The Tax-Free Exchange Loophole: How Real Estate Investors Can Profit from the 1031 Exchange

Overview

Discover the Greatest Investment Tool of All Time!

The tax breaks and loopholes built into real estate make it one of the most profitable investments in the world. In fact, the real estate tax exchange loophole—known as the 1031 Exchange—is one of the greatest tax loopholes in existence. This loophole allows a real estate investor to sell a property without paying a penny in capital gains tax—as long as the investor reinvests his or her profits into another property. Not only is...

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Overview

Discover the Greatest Investment Tool of All Time!

The tax breaks and loopholes built into real estate make it one of the most profitable investments in the world. In fact, the real estate tax exchange loophole—known as the 1031 Exchange—is one of the greatest tax loopholes in existence. This loophole allows a real estate investor to sell a property without paying a penny in capital gains tax—as long as the investor reinvests his or her profits into another property. Not only is this a great way to invest without paying taxes, it's also a great way to grow real wealth over time. The rules can be confusing, but tax exchange works for every investor, big or small. This handy guide offers detailed, step-by-step advice on using the 1031 Exchange—and much more:

  • How the capital gains tax works
  • Other little-known real estate loopholes
  • Creative real estate financing techniques
  • Advanced elements of tax-free exchanges
  • Terms and concepts you need to know
  • Eight things that can hold up a closing
  • Transferring debt to other properties
  • How zoning laws affect your investments
  • How tax-free exchanges affect your tax shelter
  • Where to find potential exchanges
  • Twelve creative techniques applied to exchanges
  • Nine booby traps to watch out for in exchanges

Don't wait—use the 1031 Exchange to start building your fortune today!

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Product Details

  • ISBN-13: 9780471695783
  • Publisher: Wiley
  • Publication date: 3/25/2005
  • Edition number: 1
  • Pages: 304
  • Sales rank: 650,909
  • Product dimensions: 6.36 (w) x 9.18 (h) x 1.11 (d)

Meet the Author

JACK CUMMINGS is a partner in the Fort Lauderdale–based firm Cummings Realty, Inc., a consulting firm for real estate developers and marketing companies specializing in hotel, time-share, and large project marketing. He is widely published in the field of real estate investing, financing, and marketing, and is the author of the classic Real Estate Finance and Investment Manual.
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Table of Contents

