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By Milana Ostroy

1031 Exchange Myth Busting

  • Keeping It Real, Video, Youtube

Despite the fact that 1031 exchanges have been an established part of tax law since 1921, and most have heard about it or know something about it, there seems to be a number of misconceptions in the marketplace about what they are and how they work. Today we’re going to dissect the myths… Reality or Fallacy? 

Myth #1: When it comes to real estate investments 1031 Exchange ALWAYS makes sense? FALSE: And I’ll share 4 instances where it actually doesn’t make sense… 

1. Why would you defer taxes if you’re in a lower tax bracket one year? Right? If you’re in a lower tax bracket the year you sell your investment, just pay the taxes at that lower rate than you would later knowing you’re going to be in a higher tax bracket in the future. 

2. If there is no gain on the investment property the 1031 exchange serves no purpose. 

3. if someone is in the 10% -12% ordinary income tax bracket, they would not need to do a 1031 exchange because, in that case, they will be taxed at 0% on capital gains 

4. If you want to re-invest into something other than real estate, you may want to pay the taxes in order to have the cash to invest something else 

 

Myth #2 – 1031 is only for commercial properties?FALSE: Although it certainly includes commercial properties, it also extends to rentals and to land held for investment. While a high percentage of commercial transactions have 1031 as a component the vast majority of investment properties are actually residential rentals including single family and duplex properties. 

Myth #3 – To do an exchange the replacement property has to be equal price or higher? FALSE: Actually you can buy a lower price investment property as long as the total of the purchase price and the net closing costs are of equal value. So if you sell a property for $1,000,000 and your closing costs were $25,000 your replacement property can be $975,000. Also if your replacement property is worth less than your net purchase price plus closing costs, you can still do a 1031 exchange and just pay tax to the extent of the shortfall. So in essence if the replacement property was only $950,000 you can still conduct the exchange and simply pay capital gains tax on $25,000 shortfall. 

Myth #3 – If you are doing an exchange and selling a rental you have to buy a rental? –FALSE! Perhaps the second best feature of a 1031 (after the tax deferral) is the generous definition of what it means to be “like kind” real estate. All real estate is like kind as long as what is being sold is held for investment or for productive use in a trade or business and what is being purchased will be held for investment or for productive use in a trade or business. So, the Taxpayer can sell a rental and buy a commercial building – like kind! The Taxpayer can sell a commercial building and buy multiple bank-owned single family houses as rentals! The Taxpayer can sell land and buy a building to house their business! The combinations are limitless. 

Myth #4: – You have to sell your investment property before you can buy the replacement property FALSE! In fact you can buy your replacement property first, specifically within 180 days of selling your current investment and still qualify for the 1031 exchange, except now its called a “reverse exchange” 

Myth #5: You cannot do a 1031 exchange on your own or even using the escrow company. It requires a qualified intermediary? TRUE: A qualified intermediary (QI) must facilitate a 1031 exchange and their main role is to hold funds from the relinquished property and uses them to acquire the new replacement property. These funds never come into contact with the property owner, who is involved in the 1031, per the IRS 1031 rules. Once you touch the money its taxable so make sure you do it right. If you’re interested in pursuing real estate investments lets talk about your current portfolio and what you want to acquire or sell. If you need a recommended qualified intermediary contact me.

Thanks for joining me in this Mythbuster session. If it was helpful, please like, comment, share and tag anyone that could benefit from it. I’ll see you next week!

Watch more video and content on YOUTUBE 

 

 

Despite the fact that 1031 exchanges have been an established part of tax law since 1921, and most have heard about it or know something about it, there seems to be a number of misconceptions in the marketplace about what they are and how they work. Today we’re going to dissect the myths… Reality or Fallacy? 

Myth #1: When it comes to real estate investments 1031 Exchange ALWAYS makes sense? FALSE: And I’ll share 4 instances where it actually doesn’t make sense… 

1. Why would you defer taxes if you’re in a lower tax bracket one year? Right? If you’re in a lower tax bracket the year you sell your investment, just pay the taxes at that lower rate than you would later knowing you’re going to be in a higher tax bracket in the future. 

2. If there is no gain on the investment property the 1031 exchange serves no purpose. 

3. if someone is in the 10% -12% ordinary income tax bracket, they would not need to do a 1031 exchange because, in that case, they will be taxed at 0% on capital gains 

4. If you want to re-invest into something other than real estate, you may want to pay the taxes in order to have the cash to invest something else 

 

Myth #2 – 1031 is only for commercial properties?FALSE: Although it certainly includes commercial properties, it also extends to rentals and to land held for investment. While a high percentage of commercial transactions have 1031 as a component the vast majority of investment properties are actually residential rentals including single family and duplex properties. 

Myth #3 – To do an exchange the replacement property has to be equal price or higher? FALSE: Actually you can buy a lower price investment property as long as the total of the purchase price and the net closing costs are of equal value. So if you sell a property for $1,000,000 and your closing costs were $25,000 your replacement property can be $975,000. Also if your replacement property is worth less than your net purchase price plus closing costs, you can still do a 1031 exchange and just pay tax to the extent of the shortfall. So in essence if the replacement property was only $950,000 you can still conduct the exchange and simply pay capital gains tax on $25,000 shortfall. 

