What is a 1031 Tax Deffered Exchange?

There are three types of 1031 tax deferred exchanges that can take place:

1.) Straight exchanges—two parties trade properties of equal or approximate value. This is the simplest exchange.

2.) Multi-party exchanges—this involves three or more parties buying, selling, or exchanging properties. Don't attempt these exchanges without the aid of a tax professional; they tend to be very complex.

3.) Delayed exchanges—this exchange allows the sale of the relinquished property and the buying of the replacement property to occur at different times as long as stringent rules are followed.This is the exchange most often used.

What's the Advantage of the 1031 in Terms of Taxes?

As the law's title indicates, the capital gains tax is deferred, but not eliminated. However deferral is a great way to leverage small real estate holdings into larger ones! Since you can postpone gains, you're able to use a tax-deferred exchange strategy to transfer equity to a larger property, all without paying taxes!

Another advantage is that there’s no limit on exchanges. This means you can make as many exchanges as you want! So, over the course of your lifetime, you can keep growing income and appreciation by adding new properties without having to pay the capital gains tax!

If you specialize in buying and renovating properties and want to keep reinvesting your profits into larger properties, then this strategy is especially attractive.

Note: If you don’t keep reinvesting, you risk being classified as a real estate dealer by the IRS and will not be able to participate in exchanges.

What Are the Basic 1031 Qualification Rules?

There are some basic rules that must be followed in order to qualify for a 1031 exchange. These include the following:

1.) The properties to be exchanged must be located in the United States. Note: You can exchange foreign property for foreign property and domestic for domestic. However, you can’t mix these exchanges together.

2.) You must trade only like-kind real estate.

3.) An exchange must be made that’s equal to or greater in both value and equity. Any cash or debt relief received above this amount is considered “boot” and is taxable.

4.) The like-kind property must be identified within 45 days of the closing on the initial property.

5.) All proceeds from the initial sale must be turned over to a"qualified intermediary" (also called a QI, facilitator, exchanger, etc.) who is the person or company playing the role of middleman.

6.) Any of the proceeds not under the control of the middleman are subject to taxation.

7.) The middleman holds the funds from the initial property in escrow until such time as the closing on the second property occurs.

8.) The middleman also assists the owner with the preparation of paperwork and other services to ensure the transaction progresses in a smooth manner.

9.) The closing on the second property must take place within 180 days following the close on the first property.

Wow, as you can tell, this is pretty complex subject and can't completely covered here! But if you're an investor or plan to be one, I hope I whetted your appetite for this subject.

And please, if you have any further questions, feel free to call me! I'd love to tell you more!

Happy Holidays!

We would like to wish you and your family a happy holidays! Thank you for all your past business and the referrals you have sent us as well as supporting our video blog. Remember us for any of your real estate needs and have a great and safe new year. See you in 2011! Now please enjoy this article about bi-weekly mortgages.

Are Bi-Weekly Mortgage Payments Worth the Time and Effort?

In most cases, yes! It’s essentially a process by which you make extra payments on your mortgage. That way, you save interest costs and pay off the loan faster.

How Does It Work?

You make a payment to your lender every two weeks instead of once a month. This means that each payment is equal to half of the monthly amount due. The result – you’re paying the equivalent of 13 full payments rather than the usual 12.

It gets even better! The full amount of the extra payment is applied toward the principal. And because the principal balance is the amount on which interest is calculated, paying down principal results in a reduction in accrued interest!

Let’s look a traditional payment monthly schedule vs. a bi-weekly schedule so you can see exactly how it works.

Example 1: Traditional monthly payments

Let’s assume you have a loan balance of $250,000 with a 6 percent interest rate and a 30-year loan term. In this example, your monthly payments are $1,498.88. So, over the life of the loan, you’d pay a total interest of about $289,595.

Example 2: Bi-weekly payments

Using the same loan balance and terms described above, the difference would be the following:

• $749.44 paid every two weeks

• About $225,490 paid in total interest

• This results in a savings of more than $64,000 in interest!

• In addition, the loan is paid off in 24 rather than 30 years

Bi-monthly payments are still a good strategy if you’re an individual who doesn’t plan to keep your house for 24 or 30 years. Why? Because bi-weekly payments still reduce principle, even over a short period of time.

For example, in the first year, the principle is reduced by nearly $1,600. And, at the end of the fifth year, the principle amount has been reduced by about $9,000!

How Do I Arrange Bi-Weekly Payments?

The first task is to contact lenders to find out if they do offer a bi-weekly payment schedule.

If they offer one, ask what the participation requirements are. In typical situations, lenders require you to have payments automatically withdrawn from your bank account since they dislike processing checks every two weeks.

Often, it’s the case that a one-time fee is charged for this service. The fee can be minimal or be in the several-hundred-dollar range, depending on the lender.

So, after all these benefits, how can there possibly be disadvantages to bi-weekly mortgage payments?

Well, the first disadvantage relates to a situation I mentioned above - the lender’s fee is very expensive for the service provided. In such a case, the costs may outweigh or cut down your overall savings.

A second disadvantage occurs when paying bi-weekly is too hard on your budget. Upfront, you need to make sure that you have the money available for the increased payments.

The final potential disadvantage relates to the length of time you plan to stay in your home. That can affect your overall savings on interest.

I recommend that you weigh the pros and cons of bi-weekly mortgage payments by using one of the many online calculators. Just enter your numbers and the calculator will give you a comparison.

If you’d like the assistance of an expert on the subject, contact us immediately!