1031 Exchanges Made Easy
✴1031 Exchange
✴Benefits of a 1031 Exchange
✴1031 Exchange Requirement
✴Time Periods
✴Identification Guidelines
✴The Role of 1031 CORP.
✴Tax Consequences of a 1031
General Rule to Defer All Gain
Generally, in order to defer all gain, you must acquire replacement property equal or greater in value than the net selling price of the relinquished property (contract sales price less routine transaction expenses). The equity in the replacement property must be equal or greater than the net equity in the relinquished property (contract sales price less routine transaction expenses less the mortgage payoff, if applicable). A trade down in value or equity creates a taxable event. You are taxed on the greater trade down (value or equity). A tax consequences worksheet is enclosed to help give you an idea of how an exchange can work in your situation. You should always discuss your situation with a tax and/or legal professional before proceeding with a 1031 exchange.
Pulling Cash out Tax-Free
After the exchange is complete, many advisors believe a loophole in the regulations enables you to refinance and pull cash/equity out of the replacement property, tax-free. Advisors suggest it is wiser to pull the cash out after the exchange is complete than to pull the cash out on the relinquished property prior to or immediately preceding the sale.
Basis of Replacement Property
The basis of the replacement property is lowered by the deferred gain. Essentially, the basis is carried to the new property and increased by any additional property value acquired.
Depreciation of the Replacement Property
The basis of the replacement property acquired in a 1031 exchange is generally the same as that of the relinquished property less any cash received plus any gain recognized. Notice 2000-4 clarified how MACRS replacement property in a 1031 exchange should be depreciated. The MACRS replacement property should be treated in the same manner as the MACRS relinquished property with respect to your basis in the replacement property provided it does not exceed the adjusted basis in your relinquished property. The replacement property is depreciated over the remaining recovery period, and using the same depreciation method and convention as that of the relinquished property. Any excess basis in the replacement property is treated as newly acquired MACRS property. There will generally be at least two different depreciation schedules in place on one asset. Notice 2000-4 applies to properties placed into service on or after January 3, 2000. T.D. 9115 (2/27/04) is a clarification of Notice 2000-4 and gives you the option to elect out of this depreciation treatment.
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