PATRICK MCCARRAN

Preserve Equity, Build for the Future Using a 1031 Tax Exchange

Leaving California or is it time to reinvest in a different property or state? Due to the recent upswing in homes values we have realized a significant growth in equity. Maybe you would prefer an investment in a different city, region or even another state? Many owners think that they may be stuck in their current investment property? Whether you bought it as an investment or it was an owner occupied that went past your 3 year deferment period you have options. Possibly you would like to combine many properties into few or few into many? If so, look into 1031 Tax Exchanges which allow you to defer taxes on capital gains resulting from the sale of investment real estate.

With an exchange, owners are able to preserve equity, while still selling the property. To accomplish this, sellers hire a Qualified 1031 Intermediary (QI) to document the sale as an exchange and to

receive the funds from the sale. I can not stress the importance of a THIRD party for the exchange. This does NOT mean a title or escrow company. By definition you can not have any direct control over the funds.

Central to a 1031 Exchange is the interpretation of like-kind property. While the common assumption is that like-kind implies land for land or a condominium for a condominium swap, the interpretation of like kind is actually less literal. Rather, it defines like kind as meaning that both the replacement and the original property must be used as an investment. So land, condominiums, single-family homes and motels can all be exchanged for one another as long as they are used in the exchanger’s business or held as an investment.

1031 Exchanges are complex mechanisms and like all IRS requirements, they are very specific. For example, exchangers have 45 days from closing to identify properties they intend to purchase and 180 days to complete the purchase.

The 45-day time frame used to be burdensome for sellers. Now, they can opt for a Reverse Exchange, in which an additional third party called “the exchange accommodation title holder” (EAT) acquires title until the original property sells. Reverse Exchanges shift the 45- and 180-day time frame to the selling side of the transaction. With an Improvement

Exchange, which also uses an EAT to hold the replacement property, sellers can build investment properties from the ground up or improve existing properties. The improvements have to be built and paid for during the 180-day period. The time periods are exact and not flexible.

If you are interested in a 1031 Exchange, the first step is to consult your tax advisors as well as an attorney or CPA who is knowledgeable with 1031 Exchanges. Make sure that your real estate professional knows you plan to conduct an exchange and be sure that he or she is familiar not only with the process but also with the specific documentation and time frame mandated by the IRS.

For a list of qualified companies contact a local realtor or often title companies will have an affiliate they can refer. Remember your options are open.

This article is intended to inform readers, but does not constitute any financial or legal advice.

Patrick McCarran is a local Realtor and Broker. Call/text 925-899-5536 • pmccarran@yahoo.com • CallPatrick.com Independently owned and operated. Equal Housing Opportunity. In association with Realty One Group Elite DRE#0193160.