Navagating The Newest 1031 Exchange Alternative - Oil & Gas Royalties

All investing presents a risk versus reward challenge that investors face when ever they chose to satisfy a 1031 exchange requirement in order to defer capital gains and recaptured depreciation on their investment property. The newest entrant to compete with tenants in common (TIC) investing is energy interests in oil & gas.

There is confusion as to what a royalty interest is and what a working interest is and how they compare. Each has its place in the risk versus reward scenario but more and more investors are favoring royalties over working interests because of the lack of liability involved. The investors we work with are typically at or near retirement age, desire steady income but above all else want to preserve their hard earned wealth. Consequently, they turn to Royalty Interests over Working Interest. Albeit the reward is higher with the working interest ? it is not enough to off set the risk. We are in the business of capital preservation.

The liabilities involved are multiple in a working interest but the five greatest we have discovered are:

? Liability of a Capital Call
? Liability to Governmental Authority Having Jurisdiction, Including Environmental Liability
? Liability for Costs of Exploration, Operation & Plugging
? Liability for Property Damage and/or Personal Injury caused by Operations, Fire or Blowout
? Liability for Subsurface Damage of Hydrocarbon Reservoirs Caused by Negligent or Intentional Operations

If I were selling real estate that I had owned for 20 or 30 years, had paid down the debt and was looking for a potential retirement vehicle to satisfy a 1031 exchange - then looking at the above bullets would make me very uncomfortable to say the least! Royalties have none of the above stipulated concerns. Royalty interests can have expected lives of anywhere from months to 40 years and beyond, though only those with a long expected life are appropriate for someone considering them a 1031 exchange. Energy investors have been enjoying the benefits of private royalty ownership and ?like-kind? exchanges for over 60 years. Court Rulings dating back to the 1940?s have set the precedent and affirmed the opportunity for investors to accomplish tax deferral by exchanging between brick-and?mortar and royalty interest; both of which are forms of real estate.

Many investors are nearing retirement age. They continually seek above all capital preservation and a steady stream of income. They require both to sustain their quality of living. The royalty interest is a payment derived off of the production sold on a particular property. Typically, that is 25% of any well drilled. There are inherent risks associated with royalties. They may loose their value over time. Value is based on current production and estimates of proven reserves. Royalty investment is centered on proven oil & gas production numbers (past, present and projected) and not with the current price of oil & gas. To determine a fair sales price on your interest, a registered professional petroleum engineer performs an engineering and economic evaluation, such as analyzing historical production data, calculating production decline rates, and reviewing historical cash flows. The information is then used to forecast future well performance, calculate remaining oil and gas reserves, and predict future revenues. Another risk is the price of gas and oil may decline thus reducing the monthly income stream. Although the future forecast for energy is that demand will exceed supply. Knowing who you are buying the royalties from and their performance history is absolutely crucial. For the type of investing we are writing about here we are seeking forecasts that go out 30, 40 years or more.

The working interest puts up the capital costs, the operating expenses, takes on the liability insurance and operates the well for the next 30, 40 or more years. Royalty investors get the same share of the reserves but none of the expenses or liabilities listed above. Consider this for just a moment; it cost $11 a barrel to go out and develop reserves (to drill). Its $7 a barrel to go out and acquire it; investors are buying reserves for .65 on the dollar of the cost of finding and developing it. In our view the royalty side of the business is the only side of the business that you should be involved in when reviewing your 1031 Exchange Alternatives.

Ricardo E. Jobin is Senior Vice President of 1031 Exchange Alternatives?. Ricardo attained an MBA in 2000 from Davenport University and served as a board member for The Strategy Forum of Detroit. He is a member of TICA, the national Tenant-in-Common Association and has first hand experience in the acquisition and management of commercial real estate. Ricardo is a licensed securities agent and a registered representative of SIGMA Financial Corporation, member of NASD & SIPC. For more information call 1-800-466-2003 or visit http://www.1031ea.com.

A 1031 Exchange Exit Strategy With Profit Potential

If you could avoid day-to-day asset management, increase your cash flow and not pay capital gains taxes, would that interest you? Well lend me your ear; we have something to talk about.

Now the small investor can step up to the big leagues. REITs (real estate investment trusts) are leading the real estate comeback parade. REITs offer investors the diversity that would otherwise take millions in borrowing power to achieve. There are over 300 REITs today with assets totaling over $130 billion. They are generally seeking to acquire properties with a worth of $10 million or more. Baby boomers saving for their retirements will likely continue contributing until 2013. If only a small percentage of this new capital purchases REIT-stocks, analysts in Barrons? January 1999 report forecast REIT-sector annualized total earnings of potentially, 20% for many years. In April of 1999, Barron?s reported that ?the average cash flow on REITs is 10% to 12% versus 7% to 9% in the private market. Although 1998 was the worst year for the market value of equity-REIT stocks in close to 25 years, the sector turned in an average increase in earnings of 13%. But hold on; let?s not put the cart before the horse. The key to the real estate kingdom is a two-step process.

STEP ONE:
First you must sell your current smaller property and reposition your equity by doing a 1031 exchange into a replacement property, as a TIC (tenant-in-common) with others, of the quality and value that REITs want to purchase.

As a tenant-in-common (TIC) owner, one?s passive revenue and deductions are reported on his/her Schedule E, the same as any direct-ownership interest in a rental property. Each TIC is a direct owner with complete control of his/her fractionalized interest with a separate deed, title and escrow, as required to accomplish a 1031 exchange.

Instead of owning all of the property, a TIC owner may own perhaps 20% of a larger, newer, better-performing property ? the type and value of property that REITs are buying.

STEP TWO:
Having upgraded to a piece of major-league property you have all the traditional exit options ? plus more. You may elect to keep your interest. Alternatively, you might be able to sell the property to a REIT or institutional investor for more value than it is worth. This can be the stuff that real estate dreams are made of.

BEST OF BOTH WORLDS:
The direct exchange of properties for REIT stock creates a taxable event for the transferor. But an UPREIT (umbrella real estate trust) solves this taxation problem. Starting in 1992 this new form of REIT emerged and has proved popular and, since its creation more than 75% of new REITs have taken that form. It is the union of a REIT with an Operating Partnership (OP) wherein the partners have the right to convert their OP-interest to the REIT?s stock, but until they exercise this right, it is not a taxable event.

LESS COMPLICATIONS:
Ask yourself, ?Would I like my life to be less complicated? Would I like to avoid taxation of my capital gain? Am I tired of managing real estate? I f a cash-rich public company offered me a tax-free, good price for my investment property, would I accept the offer??

STEP-UP BASIS:
Similar to any investment property, by maintaining ownership of the UPREIT-interest until one?s death, one?s surviving spouse or heir(s) will receive it on a stepped-up basis. The surviving spouse or heir (s) may then sell the REIT?s stock, and the capital gains tax has evaporated completely. Nowhere does it require you to manage real estate until you die to benefit from a stepped-up basis. Once more by eliminating day-to-day management involvement, you just might simplify your life and live longer.

WIN, WIN, WIN
Orchestrating a 1031 exchange with an UPREIT exit has many benefits, but ?to go to taxpayer?s heaven, you have to die.? An UPREIT?s exit strategy required a lifestyle change from active to passive management. For many this change is a welcome relief.

? No capital gains taxes
? No property management
? Daily stock liquidity
? More return potential
? More diversity, and
? More safeguards.

What?s wrong with this picture?

?America has always had two tax systems;
one for the informed and one for the uninformed.
Both systems are legal.?
Former Justice Learned Hand

1031 Exchange Alternatives began as a securities and insurance provider in the mid 1970?s and strategically changed its focus exclusively to the Tenant-in-Common industry in 1997. As a family run brokerage it delivers unbiased and exclusive service to its clients providing detailed analysis of co-ownership real estate investments. Charter Members of TICA, the national Tenant-in-Common Association. Registered Representatives of SIGMA Financial Corporation. Members of NASD & SIPC. For more information call 1-800-466-2003 or visit http://www.1031ea.com.

Concise Overview of Section 1031 Tax Deferred Exchanges

The 1031 tax deferred exchange is not always the right or best solution. Investors should consider whether other tax deferral or tax exclusion strategies might be more appropriate and should always consult with their legal, tax and financial advisors before entering into any real estate transaction, especially a 1031 tax deferred exchange.

This article has been written as a concise overview of 1031 tax deferred exchanges. It is only a brief summary to assist Investors in understanding the very basic 1031 tax deferred exchange requirements. You can read an Introduction to Section 1031 Tax Deferred Like-Kind Exchanges for a more complete and indepth explanation.

1031 Exchange Requirement

The sale and the purchase transactions must be structured property in order to qualify for tax-deferred treatment under a 1031 exchange. The Qualified Intermediary often referred to in the real estate industry as the 1031 Exchange Accommodator or the 1031 Exchange Facilitator will complete the necessary legal documents to ensure that you are in compliance will all laws, regulations and rulings.

It is critical that the Qualified Intermediary be be assigned into the Purchase and Sale Agreement or Contract and the Escrow Instructions, if any, prior to the close of the sale and purchase transactions. If either transaction closes without the Qualified Intermediary involved the transaction will not qualify for 1031 exchange treatment.

