1031 Planning For The Exhange


Planning for the Exchange

 

InternaI Revenue code 1031 aIlows taxpayers the opportunity to defer taxes only if the proper paperwork is in place prior to the closing of the property. Without this paperwork in place for the closing a taxable event has occurred regardless of whether the Exchangor touches the proceeds or not.

 

Many investors will be in contact with a Qualified Intermediary well in advance of the closing of their property. The Intermediary can answer questions and help counsel the Exchangor to be sure they fully understand their options for the Exchange. Starker Services has counselors available 7 days a week as needed to answer any questions you may have and make sure you fully understand the exchange process.

 

Calculating Capital Gain

 

It is possible to have little or no equity or even lose money on a property and still owe tax. Capital gain is arrived at by subtracting the adjusted basis from the net sale price. The net sale price is the gross sale price minus standard transaction costs. To arrive at the adjusted basis, first establish cost basis (usually the original purchase price). Next, add to this figure all improvements made to the property that were not expensed. Then subtract all depreciation taken over the period of ownership.

 

A Simple Procedure

 

Step #1:

Once the Exchangor determines the need to defer capital gains on the sale of property, the Exchangor enters into a Purchase and Sale Agreement. There is little difference between a normal sale and an exchange at this step. The only difference is that the Exchangor or their agent will want to include language in the contract or by addendum asking for cooperation by the buyer. This does not alter the contract. If the Exchangor decides prior to closing not to proceed with the exchange, they simply close as a taxable sale.

 

The wording to include is: "It is the intent of the Seller to perform a §1031 exchange and the buyer is asked to cooperate by signing an Assignment Agreement at no cost or liability to the Buyer.”

 

Acceptance of the Offer

 

Step #1:

 

Once the contract is accepted, contact the qualified Intermediary or Accommodator. They will ask for the name and address of the Exchangor, agent, and closer. The Intermediary will prepare all documents and instructions needed. When the property is sold, ownership of the property will transfer to the Intermediary and then to the ultimate buyer. The deed will pass directly from the Exchangor to the buyer.

 

Identification

 

Step #2:

 

Replacement property identification forms will be forwarded to the Exchangor and their agent soon after the close of the property. These forms can be faxed or mailed to the Qualified Intermediary by midnight of the 45th day to comply with the I.R.S. requirements.

 

Replacement Property

 

Step #3:

 

The purchase of the Replacement property must occur within 180 days of the closing of the Relinquished property. The Exchangor will enter into a contract to purchase and then notify the Accommodator of the address of the property and the closer information. Instructions to complete the exchange will be delivered to all parties for review and signature. The exchange will be completed with Accommodator using the proceeds from the sale to purchase the designated property and transferring it back to the Exchangor.

 

Installment Sale

 

The installment sale could be considered the government's gift to seniors. It was designed so that you would only be taxed on the money you actually receive during anyone calendar year rather than the entire amount all at once.

 

• The seller assumes the role of a banker, and carries back the loan.

 

• The buyer sends regular payments, typically monthly.

 

• At least one payment must be received in the tax year after the sale.

 

• A down payment is negotiated between the seller and buyer as in any other sale. Always advise your clients to get at least a 20% down payment when carrying the loan. This may avoid the chance of foreclosure that might happen if there was less money put down.

 

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