Home | Ask Your Question | Mortgage Glossary
Find me a lender for:  
Will a 1031 Property Exchange Solve Your Problems? By Paula Straub

If your problem is listed below, a 1031 exchange may or may not be your solution.

1. Are you a landlord that doesn't want to manage property anymore?

2. Do you want to sell your investment property, but don't want to pay huge amounts of Capital Gains Tax?

3. Is your current income property not producing enough income?

4. Do you have a low adjusted basis and not much debt on your rental?

5. Is your credit rating less than perfect?

If you answered yes to any of the above 5 questions, a traditional 1031 property exchange into another like-kind property might just put you right back to square one!

Let's address each of the 5 problems one at a time.

1. If you exchange your current property for another of equal or greater value you still are faced with the same landlord/tenant problems that you currently have. Sure, you could hire a property manager, but why is it that you currently don't have one?

2. A 1031 property exchange into a like-kind property does defer the payment of Capital Gains tax if you carry over all your equity and at least the same amount of debt. However, since your new property costs you at least as much as you sold the last for, your property taxes will most likely increase. The cost of your new investment has probably just gone up.

3. If your positive cash flow is currently nothing to write home about, your new property will have to justify higher rents, be located in an area with lower property tax, or have fewer maintenance costs. Otherwise, the chances of additional passive income are very slim.

4. Your adjusted basis will carry over as is to the new property, so you will receive the same depreciation benefits as on the prior property, unless you pay more for your exchanged property. Most likely a wash.

5. A poor credit score may result in a higher interest rate or poorer terms on your new mortgage, assuming you don't own your current property free and clear. Again, this translates into higher ownership costs. You will also pay two sets of closing costs in the transaction.

One more thing to consider is the time it may take to sell your current property, find a replacement property and secure all funding. This must be done within the 1031 specific time frames. Think of the times that escrows have fallen through and loans have dragged on forever and sometimes never closed at all.

Considering your dilemma and possible pros and cons, will a 1031 property exchange put you farther ahead, further behind, or at best put you right back in the same boat you are in now?

If the answer to the last question was not "farther ahead", let me suggest that you look into a 1031 exchange that has a slightly different twist.

It's called a 1031 exchange into a tenant in common property. This might just put you in the "farther ahead" category and solve many of your problems. Instead of exchanging into another solely owned investment property, you will get a fractional proportionate share of an A grade commercial property. You will have a deeded interest equal to your share of ownership (your exchange amount).

If done properly:

1. You will no longer be responsible for the property management

2. All capital gains will be deferred.

3. You can get a contractual monthly income from the equity transferred (usually 6-7%)

4. Your carryover basis is the same, but you can acquire extra non- recourse debt without qualifying and receive a higher interest deduction on your monthly income, thus making it less taxable.

5. The debt you acquire with the TIC (assuming your debt/equity ratio is within the accepted guidelines does not require you to obtain a mortgage or pay it down. This is called non-recourse debt. Your credit score does not become a factor, and the closing can be done in a matter of days, not weeks or months.

Now, ask your self again. Would a 1031 exchange into a tenant in common solve your problems? If the answer is "yes", what are you waiting for?

How much would you pay to save thousands in Capital GainsTax? I'll teach you for free in a Teleconference that may change your life. Sign up at ==> http://www.savegainstax.com - Defer Capital Gains Tax

See Also:

Secrets of Making Money from Real Estate - Part 4
Analyzing and finding the right property deals:Firstly read my other article on how to Buy the property at a discount, this will cover the basics on how to buy property at a lower than market value price. This is very important because It can completely change the aspects and financing the deal. It ... more...

What is Tax-Deferred Exchange?
Under Section 1031 of the Internal Revenue Code, owners of real estate held for investment or use in a trade or business can swap their property tax-free for "like-kind" real estate. Exchanges are made for people wanting to stay invested in real estate, increase their leverage and to avoid paying ... more...

List Your Property Correctly & Make More Money!
Selling Real Estate is an ART - not mathematical rocket science. There are no rules, no absolutes, no equations to determine an exact price in most cases, and no way to determine the time needed to sell the property, or where to find the buyer.There are however lots of tips and techniques that can ... more...

6 REASONS for Investing in Florida Real Estate Investment Property NOW
I invite you to take the next few minutes to learn the truth about the real estate market, how it compares to other methods of building assets and why it is such a lucrative form of investing. Many potential investors will say, 'I need to get into the Florida Investment Property market', especially ... more...

More on property...

Search More Info On:

  • Property
  • Property Tax
  • Rental Property
  • Credit Problems
  • Property Value
  • Cash Flow Property

    Shop For Your Mortgage Now!
    Shop For Your Mortgage Now!

    You'll be re-directed to Top-Lenders.com

    Want to Know Your Rate?
    Get Customized Mortgage Quote Instantly

    ExplainingMortgages © 2005 - 2009