Reinvesting or Replacing Values

Investors must acquire one or more like-kind replacement properties that are equal to or greater in net purchase value than the net sales value of the relinquished property, must reinvestment all of the net cash proceeds from the sale of the relinquished property, and must replace the same amount of debt that was paid off on the sale of the relinquished property with equal debt on the like-kind replacement property. The Investor can always put more cash into the purchase of his like-kind replacement properties, but can not pull any cash out of the transaction without incurring depreciation recapture and/or capital gain income taxes.

Qualified Use Requirement

The relinquished property and the like-kind replacement properties must have been held as rental, investment or business use property. The critical issue is that the Investor must have held or has the intent to hold the properties for investment purposes.

Like Kind Property Requirement

There is a lot of misinformation regarding like-kind property. It is not true that if you sell a condo you must acquire a condo, etc. As long as you meet the qualified use requirement discussed above any kind of real estate held for investment is like kind to any other kind of real estate that is also held for investment.

You can exchange out of or into any of the following asset types: single family, multi-family, commercial office, retail shopping, industrial, vacant land, oil and gas interests, mineral rights, and tenant-in-common investments.

Multiple Assets and Fractional Interests

The 1031 exchange allows Investors to easily reposition, diversify or consolidate their investment real estate portfolios. They can sell one relinquished property and diversify their portfolio by acquiring multiple like-kind replacement properties, or they can sell multiple relinquished properties and consolidate their portfolio by acquiring fewer like-kind replacement properties. You can also sell or purchase fractional (partial) interests in property.

1031 Exchange Structures

The most common 1031 tax deferred exchange is a forward, or delayed, 1031 exchange where the Investor sells his relinquished property first and then acquire his like-kind replacement property within the prescribed 1031 exchange deadlines. A reverse 1031 exchange allows the Investor to acquire his like-kind replacement property first and then subsequently dispose of his relinquished property within the prescribed 1031 exchange deadlines. An improvement (build-to-suit or construction) 1031 exchange allows the Investor to use his 1031 exchange funds to acquire like-kind replacement property and to use excess 1031 exchange funds to construct or improve the like-kind replacement property.

1031 Exchange Deadlines

There are very specific 1031 exchange deadlines that must be followed in a forward 1031 tax deferred exchange. The Investor has 45 calendar days from the close of the relinquished property transaction to identify potential like-kind replacement properties being considered for purchase and an additional 135 calendar days ? for a total of 180 calendar days ? to complete the 1031 tax deferred exchange by acquiring some or all of the identified like-kind replacement properties.

1031 Exchange Identification Requirements

Investors must identify their potential like-kind replacement properties to their Qualified Intermediary within the 1031 exchange time limits discussed above. The identification must comply with one (1) of the like-kind replacement property identification rules outlined below:

Three (3) Property Identification Rule

The three (3) property identification rule is the most common and is used in most 1031 tax deferred exchange transactions. This rule allows the Investor to identify up to but not more than three (3) potential like-kind replacement properties. It is highly advisable for the Investor to identify three (3) properties even if the intent is to only acquire one. If the Investor is looking to diversify his investment real estate portfolio and needs to identify more than three potential like-kind replacement properties one of the following two rules should be considered.

200% of Fair Market Value Identification Rule

The 200% of fair market value rule allows the Investor to identify more than three (3) potential like-kind replacement properties as long as the total fair market value of all the potential like-kind replacement properties identified does not exceed 200% of the sales price of the relinquished property(ies).

95% Exception to Identification Rules

The 95% exception to the identification rules allows an Investor to identify as many like-kind replacement properties as they wish provided they actually acquire and close on 95% of the fair market value actually identified.

William L. Exeter is President and Chief Executive Officer of Exeter 1031 Exchange Services, LLC.

Mr. Exeter has been in the financial services industry since 1980 and entered the tax-deferred like-kind exchange services industry in 1986. He has written and lectured extensively on tax-deferred like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code and on Tenant-In-Common (TIC) Properties as like-kind replacement property solutions pursuant to IRS Revenue Procedure 2002-22. In addition, he is a frequent guest expert on "The Financial Advisors - Money Talk Radio Show? on News Radio AM 600 KOGO San Diego and on the "Inside Business Radio Show" on Business Talk Radio AM 1000 KCEO San Diego. Mr. Exeter also serves as a consultant through the Exeter Advisory Group, LLC.

Mr. Exeter is speaking at the following upcoming 1031 Exchange Seminars.

Private Annuity Trust vs. 1031 Exchange- When a PAT Makes Sense (Part II)

In the last article, I pointed out when, as a real estate investor, doing a 1031 Exchange on the sale of a Real Estate Property may not be your best option.

So, let's assume you do want or need to sell a real estate investment, don't want to do an exchange, and don't want to pay a huge lump sum capital gains tax payment of 15-40% on your gains. Now is the time to see how a Private Annuity Trust can save you money.

It's important to know that you don't avoid paying your capital gains tax obligation, you just get to defer all payment for a while if you're under 70 years old, or you at least get to spread out the obligation over many years. The total of years can be your lifetime or a fixed number of years determined by you when you set up the trust.

So, how does that help you? Well, if someone were to offer you a 0% interest loan on let's say $300,000.00 for the next 30 years, and you only had to make minimum payments, would you jump at the chance? Most people sure would. Think of how you could invest that 300K so that you could enjoy the benefit of the interest it accrued. This is effectively what a Private Annuity Trust does for you. It allows you to keep most of your gains working to your advantage, while paying back the money owed to the IRS over a long period of time.

This also holds for the depreciation recapture if you owned your property for a long period of time and depreciated it according to a schedule to realize annual tax advantages of owning investment real estate.

If you do not put a tax strategy in place and sell outright, not only do you owe capital gains tax, but you also owe depreciation recapture, which can be another 25-35% of your total depreciation taken over the ownership cycle of your investment.

And, you will avoid the possibility of the dreaded Alternative Minimum Tax trap. This is something else that may catch you by surprise when you least expect it triggered by your outright sale of property. This could mean having other legitimate tax deductions disqualified and a higher tax payment owed by you.

As you can see, it's definitely worth it to consult with an expert in Capital Gains Tax saving strategies before you make the decision to sell your real property.

The PAT can also work with the sale of a second home, vacation home, or even your primary residence. With these assets, a 1031 exchange is not an option.

Paula Straub is a Investment Advisor Representative and Insurance Agent in Southern California. She facilitates Capital Gains Tax Saving Strategies for clients in all 50 States by working closely with Nationally recognized companies. Paula is an educator, author and professional speaker. You can learn more about Paula at her website http://www.Paula-Straub-Capital-Gains-Tax-Site.com or contact her directly at (760)917-0858

Private Annuity Trust vs. 1031 Exchange- When a PAT makes Sense (Part I)

Real Estate Investors tend to be hard core. There is nothing like having your money invested in property you can touch, visit, renovate and watch gain in appreciation.

You may have heard the term "Swap till you drop". What this term means is that as an investor,you sell your real property and exchange it for another of? equal or greater value, and continue to do this until you die and leave the assets to your heirs. This does (under current tax law) allow you to avoid paying capital gains tax and recaptured depreciation forever. And, your heirs currently inherit it at the value at the date of your death. They do not pay capital gains tax and depreciation, except if they sell it over the value it was at death.

This is a good thing.

However, there is going to be a time to exit the real estate investment phase of your life.? Let me give a few examples of when this might be the case.

1. You have accumulated a number of investment properties and reach a point in life you want less hands-on management responsibilities.

2. You want to slow down a bit during retirement and actually want to use some of the equity you have worked so hard to accumulate to improve your income and lifestyle.

3. The market conditions are ripe to sell, but purchasing another property of equal or greater value doesn't make sense.

4. Economic conditions warrant sale. Perhaps need for long term care for you or a member of your family.

5. Personal circumstances, such as need for additional income, debt payoff, tax consequences, property division, etc. warrant the need to sell.

6. You need to do some estate planning and need to remove some of your assets from your estate so your heirs won't have a huge estate tax obligation.

If any of these prevail, a Private Annuity Trust may be your best option. A PAT will allow you to spread out your capital gains tax burden over many years, and trigger what is effectively a 0% interest? long term loan from the government. How often do you get this kind of opportunity?

Part II will explain more of how a Private Annuity Trust can make a huge difference when any of the above circumstances might arise.

Capital Gains Tax Saving Strategies real estate investors need to hang onto your hard earned profits. Get your free report "Seven Secrets to Help Real Estate Investors Hang onto Their Capital Gains" at http://www.saverealestategains.com

When is a 1031 Exchange the Wrong Answer?

The grass is always greener, isn?t it? Maybe you see something better on the other side, or maybe you have problems with one of your current properties. But before diving into a 1031 exchange, consider why you want to exchange, and whether or not it will solve your problems.

? Property Management Problems - If you?ve lost the taste for property management, would another location really change anything? Try hiring a manager. After all, tenant / landlord problems exist everywhere?even with higher priced properties.

? Tax Solutions - It?s true that you can defer your payment of Capital Gain Taxes when you exchange some properties. But if the new property costs as much as the one you sold, then you?ll probably see a property tax hike.

