1031 Exchange: Hot Topic! Copyright 2011 Keller Williams Realty, Inc. 1

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2 Presenter, Team Leader Gina M. Palumbo Broker-Associate NY-NJ Managing Director, KW Commercial Keller Williams Valley Realty 123 Tice Blvd Woodcliff Lake, NJ ext

3 Glenn P. Godart DMD Realtor Associate Healthcare Specialist Keller Williams Valley Realty 123 Tice Blvd Woodcliff Lake, NJ ext

4 Phillip H. Sorace Realtor Associate Financial Services Specialist Keller Williams Valley Realty 123 Tice Blvd Woodcliff Lake, NJ ext

5 Introduction In this course, you will learn the following: Internal Revenue Code 2. Buyers and Sellers 3. Why Buy and Sell Investment Properties 4. Like-Kind Properties 5. Basic Rules 6. Types of Exchanges 5

6 1031 Internal Revenue Code No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business, or for investment Exchange DEFERS Taxes 6

7 Buyers and Sellers Why did they buy initially? Cash Flow: Have your money work for you Equity Growth: Build a portfolio of assets Tax Shelter: Offset income from other sources and produce future equity How have their goals/objectives changed? 7

8 Why Buy and Sell Investment Properties Trade Up: Buy larger, higher income property by Leveraging Equity Consolidation: Combine multiple assets into larger or more manageable property Diversification: Exchange large property into multiple for better liquidity or to reduce risk Relocation: Ease of management Retirement: most common reason 8

9 Why Buy and Sell Through a 1031 Exchange? There are tax advantages of making this switch through a 1031 exchange. By the deferment of capital gains taxes the investor has greater funds to reinvest. This is critical either in their use of leveraging in their new purchase or in the cash flow potential of the replacement property. Capital gains taxes are deferred to a later time... 9

10 Like-Kind Properties In a1031 real property exchange, you can exchange real property for any other real property in the United States or its possessions, if said property is held for productive use in a trade or business, or for investment purposes. Commercial Investment Property for Commercial Investment Property 10

11 Basic Rules To get the maximum benefit for a 1031 exchange the total purchase value must be equal or greater than the property relinquished The total debt must be equal or greater All cash proceeds from the exchange must be rolled into the new purchase no cash out Funds may be used for most non-recurring closing costs, but not loan fees Receive nothing in the exchange but like-kind property 11

12 More Rules Boot Any cash taken from the exchange is considered Boot and will be taxed. Any mortgage relief is considered Mortgage Boot and will result in a tax consequence. Vesting The same tax entity that relinquished must be the same tax entity that acquires. 12

13 Sales Example Sales Example Sale Price: $1,000,000 Outstanding Loan: $ 400,000 Non-Recurring Closing: $ 80,000 Remaining Cash: $ 520,000 All Cash must go into Exchange: $ 520,000 All Debt must go into Exchange: $ 400,000 13

14 Types of Exchanges Simultaneous Exchange - prior to Delayed Delayed Exchange most common today Reverse Exchange purchase before sale Build to Suit strict guidelines Personal Property Exchange Same general asset class Office equipment/furniture, aircraft, barges, tractors, artwork, jewelry 14

15 Delayed Exchange Delayed Exchange Most typical and most common Uses a Qualified Intermediary Downside: Strict Time Restraints 15

16 Delayed Exchange Rules Time Period 180-Day Exchange Period The clock starts ticking on the date the Exchanger transfers the relinquished property to the buyer The Exchanger must identify up to 3 replacement property(ies) within the first 45 days of the 180-day exchange period The IRS tracks Calendar Days 16

17 Delayed Exchange Rules The Exchanger must acquire the replacement property(ies) within 180 days OR the date the Exchanger must file the tax return (including extensions) for the year of the transfer of the relinquished property, whichever occurs first. Extensions are not granted for any reason, including weekends or holidays The proceeds must be held in escrow by a qualified Exchange Intermediary until needed to close the new purchase 17

18 Delayed Exchange Rules The (up to) 3 properties identified can be of any value Can close on any or all of them Cannot identify additional properties after the 45 day period All rules are governed by the IRS and enforced Tax deference can be rejected if the rules are not followed exactly 18

19 Delayed Exchange Alternative Rules The 200% Rule Allows more than 3 properties to be identified The sum of all the properties identified must not exceed 200% of the value of the relinquished property The 95% Rule Allows more than 3 properties to be identified If the sum total of the properties identified exceeds 200% of the value of the relinquished property, than the Exchanger must close on 95% or more of the identified properties total value 19

20 Questions/Answers Thank You for the Opportunity to Share with You I Look Forward to the Opportunity to Work Together! ~ gina, glenn and phil SM Revision #X, 00/00/2000 Copyright 2010 Keller Williams Realty, Inc. 20

1031 Exchanges: What Realtors Need to Know. Student Handouts

1031 Exchanges: What Realtors Need to Know Student Handouts I. Benefits A. Benefits to Investors 1. Defer capital gains tax 2. Leverage for wealth building 3. Diversification 4. Consolidation 5. Cash flow