HOW 1031 TAX DEFERRED EXCHANGES MAY HELP STRENGTHEN YOUR POSITION

Also known as a "Delayed Exchange" or "Starker Exchange", you may find the good old "1031 tax Deferred Exchange" to be a good friend if you are faced with disposal of INCOME PROPERTY or INVESTMENT PROPERTY!  WHY?....cause these exchanges may allow you to DEFER all that Capitol Gains TAX that you will be on the hook for if you sell that property through normal channels!

WHY TAX DEFERRED EXCHANGES?
    1.  Allows Investors to DEFER capitol gains tax and use the increased equity to purchase a larger property or properties.
    2.  Investors may be spending more than they like maintaining properties..They can exchange several properties into one!
    3.  Investors may wish to diversify and exchange a property into another city or state.
    4.  An Investor may wish to exchange out of one property that has a lot of equity for several smaller properties.
         If down the road the investor wants to sell off some of the smaller properties, the tax burden would be SIGNIFICANTLY LESS.

    5.  Investors may wish to take advantage of increased growth and appreciation in a specific area.

WHAT IS "LIKE KIND" PROPERTY?

You have heard that investors are allowed to exchange for "LIKE KIND" property but MOST people do NOT know what this means.

To qualify as "LIKE KIND", any type of real property "HELD FOR INVESTMENT OR PRODUCTIVE USE IN A TRADE OR BUSINESS may be exchanged for ANY OTHER type of real property to be held for investment or held for productive use in a trade or business.

If we study the above paragraph carefully, we can easily see how we ARE allowed to exchange that Rental House, for a speculative land investment, or perhaps exchange that piece of raw land we've had for the last 20 years for a small commercial center, or investment houses or whatever.....as long as the parcels meet the definition of LIKE KIND as given above!

SO....HOW DO WE DO A 1031 TAX DEFERRED EXCHANGE?

There are several steps that should be followed during the exchange process.

        1.   CONSULT with your tax and financial advisors to determine of a tax deferred exchange is appropriate for your circumstances and compatible with your investment goals.

        2.   LISTING the relinquished property (the one you want to get rid of), with a good Real Estate Broker (Coldwell Banker Success Southwest) who is familiar with the exchange process.

        3.   OFFER, COUNTER OFFER AND ACCEPTANCE.  Your enter into a contract to sell with a buyer.  The buyer is advised of the exchange.

        4.   OPEN ESCROW AND COORDINATE WITH A FACILITATOR - Earnest money deposits when you sell the old property go to an ESCROW COMPANY.  The EXCHANGE FACILITATOR, a separate company who will do the actual exchange, prepares the exchange agreement and the necessary paperwork coordinates with the Escrow holder.  The sale is closed and the proceeds go to the FACILITATOR.  You are NEVER allowed to have "Constructive USE of the funds derived from a property to be exchanged, except in cases of (taxable BOOT.  This completes phase 1 of a normal tax deferred exchange.

       5.   REPLACEMENT PROPERTY IDENTIFICATION -  You have 45 days after you close escrow on your old property (Relinquished Property) in order to IDENTIFY the replacement property.  The identification must be in writing and signed by the exchanger.

        6.   BUYING THE REPLACEMENT PROPERTY - You have 180 days from the date you close on the old property to find and close on the replacement property.  Warren and Dorene Anderson or a Realtor in your area who is familiar with the exchange process will be happy to help you find just the replacement property that will fit your investment needs.   The purchase contract is substantially the same as a normal contract with a few additional clauses to help insure that your exchange will be valid.

        7.  OPEN ESCROW AND CLOSING THE EXCHANGE -  The Facilitator prepares the Phase 2 Exchange Documents and coordinates with the Replacement property Escrow holder.  At the direction of the Facilitator, the escrow holder deeds the replacement property from the Seller directly to the Exchanger (YOU).   The funds held in escrow by the facilitator are placed in escrow and the replacement property is purchased by the Facilitator from the Seller.  The transaction is closed as Phase 2 of a delayed exchange.

I know this sounds complicated however it really is a normal procedure and is done every day by savvy investors.  Warren and Dorene can help you through these steps and we can even recommend a good Facilitator company for you.