? Income Solutions - A powerful ?grass is greener? temptation is when you start thinking one property will produce more cash than another. It?s true that some will, but ask yourself why you?re having problems now. Is it the property or the management? Lower tax rates and lower maintenance costs, are sometimes good reasons for a 1031 exchange. But if maintenance costs are high because of negligence, you?ll find yourself with the same problem (lacking a paddle) in a new creek.

? Low Adjusted Basis - If you have a low adjusted basis, without a high debt, a 1031 exchange will just carry your benefits over to the new property. It might just be a waste of your time.

? Credit Problems - If the 1013 exchange involves a mortgage loan, bad credit can bring high interest rates or a set of less desireable terms. Not to mention two sets of closing fees. In the end, your cost goes up.

After all that, remember the investment you make in any transaction. Your time. Are you wasting it and what is the risk? 1031 exchanges require a sale and a purchase (with all the money changing finalized) in a specified time period. What happens if there?s a hold up on a loan? How easy will it be to sell your property? How easy will it be to find a replacement? If you already have your eye on something, are you sure it?ll still be available when it comes time to buy?

The benefits of a 1031 exchange cover a well defined area and the lawn clippings look fresh and green. But if you fall outside of that area, a jump over the fence might only lead to a field of dead weeds.




Keith Gill is an experienced Real Estate investor and Mortgage Loan executive for a Major Mortgage bank that does loans in all 50 states. For more useful info got to: http://www.tucsonmortgagehome.com

The Role of Qualified Intermediary In A 1031 Like Kind Exchange

Exchanging is a creative method for marketing property. Section 1031 of the Internal Revenue Code (IRC) offers a golden opportunity to motivated real estate buyers to defer the capital gains tax liability associated with the sale of a business or investment asset. 1031 exchanges ensure maximum return on investments to people of all financial backgrounds. However, to qualify for 1031 like kind property exchange the transaction has to be done in accordance to the detailed rules, regulations and compliance issues set forth in the tax code.

Also known as a facilitator or exchange accommodator the Qualified Intermediary serves a critical function under the Internal Revenue Code. Choosing an Intermediary to facilitate the 1031 exchange is the first and most important step. The Qualified Intermediary should be a corporation that is in the full-time business of facilitating 1031 exchanges. The Internal Revenue Code requires that the person or entity serving as QI cannot be someone with whom the exchanger has had a business or family relationship prior to the transaction. It has to be an independent organization whose only contact with the exchanger is to serve him as a QI.

A Qualified Intermediary must be used to facilitate the 1031 Exchange Transaction. By definition a 1031 Qualified Intermediary is an independent and professional facilitator who receives the funds from the original sale and holds the funds until they are needed to purchase the new exchange property. The Qualified Intermediary then directly delivers the money to the closing agent who delivers the deed directly to the real estate investor.

The QI is responsible for performing the following activities in a 1031 Property Exchange:

• Acquiring the Relinquished Property from the taxpayer


• Transferring the Relinquished Property to the buyer


• Acquiring the Replacement Property from the seller and


• Transferring the Replacement Property to the taxpayer

The QI can perform all these without ever actually taking title to either of the properties. The QI is responsible for properly filling out the appropriate tax forms for the client. A QI typically provides three different documents: the exchange agreement, an assignment, and a notice. The exchange agreement is a contract between the client and the QI that sets out the rules, which must be followed in order to complete the 1031 exchange. The assignment of the sales contract to the QI must also be in place. This is because, theoretically, the QI steps into the client?s shoes and sells the property. The third document the QI provides is a notice to the party on the other side of the transaction advising that the transaction is a 1031 exchange. The purpose of notification to the other party is to prove that the exchange was in place at the closing.

An exchanger must be particularly aware of selecting a qualified intermediary before going into the transaction. There are hundreds of qualified intermediaries providing like-kind exchange services today, but most of them don't have the necessary insurance, bonding, financial backing, transactional structure, and internal controls that should be required of them. Exchange funds are often grossly under-insured, under-protected, and at risk. In today's volatile economic climate, choosing a financially solid, time-tested 1031 qualified intermediary with the necessary financial strength, resources and backing are crucial for the safe completion of a 1031 like-kind exchange transaction.

California Property and Saavy 1031 Exchanges

A major money maker these days is real estate. If you have a chunk of extra cash, it is certainly a great investment if you can find the right area. A sure win nowadays seems to be California. Everyone is always flocking there for the year-round sun and beaches. California real estate is a big money-maker. If you're looking to invest in a home to make a nice profit down the road, then certain areas of the sunny state should be considered. The prices always seem to do nothing but rise.

What many may not realize though is that Section 1031 in the Internal Revenue Service is a boon for a prospective investor, selling an investment property and wanting to make a profit by reinvesting in a similar property elsewhere in the country. This wonderful concept works on the principle of gain rolling from the old to the new. A 1031 Exchange, like any real estate transaction, involves balancing competing pressures in speed and quality.

Prospects can be sorted through online. If you're moving to a specific area, there are websites to aid you in your search. You primarily want to find a home that will increase in value no matter where you decide to live. Finding the best deals on California land options is easier than ever before. The majority of us, when searching for a home, look for something that fits our budget, but we also desire a safe neighborhood. This can often be a difficult task.

Let's face it, you have to fork out the bucks to be safe these days. At least in the more urban environments. The Internet allows you to really narrow down your search for an ideal California home. This makes it that much easier to stay within your price range.

When a close friend of mine ventured out West, my first thought was, why? He was craving the sunny beaches and abundance of amenities. It wasn't long after renting a wallet-breaking apartment for several months, that he decided to invest in some fine real estate. After doing some searching, he found a small home that fit his price range. I have to admit, when he first described the home to me, I wasn't that impressed. It sounded like a lot of bucks for an average home. However, after a year had passed, he decided to sell the house. This is where the payoff was clear. To my surprise he made a whopping 50,000 dollar profit on the piece of property.

Whether you're looking to purchase a permanent spot in California, or simply doing some investing, it is good to check all the listings available. With the Internet, this should be no difficult task. You just may find that diamond in the rough that's just waiting to become a goldmine.

Bear in mind prices vary by location, and the perspective buyer or seller can do a great amount of research online before ever enlisting the help of a professional realtor. For example, in southern California, it is possible to search tens of thousands of homes for sale in San Diego County alone in a variety of price ranges through the multiple listing service or MLS.

Several real estate publications are also available and can be found in stands at many convenient locations throughout the state. If you are interested in moving to a particular city, you can also contact the local Chamber of Commerce for information regarding the city and the surrounding area. Historically, property values in California have been rising steadily, so why wait?

Joe enjoys sound investments and tax breaks. Check out his latest resource: 1031 Tax

1031 Real Estate Exchanges - The Good and Bad!

One of the most powerful tools in a real estate investor's bag of tricks is the 1031 Exchange. When used properly it can defer the tax on capitals gains almost indefinitely.

A 1030 Exchange is really very simple. You don't actually have to trade one property for other... you just must use the gain from the sale of a income producing property to buy another income producing property. There are a few simple rules you must follow. One rule is that you have to complete the transaction with in a prescribed time period.

The other requirement of a 1031 Exchange is that you must never personally touch the money from the sale of the first property. Certain people and companies are in business to act as an "Intermediary" in exchanges. Their primary job is to collect and hold the funds from the buyer of the first property and deliver them to the seller of the property you are acquiring. And that's where the trouble starts.

In the past few years some Intermediaries have disappeared and the funds they were holding from many deals vanished along with them. Often the investor's losses amounted to from hundreds of thousands to millions of dollars.

Oh yes, there have been other problems. Some Intermediaries "co-mingle" the monies they are holding for exchangers. That means that all of their exchange client's money is held in one account under the Intermediary's name. If the Intermediary is sued for some reason all money in the account may be frozen. If the freeze lasts beyond the prescribed time limit (180 days) for exchanges the investors are out of luck. There are no extensions possible of the 180 day deadline. Now the investors must pay income tax on all those capital gains.

With the huge increase in real estate values in many areas recently, investors should be using 1031 Exchanges. There is just no better way to protect their profits and build net worth. But they must also protect those profits from careless intermediaries.

Make sure that your exchange funds are held in a separate exchange account that holds only your money and no one else's. That account must be separate not only from other client's monies, but also separate from the intermediary's assets.

Each of the accounts should have the client's name on it something like this: "The Exchange Kings, as intermediary for Barbie and Ken Investor". That account must have the investor's tax ID or social security number on the account. Now, no matter what goes wrong with the intermediary, your exchange funds will remain protected and accessible.

It's great to exchange a property for profit. Just don't exchange that profit for an unexpected loss.

Mark Walters mentors real estate investors with free videos offered at http://www.CashFlowInstitute.com

Mechanism Of The 1031 Exchange

One of the very difficult thing to achieve in Europe is managing to create a real estate fortune. Why is it easier in the States ?

One of the most important reason are taxes. Indeed, in Europe any profit made on property is subject to heavy taxes. So on top of extremely high transaction fees (notary, lawyers, real estate agents, transfer taxes and so on), you have to pay a large chunk of your capital gain as tax.

