1031 Exchange: 101

By STANLEY WALLACE, for 1031exchangetexas.com 8/17/2007

For example, service costs at closing which are not closing expenses. Thus the building is worth $200,000. You may also experience appreciation over the time that you hold your property. Cash flow is generally paid monthly and is tax-sheltered via depreciation pass-through and interest deductions, and in many cases a portion of your net income is tax sheltered. Thus, these laws are slightly favorable to multi-family properties by providing a tax depreciation rate that exceeds economic depreciation, which is in part due to inflation that has been less than expected during the past decade. The "Small Producers Exemption" allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free. (See Related Parties) The techniques previously used in the common situation where the Seller had selected the replacement parcel, but had not yet sold the relinquished parcel, included "parking" the replacement parcel, or purchasing an option to acquire the replacement parcel.

1031 Exchange opportunities in today's market

By identifying a TIC property, you can reduce your potential tax risk, and avoid a failed closing.The QI sends required exchange documents to the escrow closer for signing at property closing.Enter into an 1031 exchange agreement with your Qualified Intermediary, in which the Qualified Intermediary is named as principal in the sale of your relinquished property and the subsequent purchase of your replacement property. The concept is to make the rent absolutely net under all circumstances, equivalent to the obligations of a bond: hence the "hell-or-high water" moniker.TRANSFER TAX: A tax assessed by a city, county or state on the transfer of property that may be based on equity or value. Buying value is the secret to success in this business, and builds instant equity. But you can avoid paying tax on your profit when you sell a rental property by "exchanging" it for a similar or like-kind property, thereby rolling over your gain. This is a legal document that will help to protect your rights in the event that your tenant falls behind on payments. A typical marginal well pumps 15 barrels of crude or 90 thousand cubic feet of gas per day.The ruling, coupled with an increased interest in 1031 TIC properties, has led to a rapid growth in tenants in common and CORE investments.

Other opportunities: oil, land, office, mineral

The tax credit phases-in if the average crude price for a year is less than $18 a barrel or $2 per thousand cubic feet of gas. One can also identify fractional interests in property that will be held in a co-tenancy.Investors seeking less actively managed real estate opportunities often elect to invest in Triple Net Leased Properties (NNN) or Tenancy in Common Investments (also called 1031 TICs).Anyone who is related to the taxpayer, or who has had a financial relationship with them within the two years prior to the close of escrow of the exchange can not be used as the QI.Revenue Procedure 2000-37 provides an opportunity to accommodate a Taxpayer's business objectives while at the same time minimizing the tax risk that a reverse exchange will be disqualified as a result of agency. The Tax Reform Act of 1986 introduced into the Tax Code the concepts of "Passive" income and "Active" income.

You can protect yourself

Another form of boot is mortgage boot. These can be any number of different ways that value is added onto the transactions such as promissory notes or agreements to perform work on the property after the sale. 1031 exchange refers to a real estate transaction realized under the rules of Section 1031 of the Internal Revenue Code in order to defer relevant taxes until a future date.The internal rate of return is comparable to long term high quality debt instruments. You must purchase property that is like-kind within 180 days of the sale of the original property in order to defer the payment of capital gains taxes. This constructive receipt precludes the Investors ability to engage in a successful tax-deferred like-kind exchange transaction. This Tax Act specifically exempted Intangible Drilling Cost as a Tax Preference Item. You will sell your existing property and the money will go to the intermediary who will hold the funds in an escrow account. However, there are certain requirements that must be met to do this. The 1031 exchange is another.

Three tips for the 1031 exchange novice

Real estate immovable property is often considered synonymous with real property also sometimes called realty, in contrast with personal property also sometimes called chattel or personalty. Real estate transactions fail to close for many reasons: problems discovered during the property inspection, defects in structure, tenant issues, environmental problems, particularly difficult third parties, etc. Buying down" had begun to carry the connotation of losing out. Assumption usually occurs without the need for qualification or loan assumption fees. The similarity between mineral interests and royalty interests is that both involve ownership of minerals under the ground. Once the taxpayer finds a buyer for the taxpayer's relinquished property, the EAT sells the relinquished property to the buyer, transfers ownership of the parked replacement 1031 properties to the taxpayer, and repays the loan from the taxpayer. The lessor or landlord is responsible for any expenses incurred for structural repairs and common area maintenance. Similarly, the safe harbor accepts financing arrangements that protect the EAT and put risks on the taxpayer, recognizing the underlying economic realities of the situation and ensuring that the parties to the exchange are treated as they intended.

The 1031 exchange question

Exchanging one business for another business is not permitted under INTERNAL REVENUE CODE Section 1031. The net lease requires the tenant to pay, in addition to the fixed rent, some or all all of the property expenses which normally would be paid by the property owner (known as the "landlord" or "lessor").The most common sources of boot include the following: Cash boot taken from the exchange. Tenants-in-Common can provide a professionally managed, institutionally funded turn-key real estate solution that should be carefully evaluated and compared to other real estate investments for ease of acquisition, management and sale. This implies a depreciation rate for just the building of about 3 1/4% per year. I would stick to single family homes and small multi-units (1-5 units). It is important to remember that the 45 day identification period runs concurrently with the 180 day closing period.Sell the property, including the Cooperation Clause in the sales agreement.Real estate investment trusts (REITs) offer investors the ability to more easily include real estate-related assets in their investment portfolios.