|
|
1031 TAX DEFERRED EXCHANGES
*WHAT I DO
*1031 EXCHANGES (An Overview)
*THIRD PARY INTERMEDIARY
*NET LEASED PROPERTIES
*CREDIT TENANTS
*LISTINGS
*IN CONCLUSION
WHAT I DO
I specialize in providing national tenant (Walgreens, CVS, Best Buy, 7-11, etc.), single tenant, credit tenant, "net" leased properties for 1031 tax-deferred real estate exchanges investors.
Section 1031 of the IRS Code allows investors to defer paying taxes on the gain on sale of investment real estate...a powerful wealth-building strategy.
I can help locate any type "Replacement" property, from shopping centers to office buildings to apartment projects, however, I specialize in single tenant, net leased properties (management free, credit-tenant properties with long-term leases).
I can assist buyers in...
- locating the right property
- evaluating the deal
- negotiating the deal
- arranging financing
- arranging inspections
- arranging insurance
- providing qualified legal assistance
- providing qualified third party intermediaries
- providing qualified accounting services
- make in-person, on-site property visits on request
Although based in Palm Beach, Florida I deal with clients and properties throughout the world.
If you are looking for a specific kind of property you may submit your property requirements to me by completing the form on my CONTACT ME page on this web-site and describing what you are looking for in the comments section. Any and all submitted information will be held in the strictest confidence.
1031 EXCHANGES (An Overview)
Generally, when you sell "investment" real estate you have to pay taxes on the gain on the sale of the property. Section 1031 of the Internal Revenue Code allows you to defer paying this tax if you use the proceeds from the sale of your old property to purchase a new property. In essence, you get to use the "tax" dollars to re-invest in more real estate.
A 1031 Exchange is not a tax loophole, it is a code section written by Congress specifically to allow anyone who meets it's requirments to sell their property and defer paying taxes on the gain. A 1031 Exchange can play a very valuable role in estate and tax planning.
Many people are unfamiliar with 1031 Exchanges and the very specific "rules of the game" as required by the IRS. I can assist investors in the 1031 Exchange process, including finding a qualified "Replacement" property.
A 1031 Exchange in not difficult, but there are very strict rules and timetables that must be followed in order to make sure an investor qualifies for the desired tax benefits. Here is a brief list of important things a 1031 investor needs to know.
(1) Both the Relinquished property (the property you are selling) and the Replacement
property (the property you are purchasing) must qualify as 1031 property.
(2) You have 45 days from the date of close of your Relinquished property to prepare a
list of properties you wish to buy (i.e., you may identify more properties than you
ultimately purchase).
(3) You have 180 days from the date of close on your Relinquished Property to close the
purchase of one (or more) of the properties (Replacement properties) on your 45
day list.
(4) You may not touch the proceeds of the sale of your Relinquished property yourself.
Typically the money is held by a third party Qualified Intermediary.
(5) The holder of title to both the Relinquished property and the Replacement property
have to be the same.
(6) EQUAL OR GREATER DEBT. "In general, you must equalize the debt on your
Relinquished property and Replacement property. Your Replacement property debt
(mortgage) must be equal or greater than your Relinquished property debt
(mortgage). You may acquire less or no debt on your Replacement property, but you
should speak with your tax advisor regarding possible tax consquences of "Debt
Relief."
(7) EQUAL OR GREATER PROPERTY VALUE. Replacement property Fair Market Value
must be equal or greater than the Fair Market Value of the Relinquished property. If
you wish to acquire property of less value, you may, but splease speak with your tax
advisor regarding possible tax consequences.
(8) USE OF ALL PROCEEDS FROM THE SALE. You must use all of your exchange
proceeds from the sale of the Relinquished property to acquire your Replacement
Property in order to receive full tax benefits. If you invest only a portion of the
proceeds you wll be subject to taxes on the un-invested portion.
(9) PROPERTY IDENTIFICATION RULES. The Tax Code outlines the procedures for
indentification of Replacement properties to be purchased in a Tax Deferred
Exchange. The regulation consists of three basic rules that serve to limit the number
of properties that can be identified. The rules are called the THREE PROPERTY
RULE, the 200% RULE, and the 95% RULE, the last two of which are based on the
Fair Market Value of the properties that are indentified. Fair Market Value in this
case means value without deductoin for any loans or other liabilities secured by the
property. Fair Market Value of the Replacement property is determined at the end
of the 45 day identification period. To be safe, use the asking price of the property
as Fair Market Value.
(A) THE THREE PROPERTY RULE. The Three Property Rule indicates that we may
identify up to three Replacement properties regardless of the Fair Market Value.
If you intend to buy only one Replacement Property, it may still be wise to identify
one or two alternate properties in case the first property purchase falls through.
It is not necessary to purchase all of the identified properties. For those who are
planning to indentify and purchase no more than three replacement properties,
the 200% and the 95% rules wil not apply.
(B) THE 200% RULE. The regulations permit the identification of more than three
replacement properties, but only under the following circumstances: the total
Fair Market Value of ALL of the indentified properties must not exceeed twice
(200%) the contract price of the property being sold. Exceeding the 200% limit
will void the exchange. There is one exception to this rule, and that is...
(C) THE 95% RULE. If more than three properties have been identified, and their
total Fair Market Value exceeds 200% of the value of what was sold, the
exchange may still be valid if 95% of the total cost of all properties on the list
are purchased..
(10) TYPES OF EXCHANGES.
(A) SIMPLE DEFERRED TAX EXCHANGE. An exchange where the Relinquished
property and the Replacement property are transferred during simultaneous
settlements (closings).
