As you have seen by now, I am committing one of my two BLOGS per month to debunking the myths of the 1031 Exchange. If you search online, you’ll find more than 45 different myths. Yes, I have counted them all and I have the list, email me if you’d like for me to forward it to you.
This month, it is more of a misconception of an actual rule.
The first rule of the exchange actually states that you must reinvest in or purchase, a replacement investment property equal to or greater than the sale price of the relinquished investment property. It is the reinvestment requirement where the misconception lies.
You can, in fact, purchase a property for less than the sale price of the relinquished property, it just comes at a “price”. The “price” is, you will be taxed on any amount that was not reinvested. Example, if you sell a property for $2 million and go buy a replacement property for $1.5 million, because you want to retain $500,000 in cash, you can do that, but you will pay full capital gains taxes on that $500,000. The amount you retain or do not reinvest is called “boot”.
Many of my clients will ask me “do I have to reinvest it all or can I keep some cash back because I want to pay off some debt.” The answer is yes you can. I will then ask “how much do you want to retain?” and they will say “I want to keep $500,000 in cash” and I will say “that you will be taxed at the full rate which in most cases, you can figure is about 30% which means you’re only going to get $350,000 of that cash.” That answer usually brings some disappointment because they had planned on spending the whole $500,000.
The good news is that there are better options to getting to the cash that resides within your hard-earned equity, that is provided you do not have to replace any debt on the purchase of your upleg.
If you are in the position to purchase your new property with all cash, then do that. Once the purchase is complete, hold tight about 3 to 6 months, long enough to create a relationship that will appease commercial lenders, then take out that loan for $500,000, all tax free.
As always, it’s highly recommended that you work with a qualified intermediary and consult with your wealth and tax advisors, to ensure that you meet all the necessary regulations and requirements to avoid unintended tax consequences.
If you are an investment property owner who is interested in a no obligation, private consultation, please visit www.Best1031Online.com, or contact James Bean of SVN-Rich Investment Real Estate Partners, CA DRE# 01970580, at 805-779-1031 or email at james.bean@svn.com.
If you are an agent/broker, I am happy to discuss strategies with you on how to best serve your next listing client in preparing them for a successful exchange. Please visit the site and click on the Agent’s button located at the top right-hand corner of the Home Page!
Don’t know what certain terms mean?
Click here for a Glossary of Terms: https://svn-best1031online.com/glossary/
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All information is deemed to be accurate, and not advice. All investors/taxpayers should consult their CPA, tax attorney and investment advisors.