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1031 Tax Deferred Exchanges for Texas Real Estate

Tax deferral for Texas real estate and TX Land through the use of 1031 exchanges allows you retain as equity the amount of proceeds that would otherwise be used to pay taxes on the gain. Therefore, you are able to invest in new investment properties that are greater in value because of the additional equity available to you.

There are 6 primary rules that must be followed to meet the strict IRS regulations. Deviation from any of the rules will most likely disallow the use of section 1031 tax deferred exchange.

The 6 primary rules of 1031 exchange are as follows:

  1. Real Property Use: Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.

  2. 45 Day Identification Period: You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.

  3. 180 Day Exchange Period: From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45-day list. Again, there are no exceptions to this deadline.

  4. QI (Qualified Intermediary): The IRS mandates that you use a QI to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it. In essence, you are giving up control of the funds from proceeds of the sale to an independent party. Other names commonly used for a QI are facilitator or accommodator.

  5. Proper Holding Title: You must purchase and take title to your new property exactly as you held title to your old property. In other words, whoever holds title on the previous property must also hold title on the new property.

  6. Reinvestment Requirement: To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all of the cash proceeds from your sale. In other words, to avoid incurring a taxable gain, all proceeds from the sale must be reinvested in a new property of equal or greater value.

How do I know if I have a gain on the property that I am thinking about selling?
It would seem that this question could be simply answered by responding: "If I sell if for more than I paid for it."

However, there are other factors that enter into this equation. What you really want to determine is your "basis" in the investment property. A couple of the factors that might effect the calculation of your basis in the property are capital improvements and depreciation taken on the property. There are many others, but let's look at an example that includes these two factors.

Mr. and Mrs. Texas Hill CountryInvestors bought a rental property that they purchased 3 years ago for $500,000.00. They made capital improvements totaling $100,000.00. In addition, they took depreciation totaling $50,000.00 on their tax returns to date. They are contemplating selling their home for $1,000,000.00.

First, let's calculate their basis as follows:
500,000 Purchase Price
100,000 Capital Improvements
600,000 Total Capital Expenditures
  50,000 Less Accumulated Depreciation
550,000 Current Basis in Investment Property

$550,000.00 is the basis that would be used to calculate the gain that could potentially be deferred through the use of a properly executed 1031 exchange. Therefore, if the investment property sold for $1,000,000.00 (net of commissions and other closing costs), then the potential taxable gain that would be available for deferral through a 1031 exchange would be $450,000.

In conclusion, 1031 exchanges are an effective tool to:
  1. Defer taxes on the sale of investment properties.
  2. Build wealth through the process of purchasing properties with an increasing equity in each subsequent transaction.

There are thousands of IRS rules that cover 1031 exchanges. However, more than 90% of straight 1031 exchanges are covered by the above 6 rules. SAGE is experienced at 1031 exchanges and are happy to assist you in this manner. We also recommend that you consult your tax professional in regards to buying and selling real estate, especially when dealing with 1031 exchange.

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Dale E. Cook, MBA, Broker/Owner

Sage - Premium Texas Real Estate
405 N. Llano St.
Fredericksburg, TX 78624

830-997-1035 office
830-992-0056 cell

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