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Sunday, April 26, 2009

Going With A Qualified Intermediary For A 1031 Exchange

By Eric T. Rightley

To start a 1031 Exchange, you first check with their CPA or accountant. You and your CPA need to figure out how much you would have to pay in taxes if you just sold the property outright. Your CPA can determine your adjusted basis in your property. Once your basis is known, you can then determine what the "normal" capital gain tax liability would be; and, also the amount of taxes that would be due to "depreciation recapture", which is currently taxed at maximum rate of 25%. Note: The rate of capital gains taxes is higher for the portion of the gain that is attributable to depreciation.

Likewise, your CPA or accountant will determine how much of the gain relates to normal appreciation from the natural increase in the value of the property. This appreciation is currently taxed at a maximum rate of only 15%. Your CPA will also determine if any state income tax or capital gains tax would be incurred. This would also include municipal tax liability.

After determining all of the tax liability from selling your property, you can decide to sell it outright or to sell it utilizing the tax advantages of a 1031 Exchange. Knowing all of the tax liability helps you to make a clear decision. Normally, the 1031 Exchange will result in a far less tax bill than if you sold the property outright.

The first step in taking advantage of a 1031 Exchange is to contact a Qualified Intermediary. The Qualified Intermediary will advise you of the need for a written purchase agreement signed by you as the seller and your purchaser. This agreement establishes your desire to sell your relinquished property as part of a 1031 Exchange.

It is a good idea to stipulate in your purchase agreement your desire to utilize the 1031 Exchange option. You have established that the purchaser agrees to cooperate with the 1031 Exchange. Also, you have established the groundwork for the closing. For an example of the cooperation clause go to www.1031podcast.com.

Finally, the closing can take pace and your sale will be competed. Once the deed crosses the table to the purchaser, and the net sales proceeds are paid directly to your QI, your 1031 countdown will begin. The day after the closing is considered "Day One" in the 45 day identification period that you have to identify in writing the properties you want to purchase as your replacement property. Also, it is the start of the 180 exchange period that you have to complete the 1031 Exchange and acquire your replacement property.

To sum up, from the beginning the you should first determine what capital gains tax bill (including deprecation recapture and state and local taxes) would be with your CPA or accountant, and decide if doing a 1031 Exchange will benefit you. Next, you should document your intent to sell the property to your purchaser, as well as your desire to complete a 1031 exchange by inserting text in your purchase agreement and contacting a qualified intermediary early - before closing on the sale of your relinquished property.

Having completed your 1031 Exchange, you have started the process of deferring taxes and keeping your money working for you. - 23208

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