Yes, Virginia, There is a Way to Eliminate the Gain!
Using 1031 Exchanges as a Retirement Planning Tool
Most investors think about the immediate tax perks of completing a 1031 exchange but may not consider the long-term benefits of the tax deferral. An exchange provides the opportunity to apply pre-tax dollars towards replacement property and keep that money working for you. This money can help you acquire a more expensive replacement property that has a higher annual return on investment and enjoy greater long-term appreciation. Exchanges also provide the opportunity to diversify real estate holdings, consolidate properties and acquire property that is less management intensive.
A 1031 exchange is a tax-deferral strategy, but there are ways to defer the tax indefinitely. If an investor's strategy is to always exchange and never cash out, the gain may eventually be eliminated. When that investor passes away, his heirs inherit the property with a stepped up basis (which means at the fair market value at the time of death). A stepped up basis eliminates the tax liability on the deferred gain. Keep in mind, depending on the size of the estate, there may be estate taxes due and investors would be wise to work with a financial advisor to do some good estate planning and minimize the tax consequences for their heirs. Currently, the first $5,000,000 of an estate is exempt of estate tax but we don't know what will happen with estate taxes effective January 1, 2013.
There are other ways to avoid tax liability on some of the gain. For example, under section 121 of the Internal Revenue Code, if someone owns a property and uses it as his or her primary residence for 24 of the last 60 months, he or she is entitled to a $250,000 exclusion on the sale of the property provided he or she did not take that exclusion within the past 24 months. Married taxpayers filing jointly are entitled to a $500,000 exclusion. An exclusion is a wonderful thing as there is no requirement to pay taxes on it or reinvest. This is important to know because there is a way to take advantage of Section 121 when selling property acquired in a 1031 exchange.
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Three Cardinal Rules of a 1031 Exchange
Keep these Rules in Mind for a Successful Tax Deferral
Of course it is important to be able to recognize the opportunity for a client to benefit from a 1031 tax-deferred exchange. Typically, anyone selling something other than their primary residence or a flip should be introduced to the idea of a 1031 exchange. If the exchange is a desirable option and your client saves a lot of taxes there will certainly be many referrals from that client!
But once they start the process, you want to be able to focus on what you do best - getting their property to closing and helping them find their replacement property within the 1031 time periods. While 1031 CORP. always provides guidance throughout the exchange, here are three cardinal rules to keep in mind to make your client's 1031 exchange a successful one:
1. EQUAL OR GREATER VALUE
The value of the replacement property must be equal or greater than the net selling price of the relinquished property. The value of the replacement property is the agreed upon purchase price plus the closing costs and the net selling price of the relinquished property is the contract sales price less closing costs.*
2. EQUAL OR GREATER EQUITY
There must be the same amount or greater equity in the replacement property. All the equity left after closing costs and the mortgage payoff must be reinvested into the replacement property.*
3. SAME TAXPAYER
The same owner that sold the old property must take title to the new property. The same taxpayer with the same Social Security Number or E.I.N. must buy the new property or your client will be unable to report both properties on the same tax return.
*A trade down in either property value or equity is taxable but does not taint the entire transaction. Only the amount of the trade down is taxable.
Keep these rules in mind to ensure an easy exchange process for you and your client. This demonstrates your knowledge of 1031 exchanges as well as your commitment to their long-term success.
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Trending this Month...
No Mortgage on Replacement Property
We are seeing a higher than usual amount of Exchangers choosing to put in additional funds rather than place a mortgage on the replacement property. Some are even choosing to trade down and pay tax on the difference.
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1031 Seminars
Join us at our next complimentary seminar to learn more about 1031 exchanges and their many benefits. You must register in advance. Refreshments will be provided.
1031 EXCHANGES MADE EASY
Wednesday, July 18th, 6:30 - 8:30 pm
1031 CORP., 100 Springhouse Drive, Suite 203, Collegeville, PA
REGISTER NOW by emailing RSVP@1031CORP.com with your contact information! To schedule a 1031 seminar or sales workshop for your group, please call Margo McDonnell, CES® at 1.800.828.1031 ext. 212 or send her an email at margo@1031CORP.com.
