 |
| Q: |
What is a Tax Deferred
Exchange? |
| A: |
Taxation on an income or
investment property is much different from taxation on a personal
residence. A 1031 Tax-Deferred Exchange is apowerful financial
tool for those who own investment real estate. It allows you
to exchange your property for another and defer payment of federal
capital gain taxes, which can be as much as 28% when combined
with applicable state taxes. |
|
| Q: |
Why Exchange? |
| A: |
The tax-deferred exchange allows the
investor to defer paying capital gains tax on their investment
properties. Conversely, an investment property that is sold
without a tax-deferred exchange can force the seller to pay
up to 28% of their gain in taxes! If an investor is looking
to purchase other investment properties, then an exchange makes
much more sense because there is now a larger amount of money
available to purchase the replacement properties. An investor
is able to use the money they would have paid in taxes and put
it to work for them in another investment property. |
|
| Q: |
What is the Difference Between
a Sale and an Exchange? |
| A: |
Let's assume a sale price of $250,000
with a loan of $100,000 and that the property was purchased
for $150,000 a few years ago.
Capital Gain = $100,000
Capital Gain Tax: $100,000 x 28% = $28,000
| |
Sale/Purchase |
Exchange |
| Sale Proceeds: |
$150,000 |
$150,000 |
| Tax Payable: |
($28,000) |
None |
| |
|
|
| Cash Available for Investment |
$122,000 |
$150,000 |
| |
|
|
| Investment with 25% Down: |
$448,000 |
$600,000 |
With an appreciation rate of 10%, it would take the seller
four years to reach the value of the exchanger's property.
The exchanger clearly has the advantage over the seller who
pays taxes and then reinvests. |
|
| Q: |
What Qualifies? |
| A: |
An exchange can be as simple as a
"swap" of two properties or as complex as a delayed,
reverse, multi-property, multiparty or improvement exchange:
Simultaneous - both properties close the
same day. Since 1991, the only "safe harbor" (the
term defining the guidelines for a defensible transaction)
is through the use of a Qualified Intermediary.
Delayed - within 45 days of the close of
sale on the relinquished property, a "like-kind"
replacement property must be identified with the close of
escrow on the replacement property taking place by the 180th
day.
Reverse - occasionally it may be necessary
to acquire the replacement property before the relinquished
property is sold. This can be accomplished through a reverse
exchange.
Multi-Property and Multi-Party - may involve
exchange out of one property into more than one property,
out of several properties into one larger property, or investors
owning property together trading into separately owned properties.
Improvement (or Construction) - the Intermediary
acquires and retains ownership to the replacement property
while construction or improvements are made, upon completion
of which, the intermediary trades the improved property for
the property the
|
|
| Q: |
How Can I Benefit from a Tax-Deferred
Exchange ? |
| A: |
The most important benefit is tax
savings, because you can build wealth more rapidly by deferring
tax payments. Other advantages, often available with no out-of-pocket
expenses, include:
Leverage - Every dollar you save in taxes allows you to greatly
increase your investment portfolio through acquisition of
real estate worth many times your initial purchase.
Income - You can increase cash flow, for example, by exchanging
out of bare lands and into an income producing property.
Diversification - You can exchange one large property for
severl smaller properties in different locations.
Consolidation - You can exchange several management-intensive
properties for one larger property with on-site or off-site
management.
Co-ownership - You can divest yourself of problem co-ownerships
by exchanging joint interests for a sole interest in separate
properties. |
|
| Q: |
How Does the Process Work? |
| A: |
1. Trade for like-kind property.
2. Trade equal or up in equity and debt.
3. Identify replacement property within 45 days from close
of escrow or relinquished property pursuant to requirements.
4. Acquire replacement property within 180 days of close of
escrow of relinquished property or the tax return filing date,
whichever occurs first.
5. Let Capital Exchange guide the process
to ensure the safety and security of your exchange. |
|
| Q: |
Why Should I Choose Capital? |
| A: |
Capital Exchange Services
is a national qualified intermediary specializing in the facilitation
of tax-deferred exchanges. Our exchange program provides you
with the highest standards of safety and service. |