In the states a wonderful mechanism exists and it helped support the real estate industry. This procedure originates in the beloved Internal Revenue Code, specifically in the section 1031. A 1031 exchange or Like kind exchange is defined as follows:

If you own an asset, generally some kind of real estate such as land or building and you sell it with profit, you will be able to defer the payment of capital gains, under the conditions that you use the proceeds of the sale in order to reinvest in a like kind asset.

See the potential: you do not use precious cash to pay off taxes, you can re-invest immediately. However, you need to understand 2 things.

1 - It is a deferment, so should you sell without re-investing, the capital gain will be taxed and you will have to pay.

2 - In order to qualify certain conditions must be met:

a. the asset must be of like kind
b. the proceeds of the sale must be invested in a similar kind of asset within 180 days of the sale. (Furthermore, the property must be identified within 45 days)

This is an effective way to defer paying taxes.

A 1031 Exchange is similar to a traditional IRA or 401K retirement plan. In a tax-deferred retirement plans, when assets are sold, the capital gains that would otherwise be taxable are deferred until beginning of the cashing out of the retirement plan.

It is the same mechanism for tax-deferred exchanges or real estate investments. As long as the money is re-invested in other real estate, the capital gains taxes can be differed.

How do you make a 1031 Exchange ?

Once you have decided to pursue a 1031 Exchange, the process is rather easy. If you use a professional, it should as well be carefully facilitated. So do not hesitate to ask around. Once you have your advisor here is what will happen:

you put your investment property on the market. Then you make a new offer to purchase the investment property. The offer is accepted. Escrow for the sale is opened and preliminary title report is produced. Your advisor provides the necessary exchange documents to escrow closer for signing at property closing. Then Escrow closes. Now, within the first 45 days after the close of escrow on the sale of the relinquished property, you identify the replacement property as required by Law. Last, within 180 after the close of escrow on the sale of the relinquished property you close on the replacement property.

Often, the most difficult part of a 1031 Exchange is identifying replacement property within the first 45 days following the sale of the relinquished property. Be careful, the IRS does not grant extensions.

 1031 Exchange - How to save taxes whilst increasing your Equity -http://www.howtofocuson.com/1031-exchange-florida-properties.html

The 1031 Deferred Exchange: What Are the Requirements?

A 1031 tax deferred exchange is an excellent way to preserve equity in your properties. By allowing you to defer income taxes that would usually be charged when you sell a property, you will be in a better position to improve your economic standing. It will also give you added flexibility in managing and expanding your portfolio.

1031 tax deferred exchanges are governed by stringent regulations set forth by the IRS in the Revenue Proclamation 2000-37. Also known as RevProc 2000-37, this document details the requirements necessary to qualify for a 1031 tax deferred exchange. These requirements include:

The types of property that qualify. There is a common misconception that a 1031 tax deferred exchange only applies to real estate. This is not necessarily the case. 1031 tax deferred exchanges apply to other types of property as well. While some property types are explicitly excluded from a 1031 tax deferred exchange, these items are relatively few. Some of the disqualified properties include: stocks, bonds or notes, other securities or certificates of indebtedness, certificates of trust, partnership interests, property being held primarily for resale, and shop inventories.

Intended purpose. Both the property sold and the property to be acquired must be considered of productive use in a trade, a business, or an investment. Properties that are meant to be resold immediately do not qualify. Most primary residences are also disallowed by the IRS from participating in a 1031 tax deferred exchange, since they are not primarily of a trade, business, or investment nature. However, any other houses that you own, provided that they can be used to generate income, may be able to qualify for a 1031 tax deferred exchange.

“Like Kind” properties. The properties to be exchanged within a 1031 tax deferred exchange must of “like-kind” nature. For instance, real estate property can only be exchanged for real estate; vehicles can only be exchanged for vehicles, etc. Note that 1031 tax deferred exchanges only apply within the boundaries of the country. Exchanges with foreign properties are disallowed.

A Qualified Intermediary. A qualified intermediary (or QI) is an independent party who facilitates 1031 tax-deferred exchanges. The qualified intermediary cannot be the taxpayer or any disqualified person. It is the QI who acquires the relinquished property and transfers it to the buyer afterwards. The QI is necessary because the IRS does not allow the taxpayer to take direct or indirect control of the money generated from the original sale at any time during the proposed 1031 tax deferred exchange. If the taxpayer or any of his agents take control of the funds at any time during the transaction, the IRS will revoke the exchange. This means that the taxpayer will have to pay the appropriate capital gains tax.

Time Restrictions. There is a 45-day time limit for the identification of replacement properties, and a 180-day time limit for the completion of purchase. If the taxpayer fails to meet these limits, the 1031 tax deferred exchange will fail and the former will have to pay income taxes on the gains of the sale.

Matthew Bass is the publisher of 1031ExchangeAnswers.com He provides more recommendations and information on 1031 Tax Deferred Exchanges that you can research at your leisure on his website.

1031 Exchange and Tenancy-in-Common: Seeking the Right Advisor to Achieve TIC Investment Objectives

 A long-established section in the federal tax code, section 1031, allows real estate investors to sell property that has been held for investment purposes and defer capital gains and depreciation recapture taxes if they acquire "like-kind" exchange property of equal or greater value and reinvest all of their equity. Since the mid-1990s, many investors have experienced the benefit of reinvesting their equity into investment property interests structured as Tenancy-in-Common (TIC). TIC owners hold an undivided fractional ownership interest in investment property evidenced by a deed of trust.

TIC, also known as Co-ownership of Real Estate (CORE), enables an investor to participate in the ownership of institutional-grade, professionally managed investment properties. The investor's equity can be diversified amongst several different properties, geographic markets and real estate companies, potentially increasing both the value and safety of the real estate investment. TIC/CORE investments are designed to offer preservation of capital, predictable cash flow and long-term appreciation in institutional-quality investment property assets that benefit from greater economies of scale.

With its features and benefits, TIC/CORE is an increasingly popular 1031 exchange option for many real estate investors. However, 1031 exchanges and TIC/CORE transactions are very complicated, with both tax and legal issues topping the list of potential pitfalls. It is therefore essential that investors be knowledgeable about what to look for in a quality advisor. Financial advisors are required by securities law to be properly licensed in order to consult clients regarding TIC/CORE transactions and other investment interests in real estate. Financial advisors should hold both Series 7 and Series 63 securities licenses to qualify them as knowledgeable, well-rounded consultants in the investment process. It is essential that they have experience in the commercial real estate business, in addition to an understanding of personal investment objectives and client suitability issues.

But perhaps the most important component to look for in a TIC financial advisor is their intimate, trusted and deeply rooted relationships with key real estate companies. This attribute is critical to their ability to provide the best opportunities for their clients. There are almost 80 real estate companies across the United

States that are either already involved or considering involvement in the TIC/CORE industry as a real estate provider. As with any industry, these 80 companies represent varying degrees of acumen, experience and quality. To achieve the greatest potential for a client, a financial advisor should have consistent access to the top ten percent of these companies in order to provide their client access to the best properties available. Obviously, a new financial advisor with little or no experience or industry knowledge may not have access to the top real estate providers, as these providers prefer to work with experienced consultants that specialize in this unique segment of the market.

Investors should also be aware of how their financial advisor stacks up, looking for a history of successfully completed transactions. A long and proven track record indicates that a financial advisor is an experienced professional. An investor wants such an advisor in their corner asking all the right questions, making appropriate and suitable recommendations, understanding the nuances of successfully completing TIC/CORE transactions and providing answers to any and all tax and legal questions.

When considering a 1031 exchange or TIC/CORE investment, investors should ask the following specific questions of the financial advisor:

* What percentage of your business is 1031 exchange and/or TIC/CORE related?
* How many investors have you consulted that invested in TIC/CORE structured properties this year? How many last year?
* How long have 1031 exchanges and TIC/CORE been a focus of your investment recommendations?
* Do you have the appropriate licenses to complete this transaction (Series 7, Series 63 securities licenses)?
* With which real estate providers do you work most closely?

As customer demand continues to drive this segment of the real estate market, the emphasis on quality - quality consulting, quality property, and quality transactions - will be increasingly important. Part of the qualitative process is ensuring that financial advisors representing a client make appropriate recommendations for that client based on the client's best interest and not based on any "bias." A final issue that needs to be addressed is that it is not unusual for "referral" compensation to be paid between referring parties. This practice is illegal and a complete breach of ethics,. Therefore, if any form of compensation changes hands - disclosed or undisclosed - between financial advisors and Qualified Intermediaries, real estate companies or other unlicensed individuals derived from an exchange transaction, a felony may have occurred.

In short, investors should take the time to identify a reputable advisor who not only can provide acceptable answers to the above questions, but who will also have the relationships necessary to guide their clients into the appropriate investment. It is important to remember, firms or individuals involved in recommending, offering or selling 1031 TIC/CORE investments must be licensed with a broker-dealer, the SEC, the NASD and the state securities regulators in every state in which the firm or individual operates and in which the client resides. Any "unlicensed" firm or individual involved in recommending, offering or selling these investments is in direct violation of federal and state securities laws.

