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| 1031 Real Estate Exchanges - The Good and Bad! |
One of the most powerful tools in a real estate investor's bag
of tricks is the 1031 Exchange. When used properly it can defer
the tax on capitals gains almost indefinitely.
A 1030 Exchange is really very simple. You don't actually have
to trade one property for other... you just must use the gain
from the sale of a income producing property to buy another
income producing property. There are a few simple rules you must
follow. One rule is that you have to complete the transaction
with in a prescribed time period.
The other requirement of a 1031 Exchange is that you must never
personally touch the money from the sale of the first property.
Certain people and companies are in business to act as |
an
"Intermediary" in exchanges. Their primary job is to collect and
hold the funds from the buyer of the first property and deliver
them to the seller of the property you are acquiring. And that's
where the trouble starts.
In the past few years some Intermediaries have disappeared and
the funds they were holding from many deals vanished along with
them. Often the investor's losses amounted to from hundreds of
thousands to millions of dollars.
Oh yes, there have been other problems. Some Intermediaries
"co-mingle" the monies they are holding for exchangers. That
means that all of their exchange client's money is held in one
account under the Intermediary's name. If the Intermediary is
sued for |
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some reason all money in the account may be frozen. If
the freeze lasts beyond the prescribed time limit (180 days) for
exchanges the investors are out of luck. There are no extensions
possible of the 180 day deadline. Now the investors must pay
income tax on all those capital gains.
With the huge increase in real estate values in many areas
recently, investors should be using 1031 Exchanges. There is
just no better way to protect their profits and build net worth.
But they must also protect those profits from careless
intermediaries.
Make sure that your exchange funds are held in a separate
exchange account that holds only your money and no one else's.
That account must be separate not only from |
other client's
monies, but also separate from the intermediary's assets.
Each of the accounts should have the client's name on it
something like this: "The Exchange Kings, as intermediary for
Barbie and Ken Investor". That account must have the investor's
tax ID or social security number on the account. Now, no matter
what goes wrong with the intermediary, your exchange funds will
remain protected and accessible.
It's great to exchange a property for profit. Just don't
exchange that profit for an unexpected loss.
About the author:
Mark Walters mentors real estate investors with free videos
offered at http://www.CashFlowInstitute.com
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