From the desk of
Attention Real Estate Investors!
You are under performing!
Call Rick Gomolka to help you maximize ROI, but read below first!
Economics and Finance Majors understand the concept of "opportunity cost"
Opportunity cost is defined as the loss of potential gain from other alternatives when one alternative is chosen.
Which means the path you chose may result in lower gains even though you are making money on your current investment.
Here is an example
Put you money in a savings bank account verses a money market account (CD)Why would you only get 1/2% ROI (Return On Investment)?
If you chose to leave your money in a passbook savings account yielding you 1/2% per year on your money verses 2% a year in another bank money market or other investment vehicle the answer would be simple right?
Here is the funny thing. Most property owners of commercial buildings, who are happy with a 5% return on investment, don't want to hear us out when they could be getting more. Hmmm. Scared? Overwhelmed? Think it is a trick or gimmick? It's really not that tough. You just have to learn the basics.
What if you could yield an extra 1,2,5,10 percent more? At what ROI increase would you make it your business to look at new properties? That minimum return on investment is called MARR (minimum attractive rate of return.)
Let me show you how to increase your MARR with
a 1031 Tax Exchange
First lets define 1031 IRS Tax Code
This is from the IRS. Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.
You can see the details at
IRS 1031 TAX CODE INFO
Here is an additional excerpt if you don't want to go on their website right now.
To accomplish a Section 1031 exchange, there must be an exchange of properties. The simplest type of Section 1031 exchange is a simultaneous swap of one property for another.
Deferred exchanges are more complex but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties.
To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.
A reverse exchange is somewhat more complex than a deferred exchange. It involves the acquisition of replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180 days. During this parking period the taxpayer disposes of its relinquished property to close the exchange.
Please call your tax or real estate attorney for legal advise. You may have extenuating circumstances. It is a real specialty in the tax code. If they say you are good to go and gave you the legal implications We can help you!
Here are some key elements on a 1031 tax (Like kind or Forward) exchange. Tax codes change occasionally so consult your real estate attorney or accountant!
1) Must be the same type of asset in the United States of America. It cannot be exchanged with property outside of the USA. Example Art for art, Condo for single family. Land (if held for investment purposes) for office building. It cannot be art for a condo.
2) Simplified (but read on for details) you sell your asset, then the seller identifies up to 3 properties within 3 months of the sale to roll over all the proceeds, then closes on one of the three identified properties within six months in the same tax year.
3) Any capital gain from the first property cannot be "touched" by the owner at any time during the process. If you control the proceeds, then you will have triggered "Constructive Receipt" and your 1031 is disallowed!
4) To prevent touching the proceeds of sale you must use a tax intermediary.
5) All proceeds are used to buy the next property. There are exception to take money out. That's called Boot! More about that later.
6) The next property must be equal or greater in value.
7) The 1031 tax exchange kicks the can down the road deferring the taxes on the gain of the property and in certain estate planning escapes capital gains altogether.
8) You can do this over and over again!
9) What could be your tax implication be if you sell without a tax exchange? Here is a chart of how taxes are figured out Tax rates click here. So lets say for example your Federal Long-Term Capital gains=20% and your Massachusetts Long-Term Capital Gains 3% Total Long-Term Tax liability=23%!
10)If you die you avoid the the tax completely due to a stepped-up basis for your estate hiers!
11)Research the qualified Tax intermediary carefully. Review their reputation with Federation of Exchange Accommodators, lest you get swindled!
Some food for thought
1) Land is not a tax depreciable asset.
2) The building/condo investment is fully depreciated over 27 years.
3) If you have fully depreciated your investment your BASIS IS ZERO
4) If you own the current property for a while and it's value has increased substantially (not taking into consideration capitial improvements), you are missing out on a larger depreciation schedule on a new property, if you sell your property for the same price as a newly acquired identical property
by doing a 1031 tax exchange, your new depreciation schedule kicks in at the new property price (for the building not the land)! When we meet I will explain this in greater detail! HUGE BENIFIT FOR INVESTORS!
5) You can sell multiple small properties and buy one large property or leverage into multiple smaller ones to split up your estate down the road and give each child their own property or to settle a divorce or bad partnership!
6) Helps owners of land that do not produce income switch to income producing properties.
7) Allows owners to lease to their children or parents.
8) Compliments retirement plans.
9) You can exchange your property(ies) into multiple properties to use up your capital gains
10) One owner may sell their mutual investment and acquire a replacement property.
11 If you want to bring in an investor (not a partner) on the second property it is allowed!
12) You can dissolve a partnership, distribute real estate to partners individually then sell the real estate.
1) Personal residences. Click here on tax info on your home!
2) A second residence/ vacation home if used exclusively by the owner. If rented out part of the year it qualifies for a 1031 but exchange must be for the same type of vacation home that is also rented out part of the year.
3) You can sell to a relative as long as they hold the property for at least 24 months or the 1031 gets disqualified.
4) Exchanger purchases a property from a relative and the relative receives cash (illegal!!!)
5) Property flipper/dealer if you are buying to resell.
6) You cannot sign a Purchase and Sales agreement if you are selling and later decide to perform a 1031 Tax Exchange. You must have certain things done before hand!
7) Cannot be stocks, bonds or other securities, notes, certificates in Trust etc.
8) The seller must identify by fax, email, postmarked or overnight delivery to the Intermediary the first desired property to purchase (replacement property) within 45 days of the sale of the original property (and up to two more within another 45 day period) and must close on one or more of the property(ies) within 135 more days of the original 45 days totaling a maximum of 180 days for the entire process.
9) Single member LLC's are not recognized by Massachusetts.
10) If you plan on identifying 4 or more properties, the total market value of all the properties cannot exceed 200% of the original property sold.
11) If the new mortgage is less than the old mortgage you will be taxed.
We know of reputable qualified tax intermediaries used for delayed exchanges (AKA "STARKER" exchanges) that can help in the process to create an assignment and substitution agreement".
Also called a Warehouse exchange. It's when you find the replacement property first, then you sell your primary property. You must really have good legal advise if you want to go this route!
If the original property sells for more than the second exchanged property the left over proceeds is called Cash Boot or Booty! Any money you take out is taxed. OR better yet you can use the extra proceeds for capital improvements of the new property you purchase!
So now that I wet your appitite for 1031 tax exchanges...
I need to share one more thing with you.
My personal motto is a Latin phrase "Semper paratus" or "Always ready!" and you should be too for a great 1031 Tax Exchange!
Ring me or Click me when you are, then Start Packing!