Co-ownership is the fastest growing option for 1031 exchange investors seeking suitable replacement property. Properly structured and presented, such investments can also generate new listing opportunities for real estate agents while satisfying both the IRS "like-kind" investment property requirements and the SEC and NASD securities regulations. The advantages of co-ownership of institutional-grade real estate are clear and compelling. When exploring co-ownership, smart investors need to seek out industry experts to guide them through the replacement property process. It is indeed the wise investor who is aware of his or her long-term goals that seeks experienced guidance to chart their course, thereby turning TIC/CORE investment opportunities into realities.

(c) 2005, 1031 Exchange Options. Reprint rights granted so long as the article and by-line are reprinted intact and all links made live. This article is neither an offer to sell nor an offer to buy real estate or securities. There are material risks associated with the ownership of real estate. You must be an accredited investor. Securities offered through Sigma Financial Corporation, Member NASD/SIPC.

Cary Losson is the Founder and President of 1031 Exchange Options. A luminary in the TIC/CORE 1031 exchange marketplace, Mr. Losson is frequently quoted in journals and periodicals concerned with investment property issues and advice. For more resources to assist in your learning: http://www.1031exchangeoptions.com/resources.html

Preserve Equity, Build for the Future Using a 1031 Tax Exchange

Thinking of trading up on an investment resort property? If so, look into 1031 Tax Exchanges (based on IRS Code Section 1031), which allow taxpayers to defer taxes on capital gains resulting from the sale of investment real estate, often a sizable sum since combined Federal and State taxes can run as high as 38 percent.

With an exchange, owners are able to preserve equity, while still selling the property. The underlying concept is that an exchange of like-kind property for like-kind property does not generate funds, which can be taxed since the profits go directly into the new or replacement property. To accomplish this, sellers hire a Qualified 1031 Intermediary (QI) to document the sale as an exchange and to receive the funds from the sale. The QI then delivers the funds directly to the closing agent for the replacement property who deeds the property to the taxpayer.

Central to a 1031 Exchange is the interpretation of like-kind property. While the common assumption is that like-kind implies land for land or a condominium for a condominium swap, the interpretation of like kind is actually less literal. Rather, it defines like kind as meaning that both the replacement and the original property must be used as an investment. So land, condominiums, single-family homes and motels can all be exchanged for one another as long as they are used in the exchanger's business or held as an investment. The amount of debt held on the replacement property must be the same as the amount of debt on the original.

1031 Exchanges are complex mechanisms and like all IRS requirements very specific. For example, exchangers have 45 days from closing to identify properties they intend to purchase and 180 days to complete the purchase. Purchase and Sale agreements must include verbiage indicating the intent to affect a 1031 Exchange.

The 45-day time frame used to be onerous for sellers. Now, they can opt for a Reverse Exchange, in which an additional third party called "the exchange accommodation title holder" (EAT) acquires title to the replacement property until the original property sells. Reverse Exchanges shift the 45- and 180-day time frame to the selling side of the transaction. With an Improvement Exchange, which also uses an EAT to hold the replacement property, sellers can build investment properties from the ground up or improve existing properties. The improvements have to be built and paid for during the 180-day period.

If you are interested in a 1031 Exchange, the first step is to consult your tax advisors as well as an attorney or CPA who is knowledgeable with 1031 Exchanges. Make sure that your real estate professional knows you plan to conduct an exchange and be sure that he or she is familiar not only with the process but also with the specific documentation and time frame mandated by the IRS.

This article is intended to inform readers, but does not constitute any financial or legal advice.

Neda Dabestani-Ryba is a Realtor in Maryland. She is a member of the President's Circle of Top Real Estate Professionals. She can be reached at (800) 536-3806 or visit her website for more information: http://neda.dabestani.pcragent.com/

Prudential Carruthers REALTORS is an independently owned and operated member of Prudential Real Estate Affiliates, Inc., a Prudential Financial company. Equal Housing Opportunity

Private Annuity Trust vs. 1031 Exchange - When a PAT Makes Sense (Part I)

Real Estate Investors tend to be hard core. There is nothing like having your money invested in property you can touch, visit, renovate and watch gain in appreciation.

You may have heard the term "Swap till you drop". What this term means is that as an investor,you sell your real property and exchange it for another of equal or greater value, and continue to do this until you die and leave the assets to your heirs. This does (under current tax law) allow you to avoid paying capital gains tax and recaptured depreciation forever. And, your heirs currently inherit it at the value at the date of your death. They do not pay capital gains tax and depreciation, except if they sell it over the value it was at death.

This is a good thing.

However, there is going to be a time to exit the real estate investment phase of your life. Let me give a few examples of when this might be the case.

1. You have accumulated a number of investment properties and reach a point in life you want less hands-on management responsibilities.

2. You want to slow down a bit during retirement and actually want to use some of the equity you have worked so hard to accumulate to improve your income and lifestyle.

3. The market conditions are ripe to sell, but purchasing another property of equal or greater value doesn't make sense.

4. Economic conditions warrant sale. Perhaps need for long term care for you or a member of your family.

5. Personal circumstances, such as need for additional income, debt payoff, tax consequences, property division, etc. warrant the need to sell.

6. You need to do some estate planning and need to remove some of your assets from your estate so your heirs won't have a huge estate tax obligation.

If any of these prevail, a Private Annuity Trust may be your best option. A PAT will allow you to spread out your capital gains tax burden over many years, and trigger what is effectively a 0% interest long term loan from the government. How often do you get this kind of opportunity?

Part II will explain more of how a Private Annuity Trust can make a huge difference when any of the above circumstances might arise.

Capital Gains Tax Saving Strategies real estate investors need to hang onto your hard earned profits. Get your free report "Seven Secrets to Help Real Estate Investors Hang onto Their Capital Gains" at the Keep Your Capital Gains website.

The Skinny on 1031 Exchange: Maximizing Profits by Minimizing Your Tax Liability

A 1031 exchange refers to Section 1.1031 of the Internal Revenue Code which was passed in 1990. Normally, when you sell all real and personal property, the tax code requires the payment of the Capital Gains Tax. That is to say, when you sell your office for $100,000 more than you bought it for, you must pay the gains upon those earnings. However, after the passing of a 1031 Exchange that is no longer necessarily the case.

What types of Property Qualify?

A 1031 Exchange allows sellers of some real and personal property the opportunity to avoid paying capital gains taxes (which are 15% plus state taxes) by “exchanging” their sold property for newly purchased property. However, certain restrictions apply. The most important restriction is that only business property and investment property applies. So, an exchange under a purely residential home does not qualify, whereas exchanging a property that your business has used for its office, or even one used simply for investment diversification does.

But simply selling your office isn’t enough to qualify you for a 1031 exchange. Rather, the code also requires that that you simultaneously buy a property of “like-kind.” This does not mean that if you are selling a 2000 sq. ft. office you must buy a 2000 sq. ft office. Rather, the term is interpreted very loosely to mean virtually any real estate held for productive use in a business or for investment, whether improved or unimproved can be exchanged for any other property to be used for productive business or investment purposes. So, if you sell and unimproved lot of land and purchase an improved one or visa versa, this still qualifies, just as selling industrial property and buying rental resort property does. The point here is that while “like-kind” is an important restriction, it has been interpreted so broadly as to give individuals a lot of free reign.

The Exchange

When most owners envision a 1031 exchange they envision a provision whereby they must buy and sell the two properties on the same week or even the same day. But that is not the case. A tax-deferred 1031 exchange allows up to 180 calendar days between the sale of the first property and the purchase of the second. But no matter the time between sale and purchase, a 1031 exchange is required by the Internal Revenue code to have a “qualified intermediary” to manage the exchange.

A Qualified Intermediary

The requirement of a qualified intermediary is intended primarily to prevent individuals engaged in the exchange from using the time in between the sale and purchase of property to their financial gain. Although the seller has up to 45 days to set up the intermediary, the exchange is designed so that the seller should not profit from the use of the money before the purchase of the new property is made. An intermediary serves the judicial purpose of ensuring this. But it is important to remember that the qualified intermediary charges fee for this. While these services can vary in cost depending on the additional advisory services provided by the Intermediary, individuals interested in a 1031 exchange should expect to pay somewhere in the vicinity of $500 to $700 for the first exchange and $200 to $400 for each additional property.

Dan Johnson enjoys writing about 1031 exchange.
 

Satisfying A 1031 Exchange With The Balance Of Both - Real Estate & Energy

If you have been diligent in researching how to successfully complete a 1031 exchange employing a Tenant in Common (TIC) strategy, then you owe it to yourself to review the Private Oil & Gas Royalties that are available as a security to satisfy that same 1031 exchange.

