And back to business we go.
I attended a class yesterday on 1031 Exchanges (also referred to as Starker Exchanges sometimes). It was held at the Wrigley Mansion near the Biltmore Hotel (which made me sorry I’d packed my laptop, but neglected to bring my camera, it has gorgeous views) and was taught by a real estate attorney and a CPA.
1031 Exchanges are something I already knew a tiny bit about from my licensing school; but we hadn’t spent enough time on them there for me to really get a good grasp of what they are and how they are useful, so I was very glad I attended this class. I now feel like I know enough to at least be aware of who to contact and who to refer my clients to assistance.
Basically, 1031 Exchanges are a type of real estate transaction used by investors to defer payment of income taxes when they sell an investment property. As I’m sure you know, in the US, we are required to pay both government and state taxes whenever we receive income. Income can consist of things like your salary, winnings from the lottery, or, of course, money made on the sale of a real estate investment. In short, 1031 Exchange allows an investor to sell a property, purchase another ‘like-kind’ property with his profits and put off paying his income taxes on that profit until he is finished investing.
The idea is that the money from the sale of the original property never actually comes into the hands of the seller. It is transfered to a Qualified Intermediary (QI), who will then transfer the money toward the purchase of the new property; thus the ‘exchange’ portion of this deal. It’s about trading properties to get a new investment (similar to stocks: dump what has reached it’s maximum potential to purchase what is still on it’s way up), whether it be two properties for one more expensive one, or one property to buy two cheaper ones. You will eventually pay taxes on the money you’ve made (well… unless of course you die; then your heirs inherit the property free and clear, except for estate taxes), but a 1031 Exchange allows you to delay the inevitable.
That said, the 1031 Exchange comes with a veritable mine-field of rules and regulations. The sucker could blow up at any minute. For instance, the time limits as to when you can do this exchange are very strict. You have 180 days (NOT SIX MONTHS) from the day you close escrow on the property you’ve sold to the expiration of the possibility of a 1031 Exchange, and there are NO EXCEPTIONS. There is also quite a bit of general confusion surrounding properties that are acceptable for a ‘like-kind’ exchange. And don’t forget the mass amount of paperwork, one misstep and it’s all over and done with.
This is why it is very important to have competent people advising and representing you. As your Realtor, I can point you in the correct direction as far as a good real estate attorney, a fabulous QI and a great CPA, because, as you can tell, it practically takes a village.
If you’re an investor or thinking of investing, make sure you are well-informed on the 1031 Exchange, it might be very useful soon.