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1031 Exchange Services in Amarillo, TX
A 1031 Exchange services allow for investment property to be traded, postponing taxes that come after sale of a property as long as the property is of like-kind, of equal or greater value. The IRS 1031 Exchange code states “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”
What is a 1031 Exchange?
The IRS tax code is designed to encourage certain behaviors and penalize others. For instance, in the case of the 1031 Exchange, the U.S. Government is rewarding real estate investors, but the exchange is not just for real estate. It allows you to defer taxes on a lot of different asset types, from paintings to businesses, cattle to cars. But the most often used application is real estate. Remember, this is a tax deferment. You’re still probably going to have to pay taxes someday, until then, you can use the government’s money to invest in properties. As strange as it may sound, the IRS is undoubtedly partnering with you to build wealth in commercial real estate. But you have to be savvy to make it happen.
IRS Exchange Rules
- Properties Must Be “Like-Kind” The IRS requires the “relinquished” property and the “replacement” property be “like-kind assets”. In other words, you cannot trade a painting for piece of real estate because they are different kinds of assets and you cannot trade a primary or secondary home for an investment property. But you can trade a duplex for an apartment or a piece of land for a strip mall . . . you get the point . . . as long as both the buyer and the seller are U.S. residents and the properties are not designed for quick purchase and resale.
- The Replacement Property Should Be Equal or Greater Value In order to avoid paying any taxes when you sell your property, the IRS requires that the replacement property(ies) be of equal or greater value than the relinquished property. For example, if you have a property that you sell for $1 Million, you will have to buy at least $1 Million worth of like-kind real estate property or properties through the 1031 Exchange, including the acquisition costs such as inspections, due diligence, escrow fees, and commissions.Strictly speaking, it is possible to do a partial 1031 Exchange, but you will need to pay taxes on the difference. For instance, if your relinquished property is $1 Million and you purchase a new property through the 1031 Exchange for $850,000, you will have to pay normal capital gains taxes on the $150,000 difference.Remember there is a difference between profit and sales price. IRS requires you to do a 1031 Exchange on entire sales price. So if you purchased a property for $100,000 and you sold it for $200,000, the replacement property would need to be of equal or greater value than $200,000.
- A 45-Day Identification Window There is a strict timeline imposed by the IRS. You cannot mosey. You must identify the property you plan to close on within at least 45 days of selling your property or you will lose all benefits. Obviously the inventors of the 1031 Exchange never invested in real estate. This means, the day you sell your property, the clock starts ticking, so start looking for acquisition deals way before your close on your property. Technically, there are ways to work around the 45-day identification window. You could wait to list your property until after you find a new deal to purchase or you could negotiate a long escrow period on the property you are selling to give you more time to locate a commercial property or properties to purchase. You cannot just stack the deck with dozens of properties though. IRS restricts the 1031 Exchange to up to three potential replacement properties. There are some exceptions, the 95 percent rule and the 200 percent rule. You can identify more than three properties but you have to purchase 95 percent of those properties you pick out, OR the total combined cost of all your identified properties is less than 200 percent of the sales price of your relinquished property or properties. These are the exceptions to the rule although they are seldom used in the real world.
- The 180-Day Closing Window There are two clocks you have to watch. The first is the 45-day identification window. After that 45-day window, you have an additional 135-day closing window for a total timeframe of 180 days to close. IRS requires that the replacement property be fully purchased, i.e., a transfer of title, within 180 days of the sale of the relinquished property. Your 1031 Exchange will fail if you do not meet both of these clocks.
- The “Don’t Touch the Money” Rule You cannot touch the money of the relinquished property if you want to do a 1031 Exchange. The proceeds from the sale of your property may not enter your bank account or an account controlled by you. You have to use a qualified intermediary or accommodator to hold onto your money while you wait to buy your new property. A qualified intermediary cannot be your agent, your broker, your spouse, a family member, your investment banker, an employee or a business associate. There are a lot of different companies that can serve in an accommodator capacity. In any case, a Google search can find one for you if you don’t have one in mind already.