If you equate Oil & Gas Royalty Investing with the extreme risk of drilling exploration or the unlimited liabilities involved with working interests then you would have over looked the sector providing ROYALTY INTERESTS from domestic oil fields that have been in steady stable production for decades. Energy investors have been enjoying the benefits of private royalty ownership and “like-kind” exchanges for over 60 years. Court Rulings dating back to the 1940’s have affirmed the opportunity for investors to accomplish tax deferral by exchanging between brick-and–mortar and royalty interest; both of which are forms of real estate. A quick comparison reveals the following:

Private Royalties:

Risk Diversification - Yes – multiple properties

Risk of Capital Call - No

Benefits from Rising Global Energy Prices - Yes

Independence from other Investors in the same Property - Yes

Secondary Markets - Yes

Low Correlation (when compared to interest rates, real estate markets and the economy) - Low

TIC’s:

Risk Diversification - No – one property

Risk of Capital Call - Yes

Benefits from Rising Global Energy Prices - No

Independence from other Investors in the same Property - No

Secondary Markets - No

Low Correlation (when compared to interest rates, real estate markets and the economy) - High

So where does the balance come in?
Many investors are nearing retirement age and they seek above all capital preservation and a steady stream of income to sustain their quality of life. Diversifying holdings to include Oil & Gas Royalties can further spread risk geographically and among assets classes, as well as capitalizing on the potential for higher returns. Reducing risk and increasing return is a wealth strategy we all strive to achieve. At the same time you’ve captured a host of additional benefits a typical real estate TIC investment does not have ash shown in the table above.

How does the economy affect Oil & Gas Royalties?
Supply and demand will always be a key driver in determining the value of royalty programs. Much of the supply side is affected by a limited number of refineries already peaked in production. Reserves have also been a hot button for analysts, especially since they are typically an over stated quantity, not necessarily verified. On the demand side; we’ve been watching the increasing consumptions in India and China. Both the near-term conditions and long-term supply-demand projections make the economics of energy programs very appealing.

How does it all tie together?
Royalties are not a replacement for “Bricks and Mortar” in the 1031 exchange market it is more a coexistent alternative. Each has a specific set of benefits and risks. They both can help the investor increase wealth and retain what they have earned. Having energy in a portfolio can bring a certain peace of mind; i.e. being able to spread out the risk in a commodity that has very low correlation to real estate markets, the national economy and interest rates. It may not be suitable for every investor. Suitability is crucial in determining your strategy of energy and real estate. If it is suitable, you now have real 1031 Exchange Alternatives.

Ricardo E. Jobin is Senior Vice President of 1031 Exchange Alternatives™. He is a retired Naval Officer (1995) and in 2000 attained an MBA in Strategic Management from Davenport University while serving as an executive board member for The Strategy Forum of Detroit. In 2001 Ricardo led a privately held corporation to rank 121st on the Inc. 500’s “Fastest Growing Privately Held Companies in America”. Currently, Ricardo is pursuing studies to attain certification as a “Wealth Strategist” and is a licensed securities agent and a registered representative of SIGMA Financial Corporation, member NASD & SIPC. For more information call 1-800-466-2003 or visit http://www.1031ea.com.

Private Annuity Trust vs. 1031 Exchange - When a PAT Makes Sense (Part II)

In the last article, I pointed out when, as a real estate investor, doing a 1031 Exchange on the sale of a Real Estate Property may not be your best option.

So, let's assume you do want or need to sell a real estate investment, don't want to do an exchange, and don't want to pay a huge lump sum capital gains tax payment of 15-40% on your gains. Now is the time to see how a Private Annuity Trust can save you money.

It's important to know that you don't avoid paying your capital gains tax obligation, you just get to defer all payment for a while if you're under 70 years old, or you at least get to spread out the obligation over many years. The total of years can be your lifetime or a fixed number of years determined by you when you set up the trust.

So, how does that help you? Well, if someone were to offer you a 0% interest loan on let's say $300,000.00 for the next 30 years, and you only had to make minimum payments, would you jump at the chance? Most people sure would. Think of how you could invest that 300K so that you could enjoy the benefit of the interest it accrued. This is effectively what a Private Annuity Trust does for you. It allows you to keep most of your gains working to your advantage, while paying back the money owed to the IRS over a long period of time.

This also holds for the depreciation recapture if you owned your property for a long period of time and depreciated it according to a schedule to realize annual tax advantages of owning investment real estate.

If you do not put a tax strategy in place and sell outright, not only do you owe capital gains tax, but you also owe depreciation recapture, which can be another 25-35% of your total depreciation taken over the ownership cycle of your investment.

And, you will avoid the possibility of the dreaded Alternative Minimum Tax trap. This is something else that may catch you by surprise when you least expect it triggered by your outright sale of property. This could mean having other legitimate tax deductions disqualified and a higher tax payment owed by you.

As you can see, it's definitely worth it to consult with an expert in Capital Gains Tax saving strategies before you make the decision to sell your real property.

The PAT can also work with the sale of a second home, vacation home, or even your primary residence. With these assets, a 1031 exchange is not an option.

Paula Straub will help you understand the Capital Gains Tax Saving Strategies and save you money. Get your free report "Seven Secrets to Help Real Estate Investors Hang onto Their Capital Gains" at the Keep Your Capital Gains website.

1031 Exchange: The Best Option For Real Estate Investors

Real estate has been termed as the foundation of wealth, currency and value, which shall never crash. The fundamentals of real estate business are derived from the perceptions of risk inherent in the game. It is an accepted financial axiom that when one takes higher degrees of risk, then the potential and returns increase as well. The real estate industry has witnessed a sea of revolution over the last decade with a substantial widening of the gap between the generally held perceptions of risk and the actual risk in a transaction.

Financing and taxes are the two factors that have worried the buyers and sellers in any real estate transaction. Creativity and negotiating skills can help buyers obtain more favorable financing terms and being aware of like-kind exchange opportunities can help sellers with tax consequences. Section 1031 of the Internal Revenue Code in US provides one of the best strategies for the deferral of capital gains taxes, which would ordinarily arise from the sale of real estate. The term "1031 exchange" refers to Internal Revenue Code Section 1031, which allows real estate investors to sell an investment property and buy replacement investment property without paying capital gains tax on the profit from the sale. The capital gains tax liability is not eliminated; it is merely deferred until the investor ultimately sells out for cash. That's why a 1031 exchange is also called a tax-deferred exchange.

There are significant tax benefits to selling real estate as part of a like-kind exchange. The like kind exchange can be categorized into two types: a simultaneous exchange where a seller sells real estate and invests the proceeds in other real estate, or a deferred exchange in which real estate is sold, the sale proceeds placed in escrow with a qualified intermediary, and the proceeds then used to purchase replacement real estate within the time period prescribed by the Internal Revenue Code. In a tax-deferred exchange, the replacement property must be of equal or greater value than the property being sold, and the mortgage on the new property must be of an equal or greater amount than the existing debt on the property being sold. Any excess cash that ends up in the exchanger's hands at the end of the deal is called boot and becomes taxable income.

The foundation of 1031 exchange rule is that the properties involved in the transaction (the property to be sold and the property to be bought) must both be held for productive purpose in trade or business or as an investment and they must be like kind. This is one of the most misunderstood concepts in 1031 Exchange. Like Kind relates to the use of properties and not to the location or description of it. Any property used to produce income qualifies as like kind to other income-producing property.

The basic requirements of a 1031 Exchange can be enumerated as follows:
 

· Both the property to be sold and the new property to be acquired have to be of like kind.
· The IRC requires that the new replacement property be identified within a span of 45 days of the closing of the sale.
· Section 1031 requires that one or more of the new like kind property is purchased by the 180th day of the closing of the sold property.
· A Qualified Intermediary (QI) has to be used for 1031 tax deferred exchange transaction.
· Section 1031 requires that the taxpayer on the old property be the same taxpayer on the new property.
· In order to defer 100% of the taxes on the gain of the sold property the new property must be of equal or above the value of the sold property.
 

1031 Tax Deferred Exchange allows the real estate owner to exchange management-intensive property for quality property with the potential to generate a larger income, increase tax benefits and appreciation potential. Exchanging defers the recognition of the capital gains tax, leaving the property owner with substantially more proceeds to purchase a replacement property. Ultimately, the exchange process allows investors to reorganize and improve their real estate portfolios to best suit their unique interests and needs. With the World Wide Web creating a platform for sharing information related to real estate, numerous websites have been created where one can acquire knowledge about 1031 tax deferred exchange, like-kind property exchange, qualified intermediaries, 1031 tax exchange boot, tenants in common and triple net lease and more.

Christine is an expert Internet marketing professional with experience in various industries such as finance, real estate, business, health and other industries.

How to Maximize Cash Flow With a 1031 Tax - Deferred Exchange

The World without 1031 Tax-Deferred Exchange
 

Let’s say you bought a residential property in the Bay Area for $200K fifteen years ago and financed it with a $160K loan. Since the property is located in a good area, its value has appreciated to $1M. Over the years, you refinanced the original loan to consolidate your other debts and currently owe $300K on the property. Each month, you collect $2,500 of rent. After paying $1,800/month for the loan, $350/month for property taxes and $55/month for insurance, you barely have any money left to pay for maintenance and other expenses.

As you grow older, you realize that you need a second source of reliable income; so, you are not completely dependent on your salary. Your company says its employees are its most valuable assets, but it also outsources many jobs to China and India to cut costs. You know you should not blame your company. It has to remain competitive. So when you see an attractive multi-tenant shopping strip in a middle-class suburb of Dallas, 100% NNN lease with $200K/year of Net Operating Income (income after all expenses except the mortgage payment) on the market for $2.6M, you get excited!

