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I was lucky enough to have a few real estate investors in my family & close family friends.  Early in my life, I did a cursory review of those that we...

Investor's heart

October 25, 2017

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1031 Investment Property Exchange

October 21, 2017

Wow, I don't believe I have made it to this level!  I am at the cusp of entering a transaction I have read about, discussed with associates, and watched from afar with admiration.  As I mentioned in my post dated 10/20/2017, I elected to utilize the IRS tax program 1031 Investment Property Exchange.  Although I had yet to complete a transaction I felt comfortable moving forward with this option because of the information I had collected, absorbed, and the associates I consulted.

 

My first step was to locate an 'intermediary' that will hold the proceeds from my sale transaction.  This 'intermediary' is tasked with maintaining record of your proceeds as well as holding these proceeds during the exchange period.  Do your homework here, the individual and/or company you select will be in sole possession of your proceeds/money maintaining complete control over your investment dollars during the exchange period. 

 

I recommend a company that is insured, has this option as a substantial part of their business or wholly concentrated on this activity, as well as having recommendation from others.  Specifically, I inquired with a few of my investor associates as well as title companies that I trust seeking recommendations.  I received a few and did my research from those recommendations.  Additionally, this sort of profession has experts at every level of activity.  Someone exchanging $100,000 in equity may not be the expert to use for the $1,000,000 exchange of equity.  Know your circumstance when seeking the person for your activity.

 

Your 'Intermediary' has to be selected prior to closing on your investment property transaction.  Ideally this selection should be made prior to entering into contract to sell any investment property.

 

The closing date arrived and moved forward without incident.  The sale completed.  The proceeds were deposited into the 'Intermediary's' account.  Start the TIMER!

 

This is a very important detail; The timer for your transaction begins upon the closing of your investment property sale.  The time line is important to understand.  You have 45 days, approximately 6 weeks, to identify your replacement property and 6 months to close on that replacement property.  These time lines begin/start from the completed sale of your investment property transaction.

 

Exchange detail to understand, if your investment property sells, for example, for $500,000 and your equity within that investment was $250,000.  According to the rules of the exchange you are required to replace that investment property with a 'like-minded' investment equal to the value of your sale price.  So in order to receive the benefit from the exchange, the value of the investment you use to replace this sold investment property has to be a minimum value of $500,000.  You are not allow to buy a building for $250,000 equity amount and receive the benefit from the exchange. 

 

Additionally, the equity you have from your sale transaction cannot be used for a renovation budget.  Now I have been advised there is a way to allow this to happen, but in relation to cost this option does not make financial sense for any investment exchange under $1,000,000 equity mark.  So for this discussion, I will not discuss this option.

 

With the above-listed information the search begins!

 

The most important time frame in this transaction is the identification period.  In an ideal world you would have a property identified to replace the one which you are selling before your investment property ever hits the market.  But without that identification, you are now running against the clock.  Be careful here.  As the weeks wind down, the pressure to select a replacement property will become more intense.  Know your goal, do not deviate from your plan under this stress.  You may consider acquiring an investment while this dead line is looming that you would of otherwise not considered.  I am of the opinion that it is better to withhold your purchase of an investment than to acquire something that is outside of your original intent only to avoid the tax implications of missing the deadline.

 

*If you miss the dead line to identify your replacement property, your investment proceeds are still bound by the rules identified in the IRS property exchange.  This means your proceeds will be held the complete 6 month period!  Outside some extraordinary circumstance, your investment will be held.

 

Once your property has been identified you will advise your 'intermediary' in writing within the 6 week period and give the contact information for the Title Company you will use to complete the transaction withing 6 months from your original sale.  For the most part, the rest of the exchange process will be completed by the Title company and 'Intermediary'.

 

Post sale your equity is transferred into your new property.  It is important to note this program does not eliminate your tax sale responsibilities it only postpones them to the next sale.  That is if when you sell you elect to have the proceeds returned to you.

 

This is a powerful option available to investors whom are seeking to maximize their investment muscle.

 

 

 

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