learly, the overriding reason is the ability to defer payment of capital gain taxes, including the recapture of depreciation. With depreciation recapture at 25% (or more, depending upon the type of depreciation taken and the period over which that depreciation was taken) and federal capital gain tax at 15%, plus state capital gain taxes (depending upon the state, of course), taxes can easily account for 30% or more of the gain recognized. But there are other reasons that taxpayers exchange. Most exchanges have secondary reasons for exchanging in addition to tax deferral. Among those reasons are:
- Consolidation. Example - taxpayer owns several properties, perhaps in different states, and wishes to
consolidate his holdings into one property. - Diversification. Example - taxpayer owns one large property and wishes to diversify her holdings over a wider group of properties.
- Relocation. Example - taxpayer has moved to new location and wishes to move his investment to the same location.
- Reduction of management headaches. Example - taxpayer has owned high-maintenance property and wishes to reduce management responsibilities by exchanging into triple-net leased property.
- Solution to partnership problems. With proper advance planning, property owned by a partnership can be sold and the partners can go their own ways, some choosing to exchange and others cashing out.
- Increase cash flow. Example - taxpayer owns raw land that produces little or no income and wishes to exchange into income-producing property.
- Estate planning reasons. Example - taxpayer owns one property but has three heirs who do not agree on how to dispose of the property after the death of the taxpayer. Taxpayer can exchange out of one property into three similar properties and each heir can decide how to handle his or her own property.
- Re-leveraging of equity. As each year of ownership passes, one's equity in a property typically increases. Generally, the return on equity that the property produces decreases annually. Exchanging allows a taxpayer to re-leverage her equity.
- The increase of equity by buying at a discount. If you believe, as the old real estate adage goes, "You make your money when you buy," should you not buy more often? A rhetorical question, to be sure, but if you are able to buy at a discount, tax-deferred exchanges can create wealth more quickly than any other technique.
- Debt issues. Example - taxpayer owns a fleet of vehicles for his business. His old practice was to sell 25% of them each year and replace them with new vehicles. By taking the maximum deductions, his accountant advised him that he came out ahead by borrowing the money to purchase the new vehicles. In today's world, where borrowing is more difficult, the savvy business owner recognizes that by structuring this transaction within a 1031 exchange, he can reduce or eliminate his need to borrow money and likely end up ahead in both cash flow and tax benefits.
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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.
Ken Tharp
800-805-1031 toll free
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
Copyright © 2009 By Ken Tharp, All Rights Reserved. * The Top Ten (Actually, Eleven) Reasons People Use Section 1031 Tax-Deferred Exchanges * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
, it will make combining them into one exchange much easier.)
For the second example, let's assume the reverse: I own one property that I am selling for $300,000 and I want to purchase two properties, each worth $150,000. This setup is usually less problematic than the first example, but there still can be issues. Let's again say that closing of the relinquished property occurs on January 1. My exchange account is opened with $300,000, and I identify only the two properties that I want to purchase as my potential replacement property. On March 15, I close on the first property. However, the second property has a cloud on the title, or there is an environmental issue that must be resolved. There could be any number of possible problems that could keep the second property from closing. (This is one reason to always identify a reasonable number of potential properties during the ID process, subject of course to the limitations that the rules impose, so that you have a fallback plan if something prohibits you from closing on your first choice.) If the issues preventing the purchase from being completed are not resolved prior to the end of the exchange period on June 30, my exchange will only be partially successful and I may have a sizable tax bill for the money I could not put into the second property I had planned to purchase.
raging the transactions for the three years shows the following:
application within the auction industry. The article was published in the September 2008 issue. If you would like to access the article online, it can be found on pages 62-64 of this link: The Auctioneer. The article is reprinted in three blog entries; this is the third of the three. (Part 1 can be found 
signed and in place before closing and transfer of title occurs. Many QIs can do the paperwork for an exchange in a matter of twenty-four hours or less, but most prefer to be involved earlier in the process. Bringing the QI in early enables him to gain a thorough understanding of the circumstances, and allows plenty of time for review of all documents and the answering of any questions.
in the early 1920’s, shortly after our modern income tax code came into being through the ratification of the Sixteenth Amendment in 1913. Section 1031 allows the owner of property held for investment or used in a business to dispose of that property through a sale and reinvest the sale proceeds in new property that will be held for investment or used in a business and defer any taxes on capital gains. (A taxpayer can exchange either real estate or business personal property or both.) The net effect of this tax savings is that more money is available for the purchase of the new property; sometimes a lot more money. There are a number of factors that determine the taxes owed on a sale when an exchange is not utilized, but in some cases taxes can represent a very sizable portion of the client’s proceeds. In extreme cases, more taxes might be due than proceeds received!
. Moving on...