Since the residential real estate market in the Bay Area has softened, you consider selling your rental property to buy this shopping strip. You estimate that you would have to pay about $200K in federal and state income taxes on $800K of capital gain ($1M less $250K purchase price and selling fees, plus $50K in depreciation recapture). You just hate having to pay $200K to the government – money that may go toward your down payment on the shopping strip. There is a better way – a way to defer the income tax.

What is a 1031 Tax-Deferred Exchange?
 

Section 1031 of the Internal Revenue Code generally provides that neither gain nor loss is recognized if qualifying property is exchanged for other qualifying property of a like-kind. In the above scenario, you may defer the payment of $200K in both federal and state taxes if you acquire another investment property with equal or greater debt and equal or greater equity. In other words, if you buy another investment real property for $1M or more, using all of the net proceeds as down payment, then you may defer the $200K of taxes. Essentially, the government would lend $200K to you, without interest. And you may repeat this deferral and never pay income taxes.

How Do You Qualify for a 1031 Exchange?
 

You must comply with several strict rules. Failure to satisfy any of the rules will disqualify your transaction from a 1031 tax-deferred exchange.

1. You must trade up. The property you buy (replacement property) must have an equal or greater debt AND an equal or greater equity than the property you sell (relinquished property). This means you must put all of the net proceeds from the relinquished property to the replacement property and the fair market value (FMV) of the replacement property must be more than the FMV of the relinquished property.

2. The qualifying property must be of like-kind. The relinquished and replacement properties must be held for productive use in a trade or business or for investment, before and after the exchange. And one kind of property may not be exchanged for property of a different kind. For instance, you may not exchange a residential rental property for one you intend to occupy as your principal residence – not qualifying property. And you may not exchange a factory for equipment – not like kind. On the other hand, residential and commercial real properties are of like kind. So, you may exchange a residential rental property for a shopping center.

3. In a delayed exchange, you must identify the replacement property within 45 days and receive it within 180 days from the closing date of the relinquished property or by the due date of your tax return (with extension) whichever is sooner.

4. You may identify up to 3 replacement properties and must receive at least 1 of the 3. Alternatively, you may identify as many properties as you want as long as the total value of these properties does not exceed 200% of the value of the relinquished property.

5. You should have an exchange intermediary hold the sales proceeds of the relinquished property. Most investors use an exchange company as the qualified intermediary for a delayed 1031 exchange.

6. If you exchange a property with a related person (your children, parents), then both parties may not dispose the properties within 2 years.

7. If the sale proceeds are deposited in an interest bearing account during the exchange, you must receive the interests AFTER the close of escrow of the replacement property.

Strategies for a 1031 Exchange
 

The following strategies are intended for investors looking for commercial property as a replacement property.

1. Start looking for a replacement property early. Since you have only 45 days to identify replacement properties, you should make an offer as soon as the relinquished property is in escrow. By the time you close escrow on the relinquished property, you should have one offer accepted on a replacement property. This first choice does not need to be the most desirable property at the best price. You should think of it as a “back-up” property. It is intended to take away your worries, such as “Oh my God, what if I cannot find a replacement property?”.

2. Identify more than 1 replacement property. If something unexpected comes up with your first choice, e.g. the soil is contaminated, you have a second and third choice to fall back on.

3. Specify a 30-day due diligence and cancellation period in the contract. This will give you more time to specify more than 1 property.

4. Think twice about choosing a replacement property with loan assumption. It’s much harder to get lender approval for loan assumption than for a new loan. Moreover, you have only once chance to get approval for loan assumption versus many chances to get a new loan approved. You don’t want to have your loan assumption denied by the lender after the 45 day identification period.

Questions for a 1031 Exchange Intermediary
 

Technically, you don’t need a 1031 exchange company to handle the exchange. However, it is advisable to have an expert assist you. This company will ensure that you comply with strict IRS rules. To decide which company to assist you, you should consider:

1. The fee is around $500-$750 per transaction. The company that charges less tends to limit you to 3 replacement properties and the company that charges more may not have that limit.

2. Whether your proceeds will be deposited in a separate trust account or commingled with the company’s main account. In the event that the company goes under, you don’t want your money stuck in that company’s account while the 45 day period expires.

3. Whether your proceeds will earn any interests and the money is insured.

What if you want to buy the replacement property first?
 

For some investors, the strict 45 day identification period and 180 day exchange period may be too short. The alternative is to consider a reverse exchange. It is a transaction in which the replacement property is owned by an intermediary party during the pendency of the like-kind exchange until the taxpayer is able to sell her relinquished property. Then the replacement property is exchanged to the taxpayer. A reverse delayed exchange is an advanced strategy, and you should consult a tax advisor to guide you.

The Happy Ending
 

Your offer of $2.5M for the shopping center is accepted. The bank lends you $1.875M at 6.5% interest amortized over 25 years. After paying $12,660/month for the mortgage, you still have $4,000 a month positive cash flow! Now you realize Uncle Sam is very smart. He allows you to have a tax-deferred exchange so you can maximize your profits. In return, he may collect more taxes later. And you are OK with that as both you and Uncle Sam win.

DISCLOSURE: To ensure compliance with requirements imposed by IRS Circular 230, we hereby inform you that the U.S. Federal tax advice contained in this article is not intended to be used nor has this article been written to be used, and it cannot be used, by any taxpayer for the purpose: (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. No tax advice is being given by this article for any specific transaction. If you desire advice about any particular transaction, then please consult a professional tax advisor.

David V. Tran is the President/CEO of eFunding Inc., a commercial real estate & loan brokerage, property management & leasing, and TIC company in San Jose, CA. His website is www.efundingcom.com. He may be contacted at (408) 288-5500. eFunding does business in all 50 states. He is selected as Pensco Trust’s (a major self-directed IRA custodian) Preferred Professional and is the #1 among over 120 commercial real estate expert authors on ezinearticles.com. David currently offers 3 FREE real estate investment seminars till 12/07:
 

1. How to invest in commercial real estate for retirement income NOW.
2. How to maximize cash flow with 1031 tax-deferred exchange.
3. TIC/Syndication: strategy for small investors and self-directed IRA investors to acquire high-valued properties.
    

   You are welcome to share this report, unedited and in its entirety, with anyone you like. You may not remove this text. © 2007 eFunding, Inc

1031 Real Estate Exchange And The Importance Of A Qualifying Intermediary

A 1031 real estate exchange can provide great benefit to your financial net worth and is one of the most important tools in a real state investors' toolbox. This article will specifically focus upon the importance of choosing a very good qualifying intermediary and what factors you should consider when deciding which one to work with.

A qualifying intermediary is the most critical piece of the puzzle when looking at doing a 1031 real estate exchange. These are professional companies will ensure that you satisfy all of the IRS regulations regarding doing your exchange along with holding the money in escrow until you have found the properties which you will exchange. If certain guidelines are not properly followed, you can lose your ability to do a 1031 tax exchange and have to pay the financial consequences so be sure to do your due diligence.

Many of the same factors which you'll probably look use when searching for a new business partner will come into play when choosing a qualifying intermediary. You want to first check on the track record of the qualifying intermediary. If a company has been around for about 10 years, that is a good sign. The IRS clarified its guidelines regarding 1031 real estate exchanges in 1991. If the company is over 10 years old that means it has seen the changes in the industry and has considerable experience. You also want to check on the background of a company and where it operates. If you're looking for a property in Alabama and a qualifying intermediary you have spoken to has never done a 1031 tax exchange in Alabama, you'll probably want to consider using a different qualifying intermediary. You want someone who has the experience and the track record. You also want to see what kind of support and help are available with this company. There are very tight guidelines regarding when you identify properties as well as when you buy these properties so you want to make sure that there's enough help so that you will meet the guidelines. Also use a qualifying intermediary who uses strong security features and reasonable fees. Make sure to talk with several qualifying intermediaries to compare some these factors. Finally you should try to get a couple of references from the qualifying intermediary to make sure that they have done good work for other people in the past. If the company refuses, do not hire them.

A qualifying intermediary has a very important part within this picture and you must work to find the one to do business with. This may well be the most important decision you make throughout your work on a 1031 tax exchange.

Ellen writes for Great Hawaii Real Estate where you can find Molokai real estate listings to great Molokai condos, homes and land.

What Investors Should Know About 1031 Exchange Companies

Today many investors often exchange their investment properties to avoid paying federal and state capital gain taxes. This exchange often requires the involvement of a qualified intermediary or 1031 Exchange Company to avoid constructive receipt. Otherwise your transaction may not be qualified for 1031 tax-deferred exchange. This means the exchange company will keep all of the funds from the properties you just sold when you are looking for a replacement property to complete the exchange. However, many investors do not know these companies are in a business that is not regulated by both the Federal government and any of the 50 states. So technically, these exchange companies can use your money to invest in anything they want. Occasionally there have been sad stories about exchange companies losing investors money and then declaring bankruptcy. Investors can only recover a fraction of their money. On top of that, they may have to pay capital gain taxes because they do not complete the transaction within 180 days! So how do you avoid being a victim?

