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.
New menu items ready for the Lenten season
The Cane Fire Film Series screens “MaidenTrip” on Monday, March 10, at the AcA.
Acadiana's nightlife guide.
The vibe of the tribe done modern
The Louisiana Workforce Commission said Friday that initial claims rose to 2,125 from the previous week's total of 1,964. There were 2,887 initial claims during the comparable week in 2013.
The Board of Elementary and Secondary Education has stalled action on a $3.5 billion annual school funding formula due to state lawmakers by March 15.
The New Orleans Saints have yet to make it official as of this writing, but popular wide receiver Lance Moore has reportedly been cut by the team to free up salary-cap space on the roster.
While two medical marijuana bills are slated for the upcoming legislative session, what some Louisianans might not know is that the plant was approved for therapeutic use by state lawmakers in 1991.
The agenda is shaping up to be lighter than in previous years. But Jindal is term-limited, with fewer than two years remaining in office, and he saw his last big initiative — a proposed rewrite of Louisiana tax law — collapse without getting a vote in 2013.
Sharper has been held without bail because of an arrest warrant issued by Louisiana authorities accusing him and another man of raping two women.
Here's your daily look at late-breaking national and international news, upcoming events and the stories that will be talked about Friday, March 07, 2014:
Two Lafayette men have been revealed by police as the infamous duo behind a caper that shook our fair city to its core.
She’s the daughter of the legendary Johnny Cash, but she’s been a gifted artist in her own right for three decades, and she’s coming to Lafayette.
The Lafayette Parish School Board has received a second letter of demand related to last year’s insurance debacle, this time from Key Benefit Administrators claiming it’s owed $93,000 from the school system.
Acadiana's nightlife guide.
The Louisiana coastline is vanishing faster than mappers can keep track.
A bill that would have overridden local ordinances prohibiting public and private employers from discriminating against lesbian, gay and transgender people has been pulled within less than a week of being filed.
The panel that selects nominees for a controversial New Orleans area flood control board — a board that is suing more than 90 oil, gas and pipeline companies — is set to discuss legislation affecting its independence.
State prison officials cannot keep secret the seller and manufacturer of the two drugs purchased for executions at the Louisiana State Penitentiary, a federal judge ruled Wednesday.
State lawmakers will not appeal a judge's ruling that it was improper to use $3.7 million from a probation and parole officers' retirement fund to balance the state's operating budget.
Prepare yourselves for sun
Acadiana's nightlife guide.
Conservatives have been losing their minds over this satirical bit on the Colbert Report.
Due to the chaos of Mardi Gras and the weather, the entry deadline for this year's INDesign Awards has been extended by one week.
The Lafayette Parish School Board leaves a lot to be desired, but is scrapping the election process in favor of an appointed board the answer?
Queen Evangline and King Gabriel ruled Tuesday night
The House approved legislation Tuesday night to roll back a recently enacted overhaul of the federal flood insurance program, after homeowners in flood-prone areas complained about sharp premium increases.
IND Style does Gabriel
Newsy bits for the fam
The NFL has formally designated New Orleans' Jimmy Graham as a tight end for the purposes of his franchise tag value, which is now set at $7.05 million next season unless Graham and the Saints subsequently agree on a long-term deal.