Under Internal Revenue Code §121, homeowners are allowed to exclude up to $250,000 of capital gains if
single, $500,000 if married, upon the sale of a principle residence provided they have owned and occupied it two of the
previous five years.
If an investor sells property they pay tax. Taxes are paid on capital gain, not equity or profit. However, property that
qualifies for preferential treatment under Internal Revenue Code §1031 is treated quite differently.
"No gain or loss shall be recognized if property held for productive use in a trade or business or for investment purposes
is exchanged solely for property of a "like-kind."
The benefits of exchanging include using leverage to maximize your investment dollars to property diversification to
allow you the widest range of investment freedom. 1031 Tax Deferral can range anywhere from a simple swap of two
properties to a complex, multi-leg, multi-property transaction involving a delayed, reverse or construction exchange. The
investment strategy and the nature of the transaction will decide which exchange best suits your needs.
Imagine selling rental property or land, acquiring new real estate of any type and not paying one dime in capital gain
taxes. Thousands of investors are profiting every day simply by using the tax deferred sale IRC §1031!
Like-Kind Property
Investors often mistakenly believe they must acquire property like their relinquished property. They are surprised to
learn a wide variety of properties can be considered "like-kind."
"Like-kind" does not refer to the nature, character or type of property. Instead, it addresses the intended use of the
property. Provided the property is initially acquired and held for either business or investment purposes, it can qualify as
a suitable replacement property under IRC Section 1031.
For example, any of the following can be considered "like-kind" property exchanges: a duplex for a fourplex, bare land
for improved property, a rental house for a retail center or an apartment building for an office building. Investors do not
have to exchange for exactly the same type of property as relinquished.
The tax code also lists items that are not considered "like-kind". These include:
1. stock in trade or other property held primarily for sale;
2. stocks, bonds, or notes;
3. other securities or evidences or indebtedness;
4. interests in a partnership;
5. certificates of trusts or beneficial interest.
In addition, the Code was amended in 1989 rendering property outside the United States non "like-kind".
Benefits of Exchanging
* Relocation
* Consolidation
* Diversification
* Cash flow
* Management Reduction
Prior to 1979, trading properties was at best complicated. Completing a tax deferred exchange meant properties had to
be "swapped" simultaneously. Unfortunately, this made exchanging cumbersome and risky, if not impossible.
The 1979 Starker decision in the U.S. Court of Appeals enabled the non-simultaneous or "delayed" exchange to qualify
for tax deferral. This gave investors the time necessary to find desirable replacement property by using an Intermediary.
Treasury Regulations effective June 10, 1991 validated the delayed exchange and simplified the exchange process. By
providing specific guidelines, these Regulations were welcomed by real estate investors who were previously uncertain
of the viability of 1031 transactions.
Many investors have held property for years because a sale translated into paying taxes of up to 40% of their capital
gain. Typically, as an investor's needs change over the years, the type of investment property they want changes.
Relocation, estate building, retirement, desire to increase cash flow, to reduce management responsibilities, all affect
the type of property investors want to own. Under IRS Section 1031, investors now have the alternative of moving their
investments (and equities) into more desirable or profitable properties.
"The true power of exchanging is the ability to meet investment objectives without losing equity to taxation."
Leverage
"Every dollar saved will allow an investor to purchase 4-5 times as much real estate..."
This is possible through leverage. Leverage is a method of acquiring real estate worth many times the value of the initial
investment. Tax deferment increases leverage. To understand the power of leverage, consider that ten percent
appreciation is converted to a 50% profit with a 20% down payment. The following example shows the value of leverage
by illustrating the benefit of exchanging versus selling.
$200,000 x 40% = $80,000
If the investor sold property with a gain of $200,000, they would pay taxes of $80,000 and have only $120,000 left to
reinvest. On the other hand, the investor who exchanges pays no capital gains tax, leaving the entire $200,000 to
reinvest.
Sale Exchange
Proceeds $200,000 Proceeds $200,000
Tax Owed -$80,000 Tax Owed -0-
Cash to Reinvest $120,000 Cash to Reinvest $200,000
If each investor purchases a building with a 20% down payment, using leverage, each could buy a property worth:
Sale Value $600,000
Exchange Value $1,000,000
In a single transaction, the investor who exchanged has $400,000 more property than the investor who sold property.
