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Author: 1031exchange Published: 2009-06-21 18:20:27 Last edit: 2009-04-21 11:20:07 Tags: 1031 exchange tax exchange |
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The 1031 Exchange process starts with your CPA or accountant. The discussion should include the amount of taxes owed if you sold the property outright. The adjusted basis would be determined, and based on this adjusted basis, you can determine what the "normal" capital gains tax liability would be. Also, you can determine the amount of taxes that would be due to depreciation recapture. This depreciation recapture is currently taxed at a maximum rate of 25%. The capital gains that are attributed to depreciation are taxed at a higher rate.
Likewise, your CPA or accountant will determine how much of the gain relates to normal appreciation from the natural increase in the value of the property. This appreciation is currently taxed at a maximum rate of only 15%. Your CPA will also determine if any state income tax or capital gains tax would be incurred. This would also include municipal tax liability.
After determining all of the tax liability from selling your property, you can decide to sell it outright or to sell it utilizing the tax advantages of a 1031 Exchange. Knowing all of the tax liability helps you to make a clear decision. Normally, the 1031 Exchange will result in a far less tax bill than if you sold the property outright.
After your potential taxes are determined, you should call a Qualified Intermediary, and inform them (the QI) of your wish to complete a 1031 Exchange. Typically, you also need a written Purchase Agreement, signed by both you as the seller, and your purchaser, stipulating your desire to sell your relinquished property as part of a 1031.
It is a good idea to stipulate in your purchase agreement your desire to utilize the 1031 Exchange option. You have established that the purchaser agrees to cooperate with the 1031 Exchange. Also, you have established the groundwork for the closing. For an example of the cooperation clause go to www.1031podcast.com.
At the closing, the sale will become complete. The deed crosses the desk to the purchaser, and the net sales proceeds are paid directly to the Qualified Intermediary. This starts the 1031 countdown. The day after the closing is considered "day one" in the forty-five day identification period. During the forty-five days, you must identify in writing the property that you want to purchase as your replacement property. This "day one" is also the start of the 180 day exchange period that you have to complete the 1031 exchange and acquire your replacement property.
To sum up, from the beginning the you should first determine what capital gains tax bill (including deprecation recapture and state and local taxes) would be with your CPA or accountant, and decide if doing a 1031 Exchange will benefit you. Next, you should document your intent to sell the property to your purchaser, as well as your desire to complete a 1031 exchange by inserting text in your purchase agreement and contacting a qualified intermediary early - before closing on the sale of your relinquished property.
If you do all of the above, you will start the process of deferring taxes and keeping your money working for you.
U.S. investors can save a lot of money by using 1031 tax exchanges to defer all of their capital gains tax on the sale of investment property. 1031 exchanges are like an interest free loan from Uncle Sam.
Likewise, your CPA or accountant will determine how much of the gain relates to normal appreciation from the natural increase in the value of the property. This appreciation is currently taxed at a maximum rate of only 15%. Your CPA will also determine if any state income tax or capital gains tax would be incurred. This would also include municipal tax liability.
After determining all of the tax liability from selling your property, you can decide to sell it outright or to sell it utilizing the tax advantages of a 1031 Exchange. Knowing all of the tax liability helps you to make a clear decision. Normally, the 1031 Exchange will result in a far less tax bill than if you sold the property outright.
After your potential taxes are determined, you should call a Qualified Intermediary, and inform them (the QI) of your wish to complete a 1031 Exchange. Typically, you also need a written Purchase Agreement, signed by both you as the seller, and your purchaser, stipulating your desire to sell your relinquished property as part of a 1031.
It is a good idea to stipulate in your purchase agreement your desire to utilize the 1031 Exchange option. You have established that the purchaser agrees to cooperate with the 1031 Exchange. Also, you have established the groundwork for the closing. For an example of the cooperation clause go to www.1031podcast.com.
At the closing, the sale will become complete. The deed crosses the desk to the purchaser, and the net sales proceeds are paid directly to the Qualified Intermediary. This starts the 1031 countdown. The day after the closing is considered "day one" in the forty-five day identification period. During the forty-five days, you must identify in writing the property that you want to purchase as your replacement property. This "day one" is also the start of the 180 day exchange period that you have to complete the 1031 exchange and acquire your replacement property.
To sum up, from the beginning the you should first determine what capital gains tax bill (including deprecation recapture and state and local taxes) would be with your CPA or accountant, and decide if doing a 1031 Exchange will benefit you. Next, you should document your intent to sell the property to your purchaser, as well as your desire to complete a 1031 exchange by inserting text in your purchase agreement and contacting a qualified intermediary early - before closing on the sale of your relinquished property.
If you do all of the above, you will start the process of deferring taxes and keeping your money working for you.
U.S. investors can save a lot of money by using 1031 tax exchanges to defer all of their capital gains tax on the sale of investment property. 1031 exchanges are like an interest free loan from Uncle Sam.
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