New Jersey Mortgage and Home Loan Information

Additional Important Points:

These are some FAQs and other important points to ponder considering a 1031 exchange.

• Properties can be in different states
• Any of the 50 - not outside of U.S.
• Time limitations CAN NOT be extended.  (45 and 180)
• A partial 1031 is allowed.
• Trading down, desire to use some proceeds for personal use
• You CAN refinance the new property after the exchange!!  No waiting period.
• You can have a mortgage on the replacement property
• 1031 Exchanges are not always difficult - but they have guidelines that are VERY important. •Any investor can benefit from a 1031 - not just a "big" investor
• The cost of a 1031 could be approximately $600-800 for a simple transaction, and several thousand for a custom or more complex scenario.  Certainly worth the cost.
• You can not "flip" a property and use 1031 - you have to hold the investment property for at least one year.

It is important to note that Steve Kappre is not a tax accountant or an attorney and only offers this information in regards to his personal experience. Consult your personal 1031 exchange consultant for your personal needs and scenario.

Types of 1031 Exchanges

Simultaneous Exchange - When properties are exchanged on the same day.

Delayed Exchange - The most common type, 3 parts:

1. Sale of relinquished property 
2. Identify new property, or properties.  (45 days) 3 Property Rule: 3 properties no matter what the fair market value 200% Rule: Any number of properties as long as the aggregate fair market value does not exceed 200% of the fair market value of all the relinquished properties; 95% Rule: Any number of properties without regard to value - provided 95% of the value of the identified properties are acquired
3. Purchase of replacement property (180 days) must be one or all of previously identified replacement properties.  Taxpayer assigns the purchase contract to Qualified Intermediary who purchases replacement property with the exchange proceeds and facilitates the transfer of property by way of a direct deed from the seller.

Build-to-Suit Exchange - Option to use some or all of exchange proceeds for construction of a replacement property or major improvements to a replacement property. Construction to be included in the exchange must be built and paid for prior to the transfer of the property to the taxpayer.  The 45 day timeframe applies and the desired improvements for the replacement property have to be designated. 

Reverse Exchange - Exercised when the replacement property has to be purchased before the relinquished property is sold.  45 days to designate relinquished property, and 180 days to complete the transaction. Can be complex and as always, an expert QI should be sought out before beginning the transaction.

It is important to note that Steve Kappre is not a tax accountant or an attorney and only offers this information in regards to his personal experience. Consult your personal 1031 exchange consultant for your personal needs and scenario.

Steve Kappre is a Certified Mortgage Planner with Treasury Mortgage, a subsidiary of Aurora Financial Group, serving the South Jersey* area. Steve specializes in;

• All areas concerning First-Time buyers; First-Time Buyer mortgages, grants, down payment assistance, tax credits, police and fire loans, rehab loans for first time buyers, and more.
• Reverse Mortgages for seniors age 62 or older.
• Equity Management strategies for high-end homes and high net worth individuals.

Replacement Property - In a 1031 exchange, a replacement property, or properties, must be designated within 45 days of the sale of relinquished property. The replacement property, or properties, chosen within the 45 days must go to settlement within 180 days of sale of relinquished property.  If not the 1031 is dissolved.  The only penalty is the capital gain tax. 

Example properties - "Like-Kind" is what it is all about.  Like-kind refers to a property's nature or character.  i.e. - Multi-units, apartment complexes, raw land, shopping malls, storage centers, warehouses, parking lots, office buildings, hotels, single family, farms, etc. One may chose any like-kind property or properties to replace his relinquished property

It is important to note that Steve Kappre is not a tax accountant or an attorney and only offers this information in regards to his personal experience. Consult your personal 1031 exchange consultant for your personal needs and scenario.

 

Steve Kappre is a Certified Mortgage Planner with Treasury Mortgage, a subsidiary of Aurora Financial Group, serving the South Jersey* area. Steve specializes in;

• All areas concerning First-Time buyers; First-Time Buyer mortgages, grants, down payment assistance, tax credits, police and fire loans, rehab loans for first time buyers, and more.
• Reverse Mortgages for seniors age 62 or older.
• Equity Management strategies for high-end homes and high net worth individuals. If you would like to subscribe to these updates via e-mail, look into the right column about 3 inches under Steve's picture. There is a yellow box. Enter your e-mail address and click the "Subscribe" button. You will automatically receive these updates regarding New Jersey, South Jersey, Mortgages, Real Estate and other important news.

