Will a 1031 Property Exchange
Solve Your Problems |
By Paula Straub |
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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? |
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