Rochelle
Stone and John Mangham of Starker Services Inc. in Los
Gatos, Calif., share these tips on how to avoid common
legal mistakes in 1031 exchanges.
| 1. |
Do know
how to count. Like-kind exchange rules allow 180 days
to complete the transaction, which includes the 45
days for the identification of a replacement property.
Weekends and holidays count, and no extensions are
granted, so don’t get it wrong. |
| |
|
| 2. |
Don’t
assume a second home qualifies for an exchange. Vacation
property must be an investment (which means you don’t
live there for more than 14 days a year or 10 percent
of the time it’s rented) or used in a trade or business
to qualify for a 1031 exchange. |
| |
|
| 3. |
Do exchange
for a property equal or greater in value. If your
client exchanges for a property of lesser value, the
unspent money will be taxable as capital gains. |
| |
|
| 4. |
Do replace
your debt. Taking out a mortgage at a lower level
during an exchange creates a taxable event. If your
clients want a lower mortgage payment, they have to
bring cash to the transactions. |
| |
|
| 5. |
Don’t
ignore recapture. Any depreciation an investor has
previously taken must be deducted from the basis of
the property before calculating any gain. |
| |
|
| 6. |
Don’t
forget to set up the exchange before the transaction
closes. You need to include a stipulation in the purchase
agreement so that the funds from a property’s sale
transfer to a qualified intermediary instead of to
the sellers during the closing. |
| |
|
| 7. |
Do give
the buyers and exchangers a refund on any earnest
money advanced from their own cash for a property
that is later transferred through a 1031 exchange.
This refund will come from the intermediary, who will
replace the amount with exchange funds. |
| |
|
BY
The National Association of Realtors®
Real
Estate Vocabulary Builder:
Deed in trust
An instrument that grants a trustee under a land trust
full power to sell, mortgage and subdivide a parcel of
real estate where the beneficiary controls the trustee's
use of these powers under the trust agreement provisions.
Seed
money
The money needed to acquire or control a site, to obtain
zoning, to do a feasibility study, etc. that is needed
to begin a project.
If you would like to suggest a topic for comment in one
of our future emailers, please let me know. You can always
reach me at rory@coakleyrealty.com
or by phone 240-696-6634. I look forward to hearing from
you!
Rory
S. Coakley
Coakley Realty, Inc.
20 Courthouse Square - Suite 106
Rockville, MD 20850
www.coakleyrealty.com
