| California: As an investor in real estate you | | | | properties seem consistently more attractive. |
| understand how important it is to preserve your | | | | Those savvy about 1031s can start thinking |
| wealth and assets. In the frequently changing | | | | creatively. For instance, one way to ensure that |
| world of taxation, you are fortunate to have IRC | | | | you see your college-attending child from |
| Section 1031. This tax code allows you to | | | | time-time is to purchase a property in the college |
| exchange from one investment property to | | | | town and hold it as a rental, and do a 1031 |
| another and defer taxes on the gain. This means | | | | exchange after graduation. |
| that a 1031 exchange is a rollover of equity of like | | | | Getting tired of collecting rent and watching your |
| properties, rather than an avoidance of tax. Thus | | | | residential investment property deteriorate from |
| you continue to build wealth through real estate | | | | uncaring tenants? Are you afraid to sell after |
| investment, and maintain your hard earned equity. | | | | making such huge gains in the market? 1031 |
| Any tax liability through inheritance will be limited | | | | exchange will allow you to exchange a residential |
| to gains from the date of the inheritor’s | | | | property for a business, or office rentals with a |
| acquisition, not during the years of ownership. So | | | | better paying clientele. |
| in essence the taxes that are saved now are | | | | Exit Strategy: The lifecycle of a real estate |
| never paid. | | | | investor tends to evolve to the point that one |
| Basically since 1921, there has been an exception | | | | day; the investor would like to slow down, cash |
| in the tax Code that Capital Gain Tax is deferred | | | | out, or retire. Whether the investor owns rental |
| when investment property is | | | | houses, warehouses, land, office buildings, or |
| “exchanged” as opposed to | | | | apartment complexes, a potential replacement |
| “sold.” The policy behind Section 1031 | | | | property could be a well-located, residential |
| is that Taxpayers should be able to dispose of | | | | property in a resort community in an attractive |
| investment or income property and acquire | | | | setting – such as a beach resort or |
| replacement investment or income property | | | | mountain property. |
| without incurring a large cost of sale-the Capital | | | | To qualify for tax-deferred status, if those |
| Gain Tax. This exception has changed very little | | | | properties are purchased through a 1031 |
| since 1921. | | | | exchange transaction, they must be held for |
| These are some helpful tips and investment | | | | investment. To demonstrate the intent to hold for |
| strategies using 1031 exchanges along with other | | | | investment, most investors simply put those |
| 1031 “basics” that you should know | | | | properties on a rental program with a |
| about. The 1031 tax-deferred exchange is much | | | | management company or manage the property |
| more than selling a rental house and then buying | | | | rentals themselves. However, at some point in |
| another rental house. It requires a dedicated focus | | | | the future, that same investor has the |
| and guidance from a knowledgeable real estate | | | | opportunity to employ a very powerful tool |
| professional. Today's sophisticated real estate | | | | known as conversion. |
| investor can impact their portfolio dramatically by | | | | Suppose several years after completing the 1031 |
| employing a variety of 1031 exchange techniques. | | | | exchange, the investor elects to move or retire |
| Why do a 1031 Exchange? No matter how nice | | | | full-time to the beach (or the mountains, lake, or |
| your rental is, no matter how well built, if it's a | | | | golf community.) At the time the investor moves |
| 65-year-old home with three bedrooms and two | | | | into the previously rented investment property, |
| full baths, its closets are probably too small and | | | | no tax obligations are due. The investor simply |
| the kitchen is still decorated in the “I Love | | | | converts a property held for investment into his |
| Lucy” era fashion. There's no great room, | | | | or her primary residence. The ultimate opportunity |
| and no cathedral ceiling. In an era when people eat | | | | comes several years down the road, if and when |
| out or eat quickly, a great dining room has less | | | | the investor decides to sell the newly converted |
| appeal than in the past. Simply put, a lot of | | | | residence. At the time of that sale if the |
| renters are interested in features not found in this | | | | homeowner meets the residence requirements of |
| type home. | | | | ownership, occupies the property for at least two |
| On a personal level none of this bothers us. But in | | | | years, and held that previously 1031 exchanged |
| the contest for good renters -- folks who will be | | | | property for at least five years, he will qualify for |
| caring stewards of the property and pay their | | | | the $250,000 or $500,000 residential sale |
| rent in full and on a timely basis -- newer | | | | exclusion. |