Certified Title, LLC.

Section 1031 tax deferred exchanges continue to increase in popularity as more investors nationwide discover the wide range of investment objectives that can be easily met through exchanging.

I. PRESERVATION OF EQUITY
A properly structured exchange provides real estate investors with the opportunity to defer 100% of both Federal and State capital gain taxes. This essentially equals an interest-free, no-term loan on taxes due until the property is sold for cashi Often the capital gain taxes are deferred indefinitely because many investors continue to exchange from one property to the next, dramatically increasing the value of their real estate investments with each exchange!

II. LEVERAGE
Many investors exchange from a property where they have a high equity position, or one that is 4free and clear”, into a much more valuable property. A larger property produces more cash flow and provides greater depreciation benefits, which therefore increase the investors’ return on their investment.

III. DIVERSIFICATION
Exchangers have a number of opportunities for diversification through exchanges. One option is to diversify into another geographic region, such as exchanging out of one apartment building in Denver, Colorado, for two additional apartments — one in Los Angeles, California, and the other in Dallas, Texas. Another diversification alternative is acquiring a different property type, such as exchanging from several residential units to a small retail strip center.

IV. MANAGEMENT RELIEF
Some investors accumulate several single family rentals over the years. The ongoing maintenance and management of what can be a far-reaching group of properties can be lessened by exchanging these properties for one property better suited to on-site maintenance and management. Exchanging into a single apartment complex with a resident manager is a good example of this strategy.

V. ESTATE PLANNING
Sometimes a number of family members inherit one large property and disagree about what they want to do with it. Some want to continue holding the investment and some desire to sell it immediately for cash. By exchanging from one large property into several smaller properties, an investor can designate thatr after their death, each heir will receive a different property, which they can either hold or sell.

TAX DEFERRAL AND CAPITAL GAIN CALCULATIONS ARE DIFFERENT
Some real estate investors confuse what is required for full tax deferral in an exchange with calculations involved in determining their accumulated capital gain. The requirements for full tax deferral are different than the capital gain tax and! or basis computations. The formulas for calculating a capital gain tax liability can be found in Asset Preservation’s handout entitled “Calculating Your Capital Gain.”

WHAT ARE THE REQUIREMENTS FOR FULL TAX DEFERRAL IN AN EXCHANGE?
If an Exchanger intends to perform an exchange that is fully tax deferred, they must meet two simple requirements:

1. Reinvest the entire net equity (net proceeds) in one or more replacement properties, AND

2. Acquire one or more replacement properties with the same or a greater amount of debt.

An alternative approach for complete tax deferral is acquiring property of equal or greater value and spending the entire net equity in the acquisition. One exception to the second requirement is that an Exchanger can offset a reduction in debt by adding cash to the replacement property closing.

WHAT IS “BOOT?”
The term “boot” refers to any property received in an exchange that is not considered “like-kind.” Cash boot refers to the receipt of cash. Mortgage boot (also called “debt relief”) is a term describing an Exchanger’s reduction in mortgage liabilities on a replacement property. Any personal property received is also considered boot in a real property exchange transaction.

If the Exchanger receives cash or other property in addition to like-kind property, this may result in a taxable event. To determine the taxes that may be due, several steps are required. First, the Exchanger’s tax advisor must calculate the realized capital gain. Second, the amount of “boot”, money or other property received, along with any depreciation recapture, must be determined. Finally, a tax advisor should always review the Exchanger’s specific situation to see if there are additional tax issues that may offset any current capital gain tax liabilities.

Note: Certified Title Co, LLC cannot give tax and or legal advice. Every taxpayer should review their specific transaction
and potential tax consequences with their own tax and/or legal advisors.