Calculate Your Profit from a 1031 Exchange

Calculate Your Profit from a 1031 Exchange
The formula showing the calculation of the profit from a 1031 exchange:

Sale Price ? Debt ? Cost of Sale = Exchange Proceeds

Debt ? new debt = boot

Exchange proceeds ? down payment = boot

Boot + boot = total boot

If exchange proceeds are equal to or less than the down payment on the replacement property, boot is zero. If the debt on the replacement property is greater than or equal to the debt on the replacement property, boot is zero. But if the down payment and/ or debt on the replacement property are lower, the differences that appear to be in your favor are taxable boot.

Mortgage on relinquished property ? Mortgage on replacement property ? Additional cash paid by you towards the new property (not including money invested from the sale of your old property) = Net boot received (Not less than zero)

Net boot received +
any cash received by you in the exchange = Boot received

Terminologies:

Boot - it refers to any non-like-kind property that is exchanged.

Sale Price – it is the sale price or consideration in the deed, the fair market value on the affidavit in the deed or the projected consideration.

Debt - is that which is owed; usually referencing assets owed, but the term can cover other obligations. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned.

Cost of Sale – the total spent for a sale.
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1031 Delayed Exchange
Delayed Exchange is an exchange of property to put off capital gain taxes, in which the funds are placed in a binding trust for up to 180 days while the seller acquires an "exchanged" property, pursuant to IRS Code sec. 1031. It is sometimes called a "Starker" after the man who first used this method and survived an IRS lawsuit.

It represents a simple, strategic method for selling one qualified property and the subsequent acquisition of another property within a specific time frame for the deferral of capital gain taxes. Indeed, any property owner should consider a Delayed Exchange for the sale of their existing property. To do otherwise would necessitate the payment of capital gain taxes in amounts that can exceed 20% to 30%, depending on the appropriate combined federal and state tax rates.

It also provides exchangers with more flexibility and options in acquiring the replacement property than the simultaneous exchange. The delayed exchange begins when the exchanger's first relinquished property is sold and is completed when the last replacement property is acquired within the prescribed exchange period. There are two basic aspects to a Delayed Exchange. First, the purchase price of the Replacement Property must be equal to or greater than the sales price of the Relinquished Property. Secondly, all equity received from the sale of the Relinquished Property must be used to acquire the Replacement Property.

Several Steps in a 1031 Delayed Exchange

STEP 1
List your exchange property for sale with a licensed real estate broker.

STEP 2
Begin your search for replacement property.

STEP 3
Open escrow on the exchange property being sold and complete the exchanged information sheet which was given to you.

STEP 4
Provide written notification of the properties you wish to identify, not later than 45 days following close of escrow on the first property sold.

STEP 5
Notify immediately as soon as you open escrow on your replacement property.
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Tax Savvy Investing
A 1031 Exchange allows us to sell a piece of investment, trade or business property, buy a new property, and defer the gain or profit from the sale (not owe taxes on the sale immediately). If you eventually sell the new piece of property, you would owe taxes at that time. Generally, all gains and losses on sales of real estate are taxable, but an exception lies within a 1031 exchange where the property sold is traded or "exchanged" for the same or link kind property. The new property is seen as a continuation of the original investment, so taxes are not due at the time of the sale.

Many people believe that tax deferred exchanges are only for professional investors and huge corporations but thi s is simply not true. For me, everyone should take advantage of these whether they are a professional investors or not. The main strategy is to purchase a rental home below market value, rent it for a year, sell it, and buy two rental properties for your own good. If you do this for several times, there is a tendency that the IRS may take view that you are not a long term investor and disallow such exchanges. When you are ready to do a tax-deferred exchange, you will need a qualified intermediary, a CPA, or an attorney and you should always get professionals advice.

It is also very important to identify property in a written document signed by you, and delivered to the party assisting you with the exchange on or before 45 days from the date you sold the original rental property.

Important note: You can identify more than one property as the replacement property. The maximum number of replacement properties that you may identify without regard to fair market value is three. You may identify any number of properties provided that the total value of these properties is not more than 200% of the value of the original property you are selling. You don?t necessarily have to close all the properties you identify but you can name several if you?re not sure what will close and to observe the rules in technical note in terms of the value of properties you identify.

The 1031 Tax-deferred exchange is a great way to maximize your wealth. By keeping your investments growing without immediately paying taxes, you can do wonders for your net-worth. Remember, if you are planning to do a tax deferred exchange, you really need to ask for advice from a professional that handles these transactions on a regular basis. Try visiting www.1031exchangemadesimple.com for more information.

1031 Exchange – Investment Properties: 1031 Exchanges
If you are selling an investment property and planning on re-investing then the 1031 exchange is right up your alley. A 1031 exchange is basically a tax shelter allowed by the IRS where you sell an investment property and then re-invest the profit from that sale into another property. Now, keep in mind that you [...]

What are 1031 exchange services?
What are 1031 exchange Services?

Under section 1031 of the Internal Revenue Code, a real property owner can sell his property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains taxes. To qualify as a 1031 like-kind exchange, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations. 1031 exchange services can offer significant tax advantages to real estate buyers. Often overlooked, a 1031 like-kind exchange is considered one of the best-kept secrets in the Internal Revenue Code.

For more information here are 2 good links:
http://www.1031-nnn-properties.com/1031-exchange.htm & http://www.1031-nnn-properties.com/1031.htm

Misunderstanding Can Thwart Intent of Owners Employing a 'Starker Exchange'
Q I have rented out a house in Texas for more than 10 years and would like to sell it as part of a 1031 Starker tax-free exchange. I plan to sell the Texas house and buy a rental unit near Virginia Beach. I have never occupied or used the Texas property and have exclusively rented it to tenants over the years. I intend to rent the replacement property beach house during the summer months and also use it for 14 days or less during the rest of the year.

About the Author:

Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.

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