Question of The Month: What Is a 1031 Real Estate Exchange?

Question of The Month: What Is a 1031 Real Estate Exchange?


Hello, this is David Moore with Equity Advantage,
1031exchange.com and today’s question is what is a 1031 Real Estate Exchange? I guess I just got to clarify, 1031’s been
around since the ’20s. Historically, we were able to handle exchanges
of personal property and real property. Tax reform, when it came to be, it eliminated
our ability to handle personal property transactions so used to do cars, and boats, and planes,
and all kinds of fun stuff and we’ve lost our ability to do those things, so today any
1031 Exchange is a real property exchange or real estate exchange. When we look at the process, historically
people look at an exchange and think in the context of you’ve got something, I’ve got
something, we swap properties. The problem with that is you’ve got to actually
find things, people with assets that match up value and equity-wise, you’ve got what
I want, I’ve got you want, and we can do a swap. Well, that sort of evolved into what’s called
a three way exchange or an accommodated exchange where you’re using an intermediary, an accommidator,
a facilitator, that’s paid a fee to step into the middle of your sale and your purchase
and we convert it into an exchange. As far as the taxpayer is concerned, you’re
selling property, you’re going out to buy new property, it’s the accommodator’s job
to create an exchange out of that event. When we’re talking about it in broad terms
I like four basic parameters. One, it’s got to be an exchange, you give
us something, we give you something back. What’s getting received will have to be of
like kind. Like kind refers to the nature of the investment
rather than the form. Three, we’ve got to satisfy what we call a
napkin test. That says that you go across or up in value
and equity. Lot of misunderstanding out there on that
one. A lot of times you’re going to hear people
say you have to replace debt in an exchange. Totally untrue, debt could go two ways, one
by going down in value which triggers tax because you went down in value. The other way debt will go away is by adding
funds to the transaction which is always fine. When we have recessionary times, the loan
to values change, maybe equities change. We’ve had people come to us and say, “Hey,
I don’t want any debt on the replacement property. Do I need to pay off the relinquished property
in advance?” You don’t have to do that, you could always
add money to that replacement property. Once again, value and equity, that’s what
is critical, and if you don’t fully meet the exchange requirement you’re just going to
pay taxes and difference, it’s not all or nothing so don’t sweat that. Every dollar more you spend on something that
you want costs you a buck. If you don’t spend it, maybe it’s 30, 40 cents
in tax. Finally, we’ve got to have continuity of vesting
and that just means that the taxpayer that relinquished it has receipts so the person or entity that gives us something we have to give that person or entity something
back. Sounds easy enough, very complicated because
the finance world so often doesn’t see eye to eye with the tax and legal world. If you look at that concept, continuity investing,
it’s the second biggest heading we’ve got in the exchange business only to time. To summarize, 1031’s been around since the
’20s. It’s a great tool, let’s say it’s one of the
most important tools in your portfolio to make things happen and keep your money yours. It’s a tremendous wealth building tool, it’s
very inexpensive to use, and it can allow you to accomplish all kinds of things. Anytime you’re contemplating the sale of a
piece of investment real estate, if you’ve got questions or concerns please don’t hesitate
to give us a call, we’ll do what we can to help you out. I hope that’s answered the question. Take care. Once again, David Moore, Equity Advantage,
1031exchange.com. Thank you.

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