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Lunch & Learn Webinars 
Join us for one of our complimentary Lunch & Learn Webinar Series webinars designed to provide quick educational sessions to help you build and preserve wealth. Grab your lunch and log on to a computer near you!
1031 Exchanges Made Easy
Thursday, July 5th, 12:00 - 12:45 pm EST
This webinar will provide an overview of 1031 tax-deferred exchanges and their many benefits. We'll also review the requirements of a successful exchange. Register Now!
Advanced 1031 Exchange Topics
Thursday, July 19th, 12:00 - 12:45 pm EST
This webinar will review topics such as reverse and improvement exchanges, personal property exchanges, related party transactions, installment sales and partnership issues. 1031 basics will not be covered so if you don't know the basics, you are encouraged to take our "1031 Exchanges Made Easy" webinar first. Register Now! |
CONGRATULATIONS,
Richard M. Heller, Esq. CCIM, CES®!
RICHARD M. HELLER, ESQUIRE, with law offices in Media, Pennsylvania and a consultant for 1031 CORP., has been selected for inclusion in the 2012 edition of Pennsylvania Super Lawyers in America in the field of Real Estate Law. Mr. Heller has been listed in Pennsylvania Super Lawyers since 2004.
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Message from our President
 | | Margo McDonnell |
Dear Friends,
I feel the need to brag! One of our clients recently waited till almost the last second to send over his 45-Day Identification. It wasn't midnight, just about 11:30 pm. No problem, clients do it all the time and our awesome exchange team waits for them to check to make sure they are okay. Well, this one wasn't. The client identified more than four properties and violated the 200% Rule. Marissa immediately tried emailing him with no response. Next she tried calling his cell and then finally his home phone before reaching him. She explained what the problem was and he was able to rescind his identification and submit a new one before midnight. Marissa never mentioned this the next day. We only learned about it from the client who was very impressed with the extraordinary service provided by Marissa. Next month marks Marissa's eighth anniversary with 1031 CORP. and I feel very fortunate to have her on our team.
Speaking of next month and Marissa, the days are quickly counting down until she has her first baby! Just another four weeks or so and we are thrilled for her. Marissa is not taking on many new clients now and is working to wrap up projects. While we wish her the very best and hope she enjoys every second with her beautiful bundle of joy, Sue and I will be counting down the days till she returns in early October.
Wishing you a wonderful summer!
Best regards,
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About 1031 CORP.
Serving as a nationwide qualified intermediary for 1031 tax-deferred exchanges since 1991, 1031 CORP. strives to provide a superior exchange experience for our customers and their advisors. We provide our customers with enhanced security of funds, knowledgeable exchange professionals and a commitment to keep the exchange process simple for our customers and their advisors. Every member of the exchange team is a Certified Exchange Specialist® and has the experience and expertise to facilitate even the most complex exchange transaction, including reverse, improvement and personal property exchanges. Additional information can be found at www.1031CORP.com.
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Margo McDonnell, CES®
Certified Exchange Specialist®
President
1.800.828.1031 ext. 212
Mobile: 610.680.6896
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Sue Umstead, CES®
Certified Exchange Specialist®
Senior Vice President
1.800.828.1031 ext. 208
Mobile: 610.755.8520
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Marissa LoCascio, CES®
Certified Exchange Specialist®
Senior Exchange Officer
1.800.828.1031 ext. 210
Mobile: 610.742.4351
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Richard Heller, Esq., CCIM, CES®
Consultant
1.800.734.1031
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Bettye J. Matthews, CPA
Consultant
1.800.680.1031
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Joseph F. Szajnecki, CES®
Consultant
1.800.734.1031 |
Margo McDonnell, CES® has been selected to present two continuing education courses at Triple Play 2012, the annual conference for the PA, NJ and NY State Associations of REALTORS®.
Her courses include:
- Capital Gain Misconceptions & Their Unexpected Tax Bills
- 1031 Exchanges: What's Trending Now and Anticipated Tomorrow
Triple Play 2012 will be held in Atlantic City from December 4th - 6th.
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