EXCHANGING – INCREASING YOUR PROFITS
In today's complex world of real property investing, one exceptional tool is overlooked.
"SECTION 1031 TAX DEFERRED EXCHANGE"
Investors generally buy and sell real property to earn a profit, yet in more cases than not they overlook the exchange as one of the most valuable profit making techniques available. The advantage of the §1031 tax deferred exchange remains one of the best reasons to invest in real estate and possibly one of the last remaining true tax advantages.
Investors are often confused and reluctant to take advantage of the exchange process due to the intricacies and vague Internal Revenue Code guidelines.
Jeld-Wen 1031. an Oregon based Intermediary; specifically created and designed to help you successfully accomplish the goal of a tax deferred exchange. As a dedicated intermediary company, Jeld-Wen 1031 can ease the burden of an exchange, while eliminating some of the confusion. The end result is a significant tax savings, combined with the ability to leverage investment dollars. It also provides a tool that allows investors to relocate or restructure their investment portfolio.
THE EXCHANGE
Exchange laws are based on tax provisions dating back to 1921. Subsequent changes in the tax code, tax court rulings, and revenue rulings have created guidelines outlining a blue print for defensible tax deferred exchanges.
EXCHANGE – WHY?
The overwhelming advantage of using a §1031 exchange is deferral of taxes on capital gains. This not only saves a significant dollar amount that would normally be consumed in taxes, it also allows the same money to be leveraged into new investment properties. Along with the advantage of deferring taxes, an exchange also provides a tool that allows you to restructure your investment portfolio. Since capital gains taxes can deplete all of your proceeds it is possible to have no profit and still owe capital gains taxes. The §1031 tax deferred exchange should be given serious consideration when moving from one real property asset to another.
WHAT IS A DELAYED EXCHANGE?
In very simple terms, a delayed exchange is an investment technique where you sell your property today and reinvest in other real estate within a 180-day period or by the end of the current tax year. By following specific guidelines, the I.R.S. will not consider this a sale and repurchase, but will treat the transaction as a nontaxable event. The 1984 Tax Reform Act has allowed delayed exchanges nationwide.
WHAT ARE THE GUIDELINES?
In order to comply with federal guidelines, the theory of continuous investment is the basic qualifying concept. One property must be substituted for another without liquidating and receiving the equity of the property traded away. If there is no actual or constructive receipt of sale proceeds, combined with property value and debt considerations, the capital gains taxes will be deferred until an actual sale of the property is consummated. You can continue to exchange acquired properties, thereby deferring the tax indefinitely. Upon the death of an individual investor, the property basis is set at the current fair market value, thereby eliminating the deferred tax altogether.
The problem that arises is achieving a method to avoid actual or constructive receipt of any equity at the closing of the first leg or phase I of the exchange. It is easy to understand and track actual receipt of funds, but constructive receipt involves the concept of income deemed to be available or controlled by the exchanger whether actually received or not.
In an effort to duplicate a concept deemed acceptable, one alternative has withstood the scrutiny of the I.R.S. That concept involves the use of an independent Intermediary (facilitator) performing specific functions concerning actual and constructive receipt of funds.
Typically, the Exchanger and the Intermediary (facilitator) enter into an exchange agreement in which the Intermediary promises to perform as the Seller and Purchaser on Phase I and Phase II of an exchange. Instead of the Exchanger selling his property, the Intermediary becomes the Seller and receives the proceeds of the sale, which completes the first leg of the exchange. To comply with acceptable guidelines, the Intermediary cannot have an agency or fiduciary relationship with the Exchanger. That fact disqualifies related parties, business relationships, your escrow company, your CPA or tax advisor and your attorney if their relationship with the Exchanger is fiduciary.
After the close of Relinquished Property (Phase I) the Exchanger has 45 days to identify Replacement Property, and 180 days from the close of the Phase I to close and complete the purchase of the Replacement Property (Phase II), thereby completing the exchange.
WHAT ARE THE INTERMEDIARY'S RESPONSIBILITIES
The Intermediary (Jeld-Wen 1031.) is the third party in the exchange and assumes the contractual responsibilities of the Exchanger. Such actions and responsibilities are specifically set out in the "Exchange Agreement" between Exchanger and Jeld-Wen 1031.
Using Jeld-Wen 1031 may ensure the positive cooperation necessary to complete the exchange, as well as to provide the possibility of our participation in solutions to some of the complex problems that arise in such transactions.
Jeld-Wen 1031. was formed to meet "local", "state", and "national" needs of persons and corporations desiring to take full advantage of Section 1031 of the tax code.
Fees and charges will vary depending on the type of exchange, the complexity, timing, and equity, among other factors. In general, there will be a one time set up fee of $750.00 that includes one Relinquished Property in Phase I and one Replacement Property in Phase II.
Jeld-Wen 1031 may retain interest on sale proceeds, although it is possible to credit interest to the exchange account. Such issues should be discussed on an individual transaction basis.
We continue to keep abreast of the constant changes concerning exchanging real property. American Exchange Services stands ready to assist you in your goal of a successful §1031 exchange.
Jeld-Wen 1031 will not provide tax advice and cannot serve as a substitute for qualified professional advice provided to the Exchanger by their Attorney or Tax Advisor.