In a 1031 exchange, you don’t want to buy down in value because then you aren’t continuing your investment into a property of equivalent or greater value.
You also want to avoid taking cash or other non-like-kind property during a 1031 exchange. Let’s say someone wants to buy your $20 million property that you own free and clear, but they’re having a hard time getting financing so they ask if you’ll entertain a contract for deed where they give you $2 million down and $18 million over time.
If you want to do a 1031 exchange you need to buy a property of equal or greater value and equity. If you sell on a contract for deed, you might be shooting yourself in the foot on the ability to do a 1031 exchange. In year one of an installment sale, you get to trigger all of the depreciation recapture. If you took that contract for deed deal, by the time you’re done paying your real estate commissions and recaptured depreciation, your downstroke may be gone. Don’t do seller-backed financing if you want to do a 1031 exchange.
Another potential 1031 problem is not adequately offsetting debt relief. When you sell your relinquished property, they pay off the old mortgage. In order to completely defer your gains in a 1031 exchange, you are expected to acquire a property of equivalent or greater value, equity, and debt. There are two ways to approach this debt relief issue:
Take out a new mortgage on the replacement property.
Bring cash to the closing table to offset the debt.
Most people opt for option one because they don’t have sufficient cash on hand.
Many people fail to consider the debt offset element in a 1031 exchange and that makes it much more difficult to defer 100% of the capital gains taxes.
Section 1031 – A Tax-Saving Tool
Section 1031 is a powerful provision in the tax code that allows you to save money when selling investment or business real estate. Find out if a 1031 exchange is a good fit for your property by contacting a 1031 exchange company like CPEC1031, LLC. Our qualified intermediaries have more than twenty years of experience in the 1031 exchange industry. We can walk you through the entire process from beginning to end and make sure you hit all the necessary deadlines and benchmarks along the way.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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