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The
sheer number of investment vehicles
available to you these days is absolutely staggering.
Stocks, bonds, precious metals, commodities, options,
derivatives, real estate, etc., etc., etc. - it
can make your head spin! Now, all things being equal,
none of these investments are better than any other.
If you know what you're doing, you can make money
in any of them.
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by
By Curtis Moore, Esq.
Consultant at
The 1031 Exchange Experts |
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However,
for the average investor, real estate presents an
especially good choice. Most people have some experience
with real estate -- usually the purchase of their
house -- and it is relatively easy to understand.
Real estate is tangible. You can see it, touch it,
change it, and use it every day. In addition, real
estate can be a good source of cash flow when you
rent it. In fact, if you can get a tenant to cover
your mortgage, you are in great shape. It's like
free equity! Lastly, the taxes on the rents can
be offset by your mortgage interest and depreciation
-- both of which are great tax deductions against
real estate income. And, most importantly, as compared
to many investments, you are the one in charge of
controlling the future of your investment. Market
dynamics affect rents and value, of course.
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1031:
101
Tax-Deferred Real Estate Exchanges for Beginners |
| September
9, 2004 |
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Yet, making a wise choice in the initial purchase, managing
the property well, and selling at the right time can
ensure excellent gains.
So,
let's say you decide to invest in real estate. You purchase
a condominium that you rent to a tenant. Five years
later, you decide to sell it and buy a property for
your business. Because you made such a good decision
on the location of the condo and maintained the unit
well, it appreciated in value. Well, if you were to
simply sell the condo, the IRS would tax the profits,
or "capital gains." The difference between the condo's
sales price and what you originally paid for it (plus
improvements) will be taxed at 15%. If you took any
depreciation over the years, it will have to be "recaptured."
Recapture is taxed at 25%. And, there are State and
Local taxes to consider, as well. It is not uncommon
for an investor to pay the government 30% of their profits.
That can be a lot of money! And, there's no reason to
pay the government if you don't have to.
But, fear not -- there is a solution called IRC Section
1031. Section 1031 is a provision in the U.S. Tax Code
that allows an investor or business-owner to sell their
real estate and re-invest the money in another piece
of property without paying taxes. |
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these taxes are postponed, or "deferred," until you
decide to cash-out of your real estate portfolio or
not do another exchange).
Exchanges
are easy! The first step to completing an exchange is
to contact a "Qualified Intermediary" (or "QI") to handle
your exchange. At the closing of the Old Property, the
QI will hold the cash proceeds from that sale in trust
on your behalf. The funds should be held in a separate
bank account and not commingled with other client funds
held by the QI. Then, when you direct him to do so,
the QI will send those funds to the purchase of the
New Property. There are a few simple rules and time
deadlines that you will have to keep in mind throughout
the exchange to properly defer all of the taxes. For
instance, the New Property will have to be equal to
or greater in value to the Old Property, you cannot
pull any cash out of the closing of the Old Property,
and others. Your QI should be able to walk you through
the rules. And, that's pretty much it!
Real Estate empires have been created in this manner.
The investor buys a small rental or piece of land, and
parlays this modest purchase into bigger and bigger
real estate investments. The best way to create this
empire is to defer taxes by utilizing 1031 Exchanges. |
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