1031 is a tax savings tool that many Americans take advantage of every year. A benefit to some, a nightmare for others. Allow me to explain
Before we get started….
I’m NOT a CPA or Tax Professional; the info herein is my opinion…wait, why do we say that? What has ever happened to a non-CPA giving advice? I have no stories to tell on the topic…if you do, email firstname.lastname@example.org because I’m curious
A 1031 exchange is a legal vehicle for deferring capital gains taxes. By electing 1031 exchange status when selling one property and investing in other investment properties, you get spared from capital gains taxes. (temporarily) Why? Because those taxes are deferred, not excused or forgiven…
To get the facts on the 1031B program right from the Internal Revenue Service, go to irs.gov and search 1031 for further details.
Let’s talk about deferment for a minute…
At the time of this recording, the US Debt Clock shows our current debt at almost 28 trillion dollars. Our elected bottom feeders are about to add 1.9 trillion dollars to that in the next 30 days.
This means the US debt is spiraling out of control, how will we ever stay afloat as a country? Only one way…TAXATION!!
Do you honestly think that taxes will EVER go down in the future? Spoiler Alert, they won’t, in fact, they can’t. So, if taxes are only going to increase over time, why would you want to defer your tax obligation to a future time when taxes are higher?
The second thing to think about is the impact of being rushed on your decision-making ability. In order to complete a 1031 exchange, you have to designate the replacement property or properties within 45 days. Do you honestly think 45 days is enough time to find, negotiate and go under contract on a great deal? No..
Likely, because you lack the time to do so, you will wind up buying out of desperation to “just get a deal done” while the clock is ticking. Below we will get into the math..
By the way, “designating the properties” means a notice to the seller of each designated property. The seller will need to sign the notice (according to the IRS.gov website).
That’s not much time to put a deal together no matter what the economy is doing.
Is it easy to overpay when you feel pressured to make a decision? Yep
Head over to IRS.gov and search form 8824 and download the instructions, there is lots of good info here that you should discuss with your tax professional before proceeding.
Let’s talk math for a second.
Using a capital gains calculator I found online, I entered the following information:
Original Purchase Price: $150,000
Sale Price: $250,000
Annual Income of taxpayer $150,000
Filing Status: Single
Capital Gains Tax: Approximately $16,900 (married taxpayer would have a slightly lower number)
Have you ever lived there? This is what the IRS says about that ”If the property given up was owned and used as your home for at least a total of 2 years during the 5-year period ending on the date of the exchange, you may be able to exclude part or all of any gain figured on Form 8824. For details on the exclusion of gain (including how to figure the amount of the exclusion), see Pub. 523, Selling Your Home.”
If You Choose to go the 1031 route…
Step 1 – Find a 1031 Qualified Intermediary
Like self-directed IRAs, you are required to use a qualified third-party provider to get the break from the IRS. They will help handle everything for you.
Step 2 – Identify The Properties You Will Buy
Upon the sale of your assets, you have 45 days to identify what properties you will reinvest in. Not that you can locate multiple properties. You don’t have to close on them all.
Step 3 – Close On Your New Assets
After closing on the sale of the properties you are exiting, you have 180 days actually to close on some of the deals you have identified. Note that you can also use your funds to improve or even build new properties.