Question:
What is a 1031 or Starker exchange?
Answer: A 1031 exchange occurs when all of the equity and
debt from the sale of a property (called the relinquished property)
are reinvested into another property (called the replacement property).
Upon sale of the relinquished property an unrelated 3rd party called
a qualified intermediary (QI) must hold the proceeds. The investor
has 45 days to name up to three different replacement properties
and 180 days to close on the replacement property. If completed
successfully and within the mandated time frames, the process allows
the investor to defer all state and federal capital gains tax as
well as recapture tax.*
Question:I am planning on selling an apartment
building; do I have to buy another apartment building?
Answer: No. The tax code establishes "like-kind
property" as the requirement for reinvesting. However, different
asset classes of real estate all qualify as "like-kind"
to one another. For example, you can sell an apartment building
and buy an office building, industrial building, raw land, or even
a royalty interest in a gas or oil well. You cannot reinvest stocks,
bonds, or mutual funds, as they are not "like-kind" to
real estate.*
Question:
If I am going to receive $125,000 in cash
at closing, can I simply reinvest that amount?
Answer: No. For complete deferral of all tax investors must
not only reinvest the cash they receive at closing; they must also
replace the debt that was attached to the property. A partial exchange
is where an investor replaces part of the equity and/or debt with
a replacement property, but chooses to pay tax on the remaining
portion.*
Question:
If completing a 1031 exchange simply defers the taxes, do I ever
have to pay them?
Answer: By completing a 1031 exchange and deferring the
taxes, you establish a new basis in the replacement property. Should
you ever decided to sell that property, you may complete another
1031 exchange. This process can go on as many times as you choose.
Upon death your heirs will get a "step-up in basis." Simply
put, your heirs will be able to liquidate the property at current
market values and pay zero capital gains and recapture tax. The
property is not exempt from estate tax however.*
Question:
Can I do a 1031 exchange
into a partnership?
Answer: No. A 1031 exchange into a partnership does not
qualify for "like-kind" property even if the partnership
was created for the purposes of owning real estate.*
*
Always consult with your tax advisor before making any investment
related decisions.
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"Anyone
may so arrange his affairs that his taxes shall be as low as
possible…there is not even a patriotic duty to increase
one's taxes. Over and over again, courts have said that there
is nothing sinister in so arranging one's affairs as to keep
taxes as low as possible."
–Judge Learned Hand
US Court of Appeals, 1924-1951 |
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