To answer this question, you will need to understand a little bit about the exchange business, the fees structure as they may influence your decision on choosing an exchange company. Most exchange companies make money by charging a fee per transaction. They also make money on the difference between the money they earn from the investment of your money and the interest they pay you. There are 3 main types of exchange companies:

 
1. Some exchange companies are just division or subsidiary or an entity owned by an escrow company. For example First American Exchange Company (FAEC) is separate Limited Liability Company (LLC) owned by First American which is also in title & escrow business. FAEC occupies the same office and even has the same phone number as the First American Title office.
    
2. Some banks, e.g. Washington Mutual (Wamu) also offer 1031 exchange service.
    
3. Companies that specialize on 1031 exchange. They could be a single-location company or a franchise with offices in many states. For example:
   • Equity 1031, LLC; www.equity1031.com.
   • Equity Preservation, Inc.; www.equitypreservation.com.

 

The fees charged by these companies vary from $200 to $750. However there are different restrictions:

• The company that charges low fee (Wamu charges $200) often does not pay interest on your fund or only pays interest if your fund is above a certain amount. If your sales proceed is significant, e.g. several hundred thousand dollars, you may save on the fee but may lose a significant amount on the interest payment.
• Some companies may offer to pay savings account rate while another may pay higher money market rate.
• Some companies charge higher fee, e.g. First American Exchange charges $750, but may allow you to make as many offers as you want. Each time your offer is accepted, the exchange has to review the contract, and wire the money to the seller's escrow account.

To ensure your money is safe, you should ask the exchange company if

• Your money is deposited in the general account or separated trust account under your name. When the money is in the general account, the exchange company can use it for anything; e.g. pay salary for its employees. Should the company declare bankruptcy, all of your money could be lost. On the other hand, the trust account is intended to keep your money just for own use. This kind of account is regulated by the federal government and the exchange company cannot use money for its business. So this is a safe account to keep your funds. Normally if you don’t say anything, your money is deposited in a general account.
• Your money is FDIC insured.
• Your money is invested in the US. If it’s invested outside the US, there may be a delay from the time you request your money to the time you actually get it.
• Your money is safe. As a general rule of thumb, if the exchange company pays you high interest then chances are your money may be invested in a higher risk investment.

 

So when you choose a exchange company, you should consider its fees, services, and more importantly if the company is trustworthy enough to keep your money.

David V. Tran is the President/CEO of eFunding Inc., a commercial real estate brokerage, commercial loan broker, property management, self-directed IRA investment, & TIC company in San Jose, CA. His website is www.efundingcom.com. He may be contacted at (408) 288-5500. eFunding does business in all 50 states. He is selected as Pensco Trust’s (a major self-directed IRA custodian) Preferred Professional and is the #1 commercial real estate expert author on ezinearticles.com. David currently offers 3 FREE real estate investment seminars till 12/07:
 

1. How to invest in commercial real estate for retirement income NOW.
2. How to maximize cash flow with 1031 tax-deferred exchange.
3. TIC/Syndication: strategy for small investors and self-directed IRA investors to acquire high-valued properties.

 

 

1031 Exchange Tax Deferred Benefits Are Hard to Ignore

OVERVIEW

Section 1031 in allows you to exchange “like-kind” investment properties without triggering the payment of capital gains tax. As your property assets appreciate in value you have the ability to upgrade into larger properties with greater cash flow. Section 1031 also gives you the flexibility to exchange your rental properties that have appreciated in value in hot markets, and re-invest into lesser-known areas that are expected to develop and become the next hot market in years to come. You can continuously defer these capital gains taxes as you continue to pyramid your property investment portfolio into larger and larger properties as long as you meet the 1031 Exchange Requirements.

1031 EXCHANGE BENEFITS

There are a lot of benefits to considering the use of a 1031 exchange:

TAX DEFERRED INVESTING

The ability to re-invest your entire property equity without tax erosion can significantly enhance the amount of capital that stays invested and can make it easier to upgrade into higher value properties with greater cash flow.

INCREASE CASH FLOW

This decision to upgrade into higher quality properties with greater cash flow can occur faster now that taxes are a lower priority transaction decision. In some markets the real estate values can get ahead of the available cash flow available from the property. In these situations it may make sense to lock in your gain and look to re-invest in another property where you can achieve higher cash flow returns.

TIMING THE MARKET

The ability to speculate on the next hot market area or region is a much easier decision under a 1031 exchange. Why not lock in your profits on property that has already risen dramatically in value and re-invest it in the next hot market? As long as your capital gains are deferred making these transaction decisions is easier.

COMPOUND RETURNS

If you are stepping up your portfolio through a series of exchanges over time your full capital gain can be re-invested without tax consequence, resulting in accelerated equity accumulation.

FLEXIBILITY

The ability to switch into “like-kind” properties as defined in the tax code gives you a range of investment options and flexibility. If you don’t want a lot of the headaches associated with managing property you can also consider Tenant in Common exchanges, which do qualify under Section 1031 of the tax code.

CONCLUSION

1031 tax exchanges gives real estate investors a lot more options and flexibility to make better investment decisions on their real estate holdings without the issue of tax over-riding sound judgment. If you own a rental property or are considering it you owe it to yourself to see if a 1031 exchange is right for your circumstances

S.A. Smith is a freelance writer, contributor, and editor of the 1031 Exchange Listings information portal and can be reached at http://www.1031exchangelistings.com/

1031 Tax Exchange Properties and What to Look For

1031 tax exchange properties have very specific requirements attached to them and this article will focus upon what to look for when searching for 1031 tax exchange properties.

To give a little background on the IRS and what it considers a particular property, it is necessary to speak to you about the different categories which real estate falls into. The first category is land held for investment. The second category is land held for business. The third category is land held for personal residence. The fourth category is land held primarily for sale. For a primary to qualify for as a tax exchange property, it must fall into one of the first two categories. The land must either be held for business purposes or land which is held for investment purposes. This quickly eliminates your personal residence as a potential property which you can use as a 1031. The other category is land held primarily for sale. If you are someone who buys houses and sells them quickly, this will fall in the category of land held primarily for sale.

You should know the type of properties which are tax exchange properties and this is also important in knowing what type of properties you are not able to exchange for. They must fall under the same two categories explained above and these properties are known as like-kind properties. To give further clarification though, here is an example which can make this more confusing. If you have a farm and sell this, you often will have your personal residence as well as farmland. Your real estate can potentially fall under two different classifications then as you have farmland for business purposes as well as a personal residence. Whenever you are looking at 1031 exchange properties, make sure to get qualified professionals to help you with this.

The final part of this article will focus upon the time stipulations which you have when finding your 1031 exchange properties. Once you have sold you are property, you have 45 days to find a property which you exchange for the one which you have sold. You also only have 180 days from the sale of your property in which to close on the sale of these properties. 1031 exchange properties can be more than one property that you trade for another property.

Hopefully this article on 1031 exchange properties and what to look for has given you a good grasp and introduction to the subject. It is very important to know what type of property you are looking for as well as the kind of timelines you are under.

Ellen writes for Great Hawaii Real Estate where you can find Molokai real estate listings to great Molokai land, homes and condos.

What Properties Can Be Used For a 1031 Exchange?

In addition to the strict time limitations on 1031 Exchanges, there are certain properties that can be used. These properties must satisfy the Internal Revenue guidelines.

The idea behind the 1031 Exchange provision of the Internal Revenue Tax Code is that when a Real Estate property is sold and the proceeds of the sale are used to purchase a property of “like kind”, no real taxable income is being generated. What is actually happening is that no form of investment is being exchanged for another. This allows the tax payment to be deferred.

This is a process that is considered no different than shifting your investment from one fund to another within a 401K or other type of tax deferred retirement fund. In this case, one mutual fund is being sold and the proceeds being used to buy another. The only difference is that while the exchange of mutual funds or other holdings in a retirement fund can be exchanged quickly, Real Estate transactions require a rather longer closing process. This is why taxpayers are allowed 45 days to identify the new property and 180 days to complete the transaction.

What properties can be used for a 1031 Exchange? The property can be just about any form of Real Estate. It is the purpose the Real Estate is being held that determines the suitability of it for inclusion in a 1031 Exchange. The property must be held for a business purpose or another income generating reason. A rental property would be an example of an income generating purpose. The property can also be held for investment purposes. This is a rather general concept, but it no longer applies to a personal residence. Although at one time, a personal residence was considered as being an investment, the Tax Reform Act of 1997 changed this.

It is important to understand the concept of like-kind properties. This does not mean physical similarities at all. It refers to the purpose the property is being held. The 1031 Tax Code does exempt improvements of properties already held by the taxpayer. For example, you could not sell a home used for rental income and use the funds generated to build a new rental home on a vacant lot that you already own. Although this appears to be a like-kind exchange, the ownership of the lot makes it an improvement and not a new purchase.

It is absolutely essential that a tax professional be consulted to insure that the property that is planned to be the exchange property qualifies under the 1031 rules. The Internal Revenue Service will not be sympathetic to good intentions or honest mistakes anymore than they are forgiving of exceeding the time limits for the identification and completion of the transactions. The tax implications of major 1031 Exchanges are quite serious and it is necessary to be very sure of what you are doing every step of the way.

List or view properties for sale by owner at FSBOAmerica.org.