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.

Normal appreciation can be determined by your CPA or accountant from the natural increase in the value of your property. Normal appreciation is currently taxed at a maximum rate of only 15%. If you are in a state with an income tax or state capital gains tax, your CPA might also determine the amount of state and 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.

After your potential taxes are determined, you should call a Qualified Intermediary, and inform them (the QI) of your wish to complete a 1031 Exchange. Typically, you also need a written Purchase Agreement, signed by both you as the seller, and your purchaser, stipulating your desire to sell your relinquished property as part of a 1031.

In addition, it is a good idea to add a stipulation or clause in the purchase agreement stating that you want to complete a 1031 Exchange with regards to the property and that the purchaser agrees to cooperate with such. You have now laid the basic groundwork for the closing. For sample cooperation clause go to www.1031podcast.com.

At this point, your closing can now take place, and your sale will be completed. Once the sale is complete, and the net sales proceeds have been paid directly to your Qualified Intermediary, your 10131 countdown will begin. The day after the closing is considered "day one." From this day, you have forty-five days to identify in writing the properties you want to purchase as your replacement property. It is also the first day 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. - 23196

About the Author:

United States investors can save a lot of money by using a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is similar to an interest free loan from the U.S. Government.