WE WROTE THE BOOK ON SECTION 1031
NOW WE’RE SHARING THE CONTENT WITH YOU.
Top Real Estate Investors use Section 1031 instead of paying taxes on Capital Gains and Depreciation Recapture, and then they use IRS money to buy more property.
Now, you can, too. Learn how to:
* Keep all of your profits, tax-deferred.
* Use IRS money to buy more property.
* Do owner financing inside a Section 1031.
* Buy & rehab without selling first.
* Buy multiple Replacement Properties.
* 6x your personal property depreciation.
* Close on an incomplete construction.
* Do a partially-tax-deferred Exchange.
* “Net” boot, debt, assumptions, and notes.
* Access your equity tax-free (correctly!).
* Use Section 121 and 1031 together.
* Make a vacation home an investment.
* Report the Exchange on Form 8824.
* Refinance, die, eliminate deferred taxes.
HOW TO USE THIS SITE
The site is designed for a minimum of interruptions and no distractions.
It is best viewed on your desktop or laptop.
Each page is devoted to a specific topic, and all pages are linked.
Now, let’s get to it. Here are some suggestion.
If you aren’t aware of the power of a Section 1031 Exchange to allow you to use $50,000 of deferred Capital Gains tax to acquire a Million dollars in real property in ten years, then you should read Free Money.
If you are not a veteran of real estate transactions, you can learn all about them by reading Capital Gains Tax, which has a complete explanation and five real-life Examples analyzed.
Read 1031 Exchange Rules if:
You are a seasoned investor,
You understand a typical transaction, and
You’re ready to do your first Exchange.
And, if you already know how real estate transactions work, and you already understand the process involved in a Delayed Exchange, then read about how to do a Reverse Exchange.
If your interest is in buy and rehab, and you want to do an Improvement Exchange, or Build-to-Suit Exchange, then read Construction Exchange.
Warning: There is a dangerous amount of content on the web regarding Section 1031. It is simply incorrect. It is being repeated in an echo chamber by people who are uninformed.
But, if you know the facts, you will have a huge advantage in your real estate investing. For example:
* Intent is completely irrelevant in selling your Relinquished Property.
* You can Refinance your Relinquished Property prior to sale.
* You cannot Refinance your Replacement Property right after closing.
* Owning Dealer Property does not mean you aren’t also allowed to use Section 1031.
Click on any of the links to see the proof of the statements.
Anytime you need a definition of a term used here on the site, you can click on the Dictionary above. And if you want to know who is writing this material, I invite you to go to the About page and look at my bio.
And, finally, before you start a real estate transaction, it is always a good idea to look at the tax return you’ll be filing, and what information you will be putting on it. Read about Form 8824.
Now, for Newbies (we all were at one time), learn about the language and the players involved in a Section 1031 Exchange below.
If you are impressed with the content on this site, and in the book, and I think you will be, I invite you to look at my other books on Real Estate Investing at MichaelLantrip.com. You can look inside, check out the Table of Contents, read 50-100 pages, and see if they should be in your library.
Now, let’s save some taxes.
It's Like A Seminar In A Book
IF YOU USE A DELAWARE STATUTORY TRUST, TRIPLE NET LEASE, OR A T-I-C, YOU MUST HAVE THIS EDITION.
On the left is an explanation of how to use the site. If you’re looking for something else, check the Categories below or use the Search box.
SECTION 1031 EXCHANGE: PLAYERS AND TERMS
SUMMARY: In a Section 1031 Like Kind Exchange, you must understand who the Players are, and what the Terms mean.
The following content will explain Relinquished Property, Purchase Price, Sales Price, Replacement Property Price, and Exchange Date. And you will meet the Exchangor, the Buyer, the Seller, the Qualified Intermediary, and the Title Company. Or, you can just read the summary.
Summary: The Exchangor sells his Relinquished Property that had a Purchase Price of $200,000 to the Buyer for a Sales Price of $400,00 and buys the Replacement Property from the Seller at a Replacement Property Price of $700,000. The Qualified Intermediary handles the funds with the Title Company, and the closing takes place on the Exchange Date.
READING TIME: Four minutes, 10 seconds.
This is the main character. This is you. You own the investment or business property which has appreciated in value, and which you want to sell without paying taxes on the profit, by qualifying to do a Section 1031 Like Kind Exchange. You will be selling property, and after you sell it, you will be buying some other property. The IRS looks at this as an exchange even though it obviously is not, therefore the IRS considers you the Exchangor instead of the Buyer or Seller.
In our Examples, you will be represented by our imaginary Exchangor, whose name is Alan Adams. His wife is Ann Adams.
The Exchangor can also be a Corporation, a Partnership, an LLC, a Trust, or any business entity.
The only requirement is that title to the Replacement Property must be taken in the same name in which the Relinquished Property was held. There is an exception involving a Single Member Limited Liability Company (SMLLC) and I will cover that later.
This is the property which you, the Exchangor, want to sell without paying taxes on the capital gains.
It can be either business property or investment property, or both.