A Qualified intermediary is a third party that enters into a written agreement with the tax payer, and facilitates the exchange for the taxpayer

• The written agreement between the taxpayer and the intermediary expressly omits the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefits of the money or property held by the intermediary. 
• QI acquires relinquished property, transfers the relinquished property, acquires the replacement property, and transfers it to the seller.
• QI also performs tasks such as paperwork, set-up of holding account, and assuring correct legal actions
• QI does not have to receive or transfer title
• QI to be contacted BEFORE process begins of buy / sell.  Some "custom" 1031 set-ups can be very complicated.

QI places funds from the sale into a separate account just for your transaction. QI also keeps the money "away" from you - if you were to hold the money it would not be in the manner of a 1031 and could be a taxable situation. As with any transaction, make sure you are working with well qualified professionals ... not all QI's are created the same. Also, chosing the wrong QI could be very risky, as they literally could leave with your money.

A qualified intermediary cannot be your agent at the time of the transaction. This includes a person who has been your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period before the transfer of property you give up. (IRS Publication 544)

It is important to note that Steve Kappre is not a tax accountant or an attorney and only offers this information in regards to his personal experience. Consult your personal 1031 exchange consultant for your personal needs and scenario.

1031 Exchanges offer benefits to real estate investors. 

"In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment..." -(IRS Publication 544)

In a 1031 a seller may be...

• An individual
• Married couple
• LLC
• Corporations
• Partnerships *
• "Tenants in common" vs. Partnership

It is important that the party relinquishing the property be the same party that acquires the new property. 

Scenarios that wouldn't work...

• Husband and wife relinquishing investment and just wife acquiring replacement property
• LLC relinquishing investment and a member of the LLC acquiring replacement property

* Example issue: a husband that owns a property solely and wishes to exercise 1031 - may have to have his wife sign for lender requirements on title - this would nullify the 1031 and create a taxable situation.

It is important to note that Steve Kappre is not a tax accountant or an attorney and only offers this information in regards to his personal experience. Consult your personal 1031 exchange consultant for your personal needs and scenario.

Where did the 1031 Exchange get its fancy name from?

The fancy name is taken from IRS code 1031. In a nutshell here is what a 1031 allows; when executing the sale/purchase of an investment property via a 1031 exchange, a taxpayer is allowed to defer capital gain taxes on like-kind exchanges. All properties utilized in a 1031 must be used for investment purposes.

Under normal circumstances, selling an investment property would bring upon a capital gain tax.  To properly execute a 1031 exchange, you will need a Qualified Intermediary (QI).  A QI is a third party that receives the proceeds of the investment property sale and holds them until a new investment property is purchased.

In short the entire process works like this: 

1. A seller hires a Qualified Intermediary.
2. Seller sells investment property (relinquished) and designates new investment property (replacement). 
3. QI uses proceeds from sale to purchase replacement property.  Under normal circumstances all capital gain tax is avoided.
4. Replacement property is deeded over to investor.

This is an overview.  Soon we will discuss in detail what like-kind exchanges are, the strict time frames for buying and selling, who a QI can and can not be, alternate ways to utilize a 1031, and more. 

If you are a real estate professional such as a Realtor, lender, title clerk, appraiser, etc. you need to be aware of the 1031 exchange.

If you are an investor, even an investor with just one property such as a single family rental (which is becoming much more common with lease-to-purchase options, prior owner occupied properties becoming rentals, etc.), you need to have a fairly decent knowledge of how to utilize a 1031 exchange.  It will save $1,000's +

Come back for our second part where we will go into more detail on how to properly utilize a 1031. 

- Steve Kappre, Certified Mortgage Planner

 

  

It is important to note that Steve Kappre is not a tax accountant or an attorney and only offers this information in regards to his personal experience. Consult your personal 1031 exchange consultant for your personal needs and scenario.