When It Comes To Taxes, 1031 Exchanges Are Key To Wealth Building

By Eric T. Rightley

The decision to utilize the benefits of a 1031 Exchange can be determined with the help of your CPA or Accountant. They will determine for you how much taxes you would pay in selling your property outright. This determination will be based on your adjusted basis in your property and the normal capital gains liability that would occur. Your CPA will help you determine the amount of taxes that would be due to depreciation recapture, which is currently taxed at a maximum rate of 25%. This tax rate is higher than the portion attributed to depreciation.

Likewise, your CPA or accountant will determine how much of the gain relates to normal appreciation from the natural increase in the value of the property. This appreciation is currently taxed at a maximum rate of only 15%. Your CPA will also determine if any state income tax or capital gains tax would be incurred. This would also include municipal tax liability.

Once you know what the taxes would be, if you decided to just sell the property outright, you can decide if you want to try to defer those taxes with a 1031 Exchange. Knowledge is power - typically, the costs of doing a 1031 exchange is far less than the tax bill, if you just sold the property outright.

Once the potential taxes are determined, a Qualified Intermediary should be brought in to help you complete a 1031 Exchange. Also, you need a written purchase agreement signed by both you as the seller and your purchaser stipulating your desire to sell your relinquished as part of a 1031 Exchange.

The purchase agreement should also include a stipulation or clause stating that you want to complete a 1031 Exchange. In this clause, it acknowledges that the purchaser agrees to cooperate in the exchange. You have now laid the groundwork for the closing. For sample cooperation clause go to www.1031podcast.com.

At the closing, the sale will become complete. The deed crosses the desk to the purchaser, and the net sales proceeds are paid directly to the Qualified Intermediary. This starts the 1031 countdown. The day after the closing is considered "day one" in the forty-five day identification period. During the forty-five days, you must identify in writing the property that you want to purchase as your replacement property. This "day one" is also the start of the 180 day exchange period that you have to complete the 1031 exchange and acquire your replacement property.

Now, I will review the steps you need to make in order to complete a 1031 Exchange transaction. The first step is to determine the capital gains tax bill, including depreciation recapture and state and local taxes. This step would be performed by your CPA or accountant. The next step is to determine if the 1031 Exchange process would be of benefit to you. This step would be made by your CPA or accountant with the help of a 1031 Exchange Qualified Intermediary. In step three, you should document your intent to sell the property to the purchaser, as well as your desire to complete a 1031 Exchange by inserting appropriate text in your purchase agreement.

Having completed your 1031 Exchange, you have started the process of deferring taxes and keeping your money working for you. - 23200

About the Author:

U.S. investors can save big money by using 1031 tax exchanges to defer all of their capital gains tax on the sale of investment property. 1031 exchanges are like an interest free loan from Uncle Sam.