History of the 1031 Exchange
- Revenue Act of 1918: Surprisingly the first income tax code was adopted by congress in 1918 and did not include tax-deferred, like-kind exchanges.
- The 1954 Amendment: In fact the tax code was amended in 1954 to lay the groundwork for the modern definition and description of a tax-deferred, like-kind exchange.
- The Tax Reform Act of 1986: The 1986 Tax Reform Act made it where all capital gains were taxed as ordinary income, enacted “passive loss” and “at risk” rules, eliminated accelerated depreciation methods, and authorized 39 years of straight line depreciation for commercial property. Though these changes caused a rapid increase in the number of tax-deferred, like-kind exchanges.
- Revenue Reconciliation Act of 1989: In 1989 congress legislated the Revenue Reconciliation Act disqualifying tax-deferred, like-kind exchanges between domestic and non-domestic property and restricting transactions to a two-year holding period.
Why is a 1031 Exchange Important
The 1031 Exchange allows commercial real estate investors to defer paying capital gains taxes and build wealth through investing.
For example, if you bought a piece of commercial real estate for $100,000 and then sold it for $500,000, you would be subject to capital gains taxes on the $400,000 profit. Your tax bill would be around $84,000. With a 1031 Exchange, you would be able to use the full $500,000 to purchase new property and defer your capital gains tax.
Eventually, you will have to pay taxes. In the meantime, you can use 1031 Exchanges throughout your investment career to buy bigger or better properties and reap the benefits of higher cash flows and greater appreciations in property values, giving you a tax-deferred vehicle to create generational wealth.
Mays Provides the Background Comps
Mays provides vital information to help you make an informed decision regarding your commercial real estate investment. We give you useful data about the construction of the property, such as the year the property was built, if there have been any updates to construction, as well as unit sizes. We provide ratios of rental and vacancy rates to ensure the location is a proper investment for potential buyers. In addition, Mays locates information about licensing and operating expenses of the property and looks out for possible competition in the surrounding area. Along with this, we provide a variety of reports:
- Market Reports: Firstly detailed research on market shifts, changes in technology, and the economy near the property.
- Submarket Reports: Data on specific submarkets or neighborhoods within a specific metro market.
- Metro Reports: Historical trends that are a foundation for any precise market analysis.
- Rent Comps: Rent comps help investors evaluate property performance as compared to its competitors.
- Sales Comps: See properties similar to the one you want and find out what they have sold for before making financial decisions.
- New Construction Comps: All in all stay informed about upcoming, completed, or current projects that are under construction in the area they you are looking to purchase property.
Information and Resources for Mays in Amarillo, TX
For more information about the resources we offer commercial real estate property investors, see Mays Market Reports and Mays Property Reports. Or if you need specific information or have a question, visit our Question and Answers or Contact us.
Why Choose Mays?
- Solid sales and Amarillo commercial real estate experience
- We also have experience other metro markets in Texas
- Motivated and disciplined and accountable to our clients
- Talk the jargon of commercial real estate brokers, owners, CPAs and attorneys and have strong presentation and communication skills
- Make a lot of calls to build relationships and create a pipeline of deals
- Highly creative in making commercial real estate deals
- High conversion rate from leads to acquisitions
- Tenacity to keep a deal alive, look at every angle, and exceed the expectations of our clients
- Accountable to high activity levels and getting results
- Proficient at number crunching, financial calculations, valuations, and tax issues
- Unmatched expertise in 1031 Exchanges
- Broker or agent services available
- Works well with others, able to create and maintain collegial relationships, and Texas friendly
- Enthusiastic, persevering, and comfortable working in an entrepreneurial environment
- Positive, can-do, up-beat, get-er-done attitude
- Happy clients, excellent references, great results
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Asset Preservation, Inc. (2018). What is a 1031 Exchange?
The Balance. (2018). Defer Capital Gains With a 1031 Exchange?
Turner, B., Turner, B. and Turner, B. (2018). 1031 Exchange: The Ultimate Guide for Real Estate Investors.
Realty Mogul. (2018). What Is a 1031 Exchange and Why Is It Important? | RealtyMogul.com.