How To Make An Exchange Work - Three Tips
Three Tips You Need To Know Before Starting A 1031 Exchange
1031 Exchanges Can Fail Due to Circumstances Beyond Your Control, So Identify More Than One Property
“Plan For The Worst And You’ll Never Be Disappointed”
1031 Exchanges are not guaranteed! Nothing can be more frustrating than entering a 1031Exchange having done all your homework, creating a plan, finding the property you want to buy, only to have the deal fall through at the last minute and you have no options other than paying the taxes.
Here some common reasons beyond your control causing a 1031 Exchange to fail.
· There are multiple offers on the property, and you lose…
· Not enough Inventory, you have nothing to buy
· You cannot qualify for the loan
· The seller has financial issues and backs out of the deal
· The property you want to buy is damaged or destroyed
· The seller is in the hospital and cannot sign a legal document
For these reasons, you will want to identify multiple properties and provide a back-up option to your 1031 Exchange. We have multiple different ways to keep you from paying taxes if a 1031 Exchange fails.
Always check with multiple sources on market conditions before starting a 1031 Exchange.
There are Alternatives To Starting A 1031 Exchange
“If You Do What You Know You Get What You Had”
The 1031Exchange is an excellent tool for redeploying equity to new investment opportunities and deferring the capital gain taxes. However, it is not the only option or the right option for every situation.
Determining the right alternative for your specific situation is beyond the scope of this document. Having said that, below are quick examples of the types of options that could be used to save a failed exchange or as an alternative to an exchange.
Opportunity Zone Funds:
Opportunity Zone Funds allow the cost basis to be retained by the client tax-free. The remainder of the proceeds, capital gains and depreciation, can be invested into an opportunity fund. Own large institutional assets, receive cash flow and depreciation without all the management headaches.
Delaware Statutory Trust:
Tired of management. Still want all the benefits of real estate ownership? The Delaware Statutory Trust might just be for you. Own large institutional assets and receive cash flow without all the management headaches.
Deferred Sales Trust:
Real estate Rich and Cash Poor? Use this strategy to convert illiquid real estate/business assets into liquid cash accounts that can be invested, diversified and can provide cash flow.
Understand The Tax Implications Before You List Your Property:
“There is no citizen of the United States that is responsible for paying for more than their fair share of taxes.”
One of the worst stories I hear all too often is that someone sold their multi-million-dollar property or business but ended up with less than $500,000 once all the bills were paid including taxes.
The sad thing is it doesn’t have to end this way!
With the right knowledge and planning, they could end up with a lot more money working for them. Here are a few things you need to consider before you sell your property:(Your Realtor and CPA can help you determine these numbers)
Your 1031Exchange must repurchase real estate of equal or greater value to the net sales price of the property that was sold, not the cash received buy the accommodator after paying the mortgage. Example: if you sold a property for $1m and paid off a $200,000 mortgage, $800,000 would be captured by the 1031 exchange accommodator. Your replacement requirement would be $1m not $800,000.
If your mortgage is larger than your adjusted basis, you have a mortgage over basis problem. This means that your capital gain is likely larger than the dollars received from the sale of your property by the 1031 Exchange accommodator. Example: if you had a $300,000 basis in the property but a $500,000 mortgage and you sold the property for $1 million, the accommodator would capture $500,000. However, your capital gain is $700k ($1m-$300k basis= $700k). If you re-purchase a property of equal or higher value, there is no problem, and no taxes are due. However, what happens if you cannot identify a property, or the deal falls through and you cannot close within 180 days? The exchange fails and the exchange accommodator will release $500,000 to you. The IRS will say you will have to pay taxes on the total capital gains of $700,000.
It would be wise to do a calculation as to what the taxes would be if you sold and cashed out or if the exchange fails.
Below is a quick way to estimate these values.
1. Your Capital Gains (Quick Estimate)
· Basis: Typically, your purchase price
· Add Capital Improvements to basis: Costs associated with significant improvements or repairs
· Depreciation: Determine if you are using straight line or accelerated, then calculate
· Adjusted Cost Basis: Basis + Capital Improvements – Depreciation
· Sales Price: What your realtor thinks the property is worth
Capital Gains = Net Sales Price – Adjusted Cost Basis
2. Cash After Mortgage and Closing Expenses (Quick Estimate)
· Sales Price: What your realtor thinks the property is worth
· Mortgage: The sum of all loans against your property
· Closing Costs: Final expenses like realtor fees, escrow fees, and sales expenses
Cash = Sales Price – Mortgage – Closing Costs
3. Mortgage Over Basis (Quick Estimate)
· Adjusted Basis: Calculated in 1 above
· Mortgage: Sum of all loans against the property
If the Mortgage is larger than your basis you will be paying taxes on the Capital Gains, not your remaining cash. We have ways of reducing or eliminating your Mortgage Over Basis when using a 1031 Exchange.
There are three tips everyone should know before starting a 1031Exchange.
1. 1031 Exchanges can fail due to circumstance beyond your control
2. There are alternatives to a 1031 Exchange
3. Understand the tax implications before you list your property
We can help you and your clients safely navigate any 1031 Exchange…
Note To Realtors,
As areal estate professional, you've probably run across investors that have either been reluctant to sell due to taxes or have had issues like the one above.
We are Tax Deferral Consultants.
We help real estate professionals provide their clients with solutions to these issues problems so that you get the listing.
What is a Tax Deferral Consultant?
Tax Deferral Consultants use tax strategies to legally reduce or defer capital gains taxes owed on the sale of a primary residence, investment property, business, stocks, or almost any highly appreciated asset.
We have 13 different tax deferral strategies and are adding new ones all the time. We have videos on some of our tax deferral strategies here: https://startanexchange.com/videos/
We are nationwide educators on the subject of tax deferral. Our mission is to provide financial services previously only used by the very wealthy to taxpayers across the country.
How many more listings do you think you would get if your clients didn’t have to pay the tax? We would love the opportunity to interview to become a part of your team so that you can provide these strategies to your clients. Best of all, you keep 100% of your commission and your clients remain your clients.
If you’re interested in learning more, I've added my calendar link below to make scheduling a time to speak simpler. https://calendly.com/chris-defertax/tax-deferral-discovery-call
Thanks, Chris Shockowitz
PS: We are also 1031 Exchange facilitators. Doing an exchange with our company means your clients have more options to save taxes. Our process is fast, simple, and affordable. For more information, check out https://startanexchange.com/. You’ll then click the “Start An Exchange” button and fill out the form. It will take you five minutes. Within about 12 hours we will have the exchange paperwork in place with the title company.
* Note: We are not CPAs or tax attorney’s. The scenarios in this article are for educational purposes only. Do not use it for your personal financial situation without speaking with a tax professional.