Say you’ve been holding real estate for use in your trade or business, or for investment purposes, that no longer suits your needs or objectives and you’d like to exchange your property for one that is better suited, while deferring taxes on the gain on the property you now own. If you’d like to understand how to continue to exchange properties and build wealth in the process, you should carefully consider the property exchange provisions of Internal Revenue Code Section 1031.
In addition to the fact that it is a tool for deferring partial or total tax on the gain, a 1031 exchange allows you to:
• swap your property for one more suited to your current business needs
• relocate an investment to a more suitable location (perhaps you have moved)
• convert from non-cash flow property (land) to one that provides an income stream — retail strip center or multifamily
• eliminate management headaches by exchanging a management intensive property such as a multi-tenant or multifamily to one that requires little or no management — like a single tenant office with a triple net lease
Many investors use the 1031 exchange to accomplish one or several of the above investment goals and, in each instance, defer tax. An often overlooked and most advantageous aspect of the 1031 exchange is to use the wealth building capacity of making many exchanges over time. There is no limitation to the number of property exchanges a taxpayer can engage in, and the compounding effects of several exchanges over a 10- to 20-year cycle may be used to build significant wealth.
Compounding occurs when the investor reinvests all of the sales proceeds, including the tax savings, into the new property and continues to do so each time a property is exchanged for another. With each transfer, the investor is able to use leverage to acquire a property of a higher value. Key is for the investor to acquire under-managed, under-performing properties and add value through proper management and increased occupancy, which translates into more income. The reinvestment of the tax deferral on each exchange and the continued efforts toward improving the performance of each asset acquired to maximize sales value adds up to significant gain each time a property is exchanged. There are investors who have done five exchanges over 10 to 15-year time frames that have turned the dollars that they would have otherwise paid in taxes into real estate worth several million dollars.
If you decide to use the 1031 exchange to meet an immediate need or objective, or have selected it as one of your wealth building strategies and want to know more about it, you should seek guidance and analysis. Consult with a CPA, a commercial Realtor, your attorney and a Qualified Intermediary to become familiar with the stringent requirements, the process and the parties involved. These exchanges require advance tax planning and attention to structuring formalities. The number and types of properties involved are defined in the tax code and include property used in trade or business or for investment purposes, as well as qualified depreciable business property.
There are two phases to the exchange process, which don’t necessarily have to occur simultaneously.
If the investor sells the old property to another party to buy replacement property, he must acquire:
• up to three replacement properties without regard to value;
• any number of properties whose total value cannot exceed twice the value of the relinquished property; or
• any number of properties whose aggregate fair market value is equal to at least 95 percent of the identified properties.
The maximum identification period is 45 days, within which to locate and identify the possible replacement property or properties. The maximum acquisition period is 180 days to acquire all replacement properties.
The taxpayer is not allowed to have actual or constructive receipt of any funds related to the properties during the process. A Qualified Intermediary, which must be an independent party, is necessary to facilitate the tax-deferred exchanges. The QI guides the investor through the successful exchange, works closely with all parties related to the exchange, prepares documentation, holds sales proceeds, acquires replacement property and delivers funds to the closing agent.
Should you want to pursue one or multiple 1031 exchanges, there are many online sites that have FAQs and information on the 1031 exchange and qualified intermediaries. Remember that your CPA and local commercial Realtor are the resources to provide guidance to translate the complex details into a clear, client-specific solution for your wealth building strategy.
Flo Guidry Meadows is a CPA with 12 years of experience in commercial real estate, currently working as a Realtor with Coldwell Banker Pelican Real Estate.
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Black Friday shopping begins; Pope visiting Turkey; oil prices decline and more national and international news for Friday, November 28, 2014.
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The fight to clean up Lafayette Parish could get some added ammunition with two ordinances up for votes Tuesday by the City-Parish Council targeting litter-bugs.
A divided 3rd Circuit Court of Appeal reversed a Lafayette district judge’s ruling absolving the co-owner of a New Iberia accounting firm of liability in an embezzlement case.
Our View: It’s reasonable, temporary and invests in Lafayette’s future.
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By striking a deal to lessen the blow of health insurance changes on state workers, school employees and retirees, Gov. Bobby Jindal's administration lowered the volume of criticism but gave itself and local school boards a new budget headache.
With the airport tax coming up for a parishwide vote in about a week, the Broussard City Council and its mayor have come out in support of the proposal.
Protesters rallied peacefully in several Louisiana cities in the wake of the Missouri grand jury decision not to indict a police officer in the fatal shooting of Michal Brown.
Three bedroom in Port Barre or two bedroom in Opelousas
The U.S. rep billed LSU for work allegedly performed on the same days Congress voted on major legislation and held important committee hearings on energy and the ACA.
“I am only getting a little nervous about two projects — the proposed Sasol GTL facility [not the new ethylene plant] and the proposed G2X facility — both in Lake Charles. They need a hefty difference between oil and natural gas prices to make sense.”
Abysmally low participation by the public has prompted the council to scuttle the 2014 survey with plans to simplify it and try again next year.
The village now says the ordinance will likely be overturned and authorities will more vigorously enforce existing leash laws.
Lower oil prices also might slow the growth of oil production in parts of the U.S., Canada and elsewhere because it will no longer be so profitable.
Bill Cassidy cast an early ballot Tuesday, seeking to draw renewed attention to a race that has fallen off newspaper front pages and away from people's minds as they plan holiday meals and shopping schedules.
A Lafayette woman faces up to 20 years in prison for running up more than $1 million in unauthorized charges to her company credit card.
Signs that our state’s banking industry is undergoing a downsizing in 2014 were further confirmed today with the FDIC’s latest figures showing a third straight quarter in which Louisiana lost more banks and earned less money.
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State police say a 47-year-old Lafayette man, who collected more than $83,000 in disability benefits, is accused of operating two businesses out of his home at a time when he claimed he had no income.
Battered all night by Baltimore's relentless pass rush, Drew Brees could feel his protection collapsing and Terrell Suggs getting ahold of him as he urgently unloaded a pass to the right flat toward tight end Jimmy Graham.
After a convincing defeat at the polls on Nov. 4, Earl “Nickey” Picard has decided to let bygones be bygones with his former right-hand man Brian Pope, announcing his support for his former employee’s runoff bid to become Lafayette’s next city marshal.
Saturday the athletic department did everything possible to ensure the 2014 Ragin’ Cajun seniors remembered fondly their last home game. Rain and lightning never arrived but turbulence did in the form of the Appalachian State Mountaineers.
Even stranger than the Republican Party’s decision to hold a “unity rally” earlier this month for Congressman Bill Cassidy in a Baton Rouge bar, Huey’s Bar, was the fact that the establishment was named after Louisiana’s most famous Democrat.
Bar Code is not a gay bar.
After failing to pass a medical marijuana bill last year, state Sen. Fred Mills, R-Parks, is telling supporters he will return in 2015 with legislation that focuses on different applications like oils and pills.
Voters, obviously, are not yet tuned into the 2015 ballot, despite the intriguing races it will host.