(B) DELAYED DEFERRED TAX EXCHANGE. An exchange where the Replacement
property is not transferred for as long as 180 days (the maximum allowed) after
the Relinquished property is transferred.
(C) MULTIPLE PROPERTIES DEFERRED TAX EXCHANGES. An exchange where one
property is exchanged for two or more properties, or two or more properties
are exchanged for a lesser number.
(D) REVERSE DEFERRED EXCHANGES. An exchange where the Replacment property
is found and must be transferred before the Relinquished property is sold. The
"intermediary" takes title to the Replacement property and transfers title to the
taxpayer/exchanger at a time prior to or at the closing with the Relinquished
property.
(E) EXCHANGES TO FACILITATE IMPROVEMENTS TO PROPERTY. Should the
Replacement property need improvements in order to meet the constraints of a
tax deferred exchange, the intermediary takes title to the property and holds it
while improvements are made. Once the Relinquished property is transferred to
the new owner, the improved property is transferred to the taxpayer at Fair
Market Value, including the cost of improvements.
(F) EXCHANGES OF PROPERTY IN NEED OF CONSTRUCTION. Should the taxpayer
purchase un-improved land on which to build, the intermediary takes title to the
land and holds it during construction. When construction is complete, the
property to be Relinquished will be transferred to the purchaser through the
intermediary. The intermediary then transfers the new, improved property to the
taxpayer at Fair Market Value, including new construction.
These are just some of the rules and regulations an investor must follow in order to qualify for a 1031 Exchange. A 1031 Exchange is not difficult, but there are very strict rules and timetables that must be followed in order to make sure an investor qualifies for the desired tax benefits.
THIRD PARTY INTERMEDIARY
In June of 1990 the IRS issued regulations making the exchange process considerably easier. However, the IRS says you must use a "qualified intermediary" to hold the funds during the exchange period. The seller is not permitted to have access to the proceeds of the Relinquished property. To do so would constitute a sale rather than a trade. An "intermediary" facilitates the deferred tax exchange for the benefit of the exchanger by holding the seller's funds.
Some people are disqualified from acting as an exchange intermediary. The list of "disqualified" persons includes related parties such as a spouse, siblings, ancestors or descendants of the exchanger. Other disqualified persons include employees, your attorney, your accountant, your investment advisor/banker, real esate broker or real estate agent. Related corporations or trusts in which the exchanger is a 10% or more shareholder, beneficiary or grantor are also considered disqualified persons.
An intermediary does not provide legal advice or specific tax advice to the exchanger. The services performed by an intermediary usually include:
- Coordinate with the exchanger and the exchanger's advisors to structure a sucessful
exchange.
- Review documentation for the Relinquished and Replacement property transactions.
- Furnish escrow with instructions to effect the exchange.
- Secure funds in an insured bank account until the exchange is completed.
- Provide the agreements to transfer the replacement property to the exchanger and
disburse the exchange proceeds from escrow.
NET LEASED PROPERTIES
In a true "net" lease (normally used only if the lease is long term - for instance 20 years or longer) the tenant not only pays a basic rental (base rent), but also assumes full responsibility for all costs of the property - utilities, real esate taxes, insurance, maintenance (including capital replacements), casualty losses, etc. Since the landlord has no obligation to pay any expenses out of the rentals he/she receives, the rentals represent his "net income" from the property - hence the term "net" lease.
The term "triple net" lease means that in addition to the base rent the tenant is responsible for taxes, maintenance and insurance.
What is the advantage of a "net" lease agreement? There are several advantages.
- First, the monthly lease agreement provides a very predictable, long term income
stream to the property owner.
- Second, since there are no property expenses (taxes, maintenance, or insurance) to
be deducted, the income stream is not impacted by future increases in property
operating expenses. The property owner can enjoy a predictable rental income
stream without property management or property expenses.
- In essence, there are no property management problems for the landlord/investor to
deal with and the investor just collects a monthly check.
Subject to the credit-worthiness of the tenant, and the terms and conditions of the lease agreement, the investor enjoys a high degree of security and should expect to have additional rental income over time as the inflation hedge features of the lease agreement (rental increases ) come into play.
CREDIT TENANTS
A "credit" tenant refers to a tenant whose credit is rated by one or more of the major credit rating agencies. The two largest rating agencies, and hence the credit ratings most relied upon when determining credit "strength" or credit-worthiness of a tenant are Standard & Poor's Corp. (S&P) and Moody's Investors Service (Moody's).
A "rating" simply helps investors determine the relative likelihood that they will get their investment back, with interest.
S&P ratings of AAA and Moody's ratings of Aaa are the highest ratings. S&P ratings of BBB or better, and Moody's ratings of Baa or better are considered "investment grade." Currently (01/01/08) for example, Wal-Mart is rated AA (very strong capacity to meet it's financial commitments) by S&P, while Sears Holding Corp. is rated BB- (speculative ability to meet it's financial commitment).
LISTINGS
Although I focus my commercial efforts on acting as a "buyers' broker, I also happily accept commercial real estate listings.
IN CONCLUSION
I hope the information above was beneficial to you. As a reminder:
- I can refer exchangers to experienced 1031 legl counsel.
- I can refer exchangers to experienced 1031 CPAs.
- I can refer exchangers to experienced 1031 qualified intermediaries.
For additional assitance, questions, or property information please go to my CONTACT ME page on this web-site.
The preceeding is a brief outline of the key elements regarding 1031 Exchanges. None of the above is intended to be legal nor accounting advice. Please consult your attorney or your accountant for any legal or accounting advice. Obviously there are many detailed items to be carefully kept track of in order to assure you of receiving your sought after tax benefits.
|