Often investors do not realize taxation on a personal residence is far different than taxation on an income or investment
property. Under Internal Revenue Code §121, homeowners are allowed to exclude up to $250,000 of capital gains if
single, $500,000 if married, upon the sale of a principle residence provided they have owned and occupied it two of the
previous five years.
If an investor sells property they pay tax. Taxes are paid on capital gain, not equity or profit. However, property that
qualifies for preferential treatment under Internal Revenue Code §1031 is treated quite differently.
"No gain or loss shall be recognized if property held for productive use in a trade or business or for investment purposes
is exchanged solely for property of a "like-kind."
The benefits of exchanging include using leverage to maximize your investment dollars to property diversification to
allow you the widest range of investment freedom. 1031 Tax Deferral can range anywhere from a simple swap of two
properties to a complex, multi-leg, multi-property transaction involving a delayed, reverse or construction exchange. The
investment strategy and the nature of the transaction will decide which exchange best suits your needs.
Imagine selling rental property or land, acquiring new real estate of any type and not paying one dime in capital gain
taxes. Thousands of investors are profiting every day simply by using the tax deferred sale IRC §1031!
Like-Kind Property
Investors often mistakenly believe they must acquire property like their relinquished property. They are surprised to
learn a wide variety of properties can be considered "like-kind."
"Like-kind" does not refer to the nature, character or type of property. Instead, it addresses the intended use of the
property. Provided the property is initially acquired and held for either business or investment purposes, it can qualify as
a suitable replacement property under IRC Section 1031.
For example, any of the following can be considered "like-kind" property exchanges: a duplex for a fourplex, bare land
for improved property, a rental house for a retail center or an apartment building for an office building. Investors do not
have to exchange for exactly the same type of property as relinquished.
The tax code also lists items that are not considered "like-kind". These include:
1. stock in trade or other property held primarily for sale;
2. stocks, bonds, or notes;
3. other securities or evidences or indebtedness;
4. interests in a partnership;
5. certificates of trusts or beneficial interest.
In addition, the Code was amended in 1989 rendering property outside the United States non "like-kind".
Benefits of Exchanging
* Relocation
* Consolidation
* Diversification
* Cash flow
* Management Reduction
Prior to 1979, trading properties was at best complicated. Completing a tax deferred exchange meant properties had to
be "swapped" simultaneously. Unfortunately, this made exchanging cumbersome and risky, if not impossible.
The 1979 Starker decision in the U.S. Court of Appeals enabled the non-simultaneous or "delayed" exchange to qualify
for tax deferral. This gave investors the time necessary to find desirable replacement property by using an Intermediary.
Treasury Regulations effective June 10, 1991 validated the delayed exchange and simplified the exchange process. By
providing specific guidelines, these Regulations were welcomed by real estate investors who were previously uncertain
of the viability of 1031 transactions.
Many investors have held property for years because a sale translated into paying taxes of up to 40% of their capital
gain. Typically, as an investor's needs change over the years, the type of investment property they want changes.
Relocation, estate building, retirement, desire to increase cash flow, to reduce management responsibilities, all affect
the type of property investors want to own. Under IRS Section 1031, investors now have the alternative of moving their
investments (and equities) into more desirable or profitable properties.
"The true power of exchanging is the ability to meet investment objectives without losing equity to taxation."
Leverage
"Every dollar saved will allow an investor to purchase 4-5 times as much real estate..."
This is possible through leverage. Leverage is a method of acquiring real estate worth many times the value of the initial
investment. Tax deferment increases leverage. To understand the power of leverage, consider that ten percent
appreciation is converted to a 50% profit with a 20% down payment. The following example shows the value of leverage
by illustrating the benefit of exchanging versus selling.
$200,000 x 40% = $80,000
If the investor sold property with a gain of $200,000, they would pay taxes of $80,000 and have only $120,000 left to
reinvest. On the other hand, the investor who exchanges pays no capital gains tax, leaving the entire $200,000 to
reinvest.
Sale Exchange
Proceeds $200,000 Proceeds $200,000
Tax Owed -$80,000 Tax Owed -0-
Cash to Reinvest $120,000 Cash to Reinvest $200,000
If each investor purchases a building with a 20% down payment, using leverage, each could buy a property worth:
Sale Value $600,000
Exchange Value $1,000,000
In a single transaction, the investor who exchanged has $400,000 more property than the investor who sold property.