Also, since passage of the TCJA (Tax Cuts And Jobs Act) in 2018, the property must be real property, or real property with personal property attached, since personal property alone is no longer covered by Section 1031.
And the property you are selling must be property that you have held for investment or for business purposes, and it must have been held for at least one year and a day.
Yes, I am aware that you have been told that “there is no holding period requirement for the Relinquished Property,” but that is incorrect. I will explain that and prove it later.
Although, I have noticed that since I first wrote this in 2017, most of the people on the web have read it and started acknowledging that I am right, and there actually is a holding period.
It is also incorrect that your “intent” at the time of purchase determines whether or not you can do a Section 1031 Exchange. It does not.
Again, I have noticed that those in the echo chamber who were challenging my position back in 2017 have stopped claiming that “intent” is the magic element that controls Section 1031 Exchanges.
This is the property that you, the Exchangor, intend to purchase to replace the Relinquished Property so that you can qualify for a Section 1031 Like Kind Exchange and not pay taxes on your capital gains.
It can be either business property or investment property, or both.
I know that I just told you that about Relinquished Property. But I repeated it because now we are talking about Replacement Property, and Replacement Property is different from Relinquished Property in one important aspect.
Replacement Property must be the type of property that can be held for investment or for business purposes by you. It doesn’t matter what the current owner is doing with the property before you buy it, it only matters what you intend to do with it, and then what you actually do with it.
The Replacement Property can be a single property, or multiple properties.
And, as I said, the Exchangor must take title to the Replacement Property in the same name in which the Relinquished Property was held.
This is the person who will buy the Relinquished Property from you.
He could be anybody, he has nothing to do with determining whether you will be able to qualify to engage in a 1031 Exchange.
It doesn’t matter what the Buyer does with the property after he buys it from you. All he has to do is bring the money to closing and leave with his deed. The only exception to this rule is when he is a “Related Person,” which we will discuss elsewhere.
In the Examples that we will use here, the Buyer will be Bob Baker.
This is not you! You are not the Seller! Remember, you are the Exchangor.
This is the person who owns the Replacement Property and he will sell it to you. He is the Seller of the Replacement Property.
He, like the BUYER (of the Relinquished Property), could also be anybody, except a Related Person, as long as he has the appropriate piece of property for you to buy.
He will have nothing to do with determining whether the Exchangor can qualify for a 1031 Exchange, but he must be told that the transaction that he is entering into involves a Section 1031 Like Kind Exchange for the Exchangor.
If the Replacement Property is made up of multiple properties, there might be more than one Seller.
The Seller might be willing to finance your purchase, so learn about Seller Financing.
In the Examples we will use here, the Seller will be Carl Carter.
This is the independent third party that will stand between the Exchangor and all of the parties- Buyer, Seller, Lender, Title Company, Realtor, Contractor, Attorney- anybody who becomes involved in the transaction.
His purpose is to handle the money so that you, the Exchangor, never touch it or have any control over it.
The rule is that if you touch or control the money from the sale of the Relinquished Property, you are disqualified from engaging in a Section 1031 Exchange.
The Qualified Intermediary is paid by the Exchangor to make sure that everything is done in accordance with the rules of Section 1031, and then the Qualified Intermediary provides written proof of how it was done.
The Qualified Intermediary is usually referred to as the QI.
WARNING: This is one area of danger in the Section 1031 Exchange and you should read about the Escrow Account and the risk involved.
Real estate transactions are handled differently in different parts of the country.
In some states, an Escrow Company handles everything. In some states, only Attorneys are authorized to handle real estate closings. And some states have licensed a Title Company to handle real estate closings and insure title to the property.
You will know what the procedure is in your state, but I will use the Title Company reference here because I operated a Title Company and I am most familiar with that procedure, and in my opinion it is the cleanest.
This is not the price of the new property that you are buying, your Replacement Property.
This is the price that you, the Exchangor, originally paid for the property that you are selling, property which is now becoming the Relinquished Property.
We must deal with what you paid for your property because the Purchase Price is the starting point for everything. It will determine your “Basis” in the property, and the basis will determine the amount of your Capital Gains, which will determine everything else that we will be discussing.
This is the price for which you, the Exchangor, are selling your Relinquished Property.
It is the other number used, along with your Purchase Price, to determine the amount of your Capital Gains.
REPLACEMENT PROPERTY PRICE
This is the price of the Replacement Property, the property that you will purchase to complete the transaction.
The price must be at least equal to, or greater than, the Sales Price, the price that the Relinquished Property is being sold for, in order to defer all of the Capital Gains taxes. You can, however, have a Partially-Deferred Exchange. More on that later.
There are two critical time limits that must be met in the 1031 Exchange process, and both of them start running on the Exchange Date.
The Exchange Date is the date on which the Exchangor transfers the Relinquished Property to the Buyer.
SALE WITHOUT SECTION 1031 LIKE KIND EXCHANGE
Now that you’re familiar with the Players and Terms involved in a Section 1031 Like Kind Exchange, it’s time to look at Capital Gains Tax, the nasty culprit that you are using Section 1031 to deal with.
Go here, or click on “Capital Gains Tax” in the menu above.