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Flawless Section 1031 Exchanges For Over 28 Years Volume - 7.1 January 2010 |
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| Year End Tax Considerations | |
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| Risk and Reward - Stock vs. Real Estate | |
In a perfect
world your investment portfolio would contain a combination of Real Estate,
Stocks, Bonds, Mutual Funds and Cash providing both long-term and short-term
instruments. Diversification of your assets is key to riding out the peaks
and valleys of investment performance. In today's changing economic
environment, understanding your exposure to risk will ultimately define your
expectations of reward. For many of us, the largest investment in our hands
consists of our primary residence and (hopefully) a market invested
retirement account. More and more retirement accounts consist of real
property in an effort by savvy investors to diversify and protect against
market volatility. Real estate has the advantage of being tangible and easily
understandable; you can see it, touch it and modify it to your own
specifications. All investments go through cycles and what is hot today may
be ice cold tomorrow, just like the weather in New England.
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the rest of the story |
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| Section 1031 Insurance Policy | |
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Entering into a
Section 1031 Exchange should be done with careful consideration of your
overall goals and objectives. The successful completion of an exchange
requires that the old or Relinquished Property be replaced with new or
Replacement Property of equal or greater value. Selecting the new property
takes a certain amount of due diligence. If the goal is to receive only cash
from the sale of commercial/investment property, then an exchange is not the
solution. If however, you want to acquire other real property and relocate
your In situations
where you may not be certain that quality property is available, it is still
advisable to conduct an exchange and use the first 45 days to take a serious
look at replacement property options. This will preserve your right to
complete an exchange, a right that is only available if you enter into an
Exchange Agreement with a Qualified Intermediary (QI) before you close
on the Relinquished Property. Think of this strategy as "1031
insurance." If you are unable to identify Replacement Property
that meets your needs within 45 days, the funds held by the QI will be
released to you, usually less a fee, but without any penalty or additional
tax exposure from the delay in meeting your tax obligations. |
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 With the
election and debate behind us, it is clear that a change in tax policy is on
the horizon in 2009. The Obama administration is committed to implementing
change as soon as possible and that change will undoubtedly include a tax
stimulus package and a new capital gains rate. Even if the new administration
delays its focus on tax policy, the Bush tax cuts are due to die a natural
death on December 31, 2010. If you are heavily invested in real estate the
fear of a rising tax rate should not dictate your overall strategy. As long
as Section 1031 provides a deferral from capital gains taxation, the rate
does not matter. Does it make sense to sell and pay the tax when the rate is
15% or when it is 20% or when it is 25%? Deferral provides an escape hatch no
matter what the rate. It is likely that a rising rate will have the effect of
producing less revenue as taxpayers put off "sell" decisions and
others beat a path to a Qualified Intermediary to handle a Section 1031
Exchange. Reinvesting in real estate is still an excellent choice, it
provides the ability to keep all of your equity working in diverse markets,
improving cash flow and long-term returns. |
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| Case Study #23- "Boot" Proof Strategy | |
 We have landed
on a new strategy to protect our clients from any immediate
taxation on boot
that is left in an exchange either as a result of not being able to re-employ
all of the cash or as a result of the sale of assets not eligible for
exchange treatment. It requires the acquisition of an annuity and
guarantees a steady cash flow to the taxpayer. In this case, our client
sold a property valued at $1.5 million dollars. The property was
exchanged for property valued at $1.25 million dollars. Rather than pay
capital gains tax on the remaining $250,000, our client opted to purchase an
annuity and receive the proceeds over a ten-year time period. Tax will
be due as payments are received but cash flow will be guaranteed. |
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| Case Study #24- Single Tenant TIC Investment | |
Our
client had the opportunity to sell three condo units to a single buyer but did
not want to take the time to scour the countryside locating a new investment.
After discussion of the clients goals and objectives, it was determined that a
small tenancy-in-common property would fit the bill. The likelihood of a
successful exchange was dramatically improved by employing this tactic. A due
diligence package of materials was immediately available for the client to
review, even before the sale of the existing property. Acquiring a match
price was easy and since the client did not have any debt on the Relinquished
Property, there was no need to locate new Replacement Property that carried
debt. A single tenant engaged in a recession proof medical facility
business proved to be an excellent choice. The client sold the old
property and before the 45th day, acquired the new property without the hassles
of making individual inspections or proving Accredited Investor status required
by TIC's sold under the guidance of the SEC. |
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Edmund & Wheeler,
Inc. QI |
| George Foss |
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QINews
©2009 Edmund &
Wheeler, Inc. All rights reserved. Reproduction without permission is strictly
prohibited. |
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QINews
There are two
important year-end Section 1031 
commercial/investment property then an exchange will provide full
deferral of capital gains tax, deferral of previously taken deprecation and,
in all but one state, deferral of state capital gains tax.
Investors of
financial products have for too long relied on the oversight of various regulatory
agencies to provide a safe and sound business environment. The mark of a few
initials (BBB, SEC, FDIC, etc.) has been considered insurance enough that
individual firms are reputable and trustworthy. The 2008 meltdown of the
financial markets has pointed out the inherent risks of assuming too much
without further investigation. The same due diligence that would be
undertaken when selecting an attorney, financial planner, accountant, or bank
should be employed when engaging a Qualified Intermediary (QI) to facilitate
a Section 1031 Exchange.