Myth #3 – If you are doing an exchange and selling a rental you have to buy a rental? –FALSE! Perhaps the second best feature of a 1031 (after the tax deferral) is the generous definition of what it means to be “like kind” real estate. All real estate is like kind as long as what is being sold is held for investment or for productive use in a trade or business and what is being purchased will be held for investment or for productive use in a trade or business. So, the Taxpayer can sell a rental and buy a commercial building – like kind! The Taxpayer can sell a commercial building and buy multiple bank-owned single family houses as rentals! The Taxpayer can sell land and buy a building to house their business! The combinations are limitless. 

Myth #4: – You have to sell your investment property before you can buy the replacement property FALSE! In fact you can buy your replacement property first, specifically within 180 days of selling your current investment and still qualify for the 1031 exchange, except now its called a “reverse exchange” 

Myth #5: You cannot do a 1031 exchange on your own or even using the escrow company. It requires a qualified intermediary? TRUE: A qualified intermediary (QI) must facilitate a 1031 exchange and their main role is to hold funds from the relinquished property and uses them to acquire the new replacement property. These funds never come into contact with the property owner, who is involved in the 1031, per the IRS 1031 rules. Once you touch the money its taxable so make sure you do it right. If you’re interested in pursuing real estate investments lets talk about your current portfolio and what you want to acquire or sell. If you need a recommended qualified intermediary contact me.

Thanks for joining me in this Mythbuster session. If it was helpful, please like, comment, share and tag anyone that could benefit from it. I’ll see you next week!

Watch more video and content on YOUTUBE 

 

 

Despite the fact that 1031 exchanges have been an established part of tax law since 1921, and most have heard about it or know something about it, there seems to be a number of misconceptions in the marketplace about what they are and how they work. Today we’re going to dissect the myths… Reality or Fallacy? 

Myth #1: When it comes to real estate investments 1031 Exchange ALWAYS makes sense? FALSE: And I’ll share 4 instances where it actually doesn’t make sense… 

1. Why would you defer taxes if you’re in a lower tax bracket one year? Right? If you’re in a lower tax bracket the year you sell your investment, just pay the taxes at that lower rate than you would later knowing you’re going to be in a higher tax bracket in the future. 

2. If there is no gain on the investment property the 1031 exchange serves no purpose. 

3. if someone is in the 10% -12% ordinary income tax bracket, they would not need to do a 1031 exchange because, in that case, they will be taxed at 0% on capital gains 

4. If you want to re-invest into something other than real estate, you may want to pay the taxes in order to have the cash to invest something else 

 

Myth #2 – 1031 is only for commercial properties?FALSE: Although it certainly includes commercial properties, it also extends to rentals and to land held for investment. While a high percentage of commercial transactions have 1031 as a component the vast majority of investment properties are actually residential rentals including single family and duplex properties. 

Myth #3 – To do an exchange the replacement property has to be equal price or higher? FALSE: Actually you can buy a lower price investment property as long as the total of the purchase price and the net closing costs are of equal value. So if you sell a property for $1,000,000 and your closing costs were $25,000 your replacement property can be $975,000. Also if your replacement property is worth less than your net purchase price plus closing costs, you can still do a 1031 exchange and just pay tax to the extent of the shortfall. So in essence if the replacement property was only $950,000 you can still conduct the exchange and simply pay capital gains tax on $25,000 shortfall. 

Myth #3 – If you are doing an exchange and selling a rental you have to buy a rental? –FALSE! Perhaps the second best feature of a 1031 (after the tax deferral) is the generous definition of what it means to be “like kind” real estate. All real estate is like kind as long as what is being sold is held for investment or for productive use in a trade or business and what is being purchased will be held for investment or for productive use in a trade or business. So, the Taxpayer can sell a rental and buy a commercial building – like kind! The Taxpayer can sell a commercial building and buy multiple bank-owned single family houses as rentals! The Taxpayer can sell land and buy a building to house their business! The combinations are limitless. 

Myth #4: – You have to sell your investment property before you can buy the replacement property FALSE! In fact you can buy your replacement property first, specifically within 180 days of selling your current investment and still qualify for the 1031 exchange, except now its called a “reverse exchange” 

Myth #5: You cannot do a 1031 exchange on your own or even using the escrow company. It requires a qualified intermediary? TRUE: A qualified intermediary (QI) must facilitate a 1031 exchange and their main role is to hold funds from the relinquished property and uses them to acquire the new replacement property. These funds never come into contact with the property owner, who is involved in the 1031, per the IRS 1031 rules. Once you touch the money its taxable so make sure you do it right. If you’re interested in pursuing real estate investments lets talk about your current portfolio and what you want to acquire or sell. If you need a recommended qualified intermediary contact me.

Thanks for joining me in this Mythbuster session. If it was helpful, please like, comment, share and tag anyone that could benefit from it. I’ll see you next week!

Watch more video and content on YOUTUBE 

 

 

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