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1031 Exchange
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Other Tax Deferred Vehicles
To List An Income Producing Property That Would Qualify For A 1031 Exchange For Free, Go To: http://www.mtgbuy.com/ExchangeProperties
There seem to be two main Tax Deferred Vehicles available today.
1) 1031 Exchange--This allows you to buy,sell and hold an investment property and still be able to take advantage of the great depreciation that investment property allows for tax benefits
2) The second Tax Deferred Vehicle is a self directed IRA which once set up is relatively easy to use. Generally these are used when an investor is NOT holding the property very long and depreciation is not a factor
We have asked two prestigious companies who specialize in these two tax deferred vehicles to write the articles below for your benefit. We suggest you contact them directly for more information
Self Directed IRA
What are the benefits of a self directed IRA? How does it compare to the 1031 Tax deferred exchange? When I refer to a self directed IRA, I use the term IRA interchangeable between a Traditional, Roth or any employer sponsored plans like a SEP, Simple or Individual 401k each of the these accounts can be self directed.
First, what is a self directed IRA? Most IRA’s are in fact self directed, if you think about it, you have an account with a security firm such as E-Trade, you decide what you want to invest in and call, e-mail or go on line to execute the purchase order.
The difference in a truly self directed IRA is the available investment choices. With security firms you have the traditional stocks, bonds or mutual funds. With Entrust Carolinas you have a world of choices in non-traditional assets, including real estate, private stock offerings, membership interest’s in LLC’s, hard money lending, business’s, loan money secured or unsecured, and with the proper structure you can even buy a business with your retirement plan and earn a salary from the business. There are many more options, truly a world of choices.
When the direct transfer of funds is completed between your current custodian and Entrust Carolinas there is not a tax consequence to the transfer.
With an Entrust Carolinas’ self directed IRA, the process starts with a letter of direction telling us what asset you what to purchase. We then deal with the attorney, real estate broker and all parties involved to make sure all the documents are vested in the name of your IRA .As the beneficiary of the IRA, you authorize us to sign the documents on behalf of the IRA. The transaction is now closed and your IRA owns the asset you choose to invest in.
When you decide to sell the asset, you send a letter of direction to Entrust Carolinas with the instructions to sign the documents to sell. When the transaction closes, all cash proceeds are sent to the IRA. If you choose a Roth IRA for the investment you will never pay any taxes. If you choose a traditional IRA, you will pay no taxes until the withdrawal of the profit from your IRA. In both cases the profit will continue to compound tax free.
With the 1031 exchange you do not sell a property, you exchange for a like kind property. The law is section 1031 of the IRC, the benefit for the exchanger is the deferral of income taxes on the profit which allows for all the profits to grow tax deferred.
A like kind property is not a house for a house; it can be a house for land, commercial center, or apartment buildings, basically any real estate for any other real estate.
Both the Entrust Carolinas self directed IRA and the 1031 exchange are complimentary vehicles to grow your wealth by deferring taxes with the 1031 exchange, or traditional IRA, or in the case of a Roth IRA not paying taxes at all.
This article is courtesy of Jim Hitt, CEO of Entrust Carolinas, LLC www.entrustcarolinas.com Jim has 34 years in the real estate business as an investor and broker. Jim can be reached at 1-866-7500-IRA (472) or jimhitt@entrustcarolinas.com
The foregoing information is intended as a basic guide in understanding the different tax deferred vehicles available to help you build and grow your wealth. It is not intended nor should it be taken so as the final authority on all such matters and we recommend you speak to a tax professional before doing anything.
To List An Income Producing Property That Would Qualify For A 1031 Exchange For Free, Go To:
http://www.mtgbuy.com/PropertyListings
Most Common Questions
Copyright 2000, Starker Services, Inc. (800) 332-1031 •
http://www.starker.com/
SHOULD MY CLIENT CONSIDER AN EXCHANGE?
This is an individual decision based on the investor’s overall retirement plan and investment goals. Although they may have a financial or tax advisor, ultimately the taxpayer will be writing the check to the Internal Revenue Service if they decide to sell and pay the capital gains tax.
WHAT IS CAPITAL GAINS TAX?
Capital gains is the difference between what a property sells for and the ‘adjusted basis’ in the property. To put it simply, when investment property is purchased, the purchase price becomes the initial cost basis. If your client makes capital improvements to the property, the cost of those improvments will increase the basis in the property, adjusting the basis upwards. Depreciation is a benefit to owning investment property which allows for a yearly deduction of a portion of the value of the property improvements.
Depreciation cannot be taken on land. Any depreciation taken is a reduction in the basis of the property.
ISN’TCAPITAL GAINS TAX ONLY 15%?
No. Gain from appreciation (the increase in your client’s property value) is taxable currently at a maximum of 15%. However, the gain from the depreciation is taxed at 25%. In addition, most states will charge state tax as well.
WHAT IS THE DIFFERENCE BETWEEN A SALE AND AN EXCHANGE?
A sale is an exchange of property for cash or other property which is not “like-kind” to real estate and therefore taxable. An exchange is a non-taxable sale because the taxpayer will sell investment property and replace it with property which is like-kind.
WHAT DOES LIKE KIND MEAN?
IRC §1031(a)(1) allows for the exchange of property held for productive use in a trade or business or for investment for like-kind replacement property. A myriad of court cases and IRS rulings have established the definition of “like-kind” real estate to be very broad. Examples of like-kind property include single-family rentals, multi-unit housing, commercial or industrial properties, ranches, and bare land. Provided a property has not been personally used, such as a principal residence or second home, it should qualify for exchange treatment.
WHAT IS A TAX DEFERRED EXCHANGE?
Internal Revenue Code Section 1031 allows taxpayers the opportunity to defer taxes owed upon the sale of investment or income property by exchanging the property for other like-kind property. Certain guidelines must be followed
WILL MY CLIENT BE AUDITED BY DOING AN EXCHANGE?
No more than if they just sold the property. The tax deferred exchange has been a part of the Tax Code in one form or another since 1921. Just like Individual Retirement Accounts (IRA’s), if your client follows the rules and guidlelines, thelaw allows for tax deferral until the property is ultimately sold and your client receives cash..
WHAT’S THE BENEFIT IF MY CLIENT WILL EVENTUALLY HAVE TO PAY THE TAXES ANYWAY?
With proper estate planning, your client may never pay capital gains tax! There are many tax-planning vehicles that allow taxpayers to relinquish their low basis assets (such as real estate) without paying taxes. Gifts to loved ones, charitable contributions, and certain irrevocable trusts are just a few options available to savvy taxpayers.
Even without a complex estate scheme, a client who exchanges instead of sells will benefit their heirs once they pass away. Any property included in a decendant’s gross estate will be transferred to their heirs with a basis “stepped-up” to fair market value.
This means that all capital gains in the property will be wiped away provided the estate’s value does not exceed the statutory exclusion limitations.
To List An Income Producing Property That Would Qualify For A 1031 Exchange For Free, Go To:
http://www.mtgbuy.com/PropertyListings
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