INTRODUCTION xvii

Financial Independence Is Just around the Corner xvii

There’s Magic in Real Estate xviii

CHAPTER 1 How to Use This Book to Maximize Your Real Estate Investment Profits 1

Pretax Investment Value 3

Brad’s Transaction 3

Boot Paid or Received 6

Eight Causes of Boot 7

Tax Basis 10

Net Operating Income 14

Charlene’s Deal 15

Amortization 19

Interest-Only Payments with Final

Payoff at Future Date 20

Zero Principal with Discounted Interest Paid 20

Reverse Mortgage 21

Equal Payments of Principal and Interest Combined 22

Other Features 23

Balloon Mortgage 24

Estate Taxes 24

Planning and Zoning 25

Comfort Zone 26

CHAPTER 2 The Real Estate Insider’s Bag of Loopholes 27

Easy Access to Information 28

Toxic Sources of Pollution 28

Finding the Owner of a Specific Property 29

Other Property Owned in a Specific Name 33

Ownership History of a Specific Property 33

Determining the Legal Description of the Property 33

Discovering the Sales History for the Entire Neighborhood 34

All Property Listed by Local Realtors 35

Tax Appraisals 37

Size and Shape of a Property 38

Zoning 39

Allowed Use 45

Other Important Factors 46

Why the United States Is Such a Great Place for Real Estate Investments 48

Great Investment Environment 48

Capital Gains Tax Treatment 50

Residential Gain Exclusion 51

Installment Sale Treatment 53

IRC 1031—Tax-Free Rollover of Investment Capital 56

CHAPTER 3 How to Put the IRS on Your Side for a Change 57

Introduction to IRC 1031 58

Like-Kind Properties 63

The 1031 Clock 65

Jake’s Exchange 65

Replacement Property 68

The Three-Property Rule 68

The 200 Percent Rule 69

Benefits and Burdens 69

Assumption of Liabilities 70

Havers and Takers 71

How Tax Laws Are Interpreted 72

How You Can Become an Insider to Real Estate Exchanging 72

Where the Insiders Hang Out 74

Rediscover the Oldest Game in Town—Barter and Exchange 75

CHAPTER 4 The Nitty Gritty of IRS Tax Loopholes 77

Parties to the Exchange 78

The First Player 78

The Second Player 81

The Third Player 81

The Fourth Player 81

Special Caution to the First Player 82

Starker Exchange 82

Reverse Exchange 83

Frank’s Reverse Exchange 83

Intent to Exchange 84

Kevin’s Exchange 85

Eight Things That Can Hold Up a Closing 86

Safe Harbors 87

Why Not All Tax-Free Exchanges Are Free of Tax 87

Election Is Made Not to Use Section 1031 Rules 87

There Is Net Mortgage Relief 88

A Portion of the Exchange Is Cash or Nonqualifying Real or Personal Property 90

Application of State Law That Conflicts with IRC Section 1031 92

Absolute Dread and Fear of IRS 92

CHAPTER 5 How a 1031 Exchange Will Put Money into Your Pocket 93

The Exchange Web 94

Slide Debt to Other Property 94

Charlie’s Sliding Mortgage 95

Legs 97

The Exchange Presentation 99

Owner’s Value of Property 100

Total Debt on Property 100

Owner’s Equity in Property 101

Motivation to Sell or Exchange 101

Area and Category of Properties Desired 101

Positives and Negatives of Property 102

Financial Data (If an Income-

Producing Property) 102

Photos of Property 103

General Demographic Information 103

Maps and Other Data 103

Offers to Exchange 104

Dan’s Mini-Offer 104

Balance Exchange Equities 108

Cash 108

Mortgages 108

Note 109

Other Property 109

Personal Property 109

Other Values 110

Two Examples of Equity Balances 110

Use an Exchange as a Buyer’s Tool 113

George’s Assets 113

Ten Steps Available to George 113

Use an Exchange as a Seller’s Tool 117

Be a Proactive Seller 117

Expand Your Available Inventory 118

Entice a Buyer to Consider Your Property 118

Replace a Big Problem with a Small One 119

Move Closer to the Desired Goal 119

CHAPTER 6 Advanced Elements of the Tax-Free Exchange 121

Date the 1031 Clock Should Start 123

Constructive Receipt 125

FIRPTA 125

State Laws versus Federal Laws 126

Foreign Property 127

Effect of a 1031 Exchange on

Your Tax Shelter 128

Example of Depreciation 129

Value of the Shelter 130

Compare a 1031 Exchange to a Sale 131

Setting the Ground Rules 131

Examining Jacob and Eva’s Transaction 134

CHAPTER 7 How to Make a One-on-One Exchange 141

Value versus Marketability 142

Dual Values 146

Justifying Value 146

Tax Appraisal Value 150

Lender’s Appraisal 150

Common Area Maintenance (CAM) 151

The Five Steps to Making an Exchange 152

1. Establish Your Goals 152

2. Understand Interim Goals 152

3. Form Target Goals 153

4. First 16 Weeks of Your Goal Formation Process 154

5. Understanding the Common Elements of All Goals 155

Where to Find Potential Exchanges 155

Motivated Sellers 156

Owners of Free and Clear Properties 157

Owners of Problem Properties 158

Owners with Problem Partners 158

Sellers with Difficult-to-Sell Real Estate 159

High-Profit Sellers 159

Exchange Clubs 160

Local Realtors 160

Buyers without Sufficient Cash to Buy

Your Property 161

CHAPTER 8 How Real Estate Exchanges Work 163

Importance of Timely and Effective Due Diligence 164

Cold Turkey Due Diligence 164

What Comes First, the Chicken or the Egg? 164

Importance of Timing 165

When Do You Go Hard? 165

Outside the Comfort Box 166

Greener Grass Syndrome 167

Expanding Your Horizons and Options with Exchanges 167

Eight Things You Have That You Can Exchange 168

Eight Motivations of Exchanges 174

Tax-Free Benefits 174

Added Revenue from Lost Time 175

Preforeclosure Exchange 175

Down and Then Out Exchange 176

Opening Closed Doors 177

Face-Saving Steps 178

“Why Not” Exchange 179

Spring-Cleaning Exchange 180

Enter the World of Barter 181

The Good, the Bad, and the Ugly of Barter Clubs 181

CHAPTER 9 Thirteen Creative Techniques Applied to Exchanges 185

Creative Financing 186

Tenant-in-Common Interests 187

Thirteen Creative Techniques for Exchanges 188

Accommodation Exchange 189

Paper Exchange 192

Pyramid Exchange 193

Double Exchange 195

Future Exchange 198

Mixed Bag Exchange 201

Sweat Equity Exchange 205

“No Sweat Off My Brow” Exchange 206

Prepaid Rent Exchange 208

Leaseback Exchange 210

Personal Property Exchange 212

Commission Exchange 213

Tenant-in-Common Exchange 215

CHAPTER 10 Booby Traps That Await You in Exchanges 221

Your Investment Team 222

A Good Lawyer 222

An Accountant 223

Title Insurance Company 223

Inspection Teams 223

Section 1031 Facilitator 224

Real Estate Agents 225

Maps Galore 225

Important Elements You Must Double-Check Prior to Closing 226

It’s Wonderful How Difficult It Really Is 227

Nine Booby Traps to Look Out For in Making Exchanges 227

Failure to Report 228

Violation of FIRPTA 228

Greener Grass Syndrome 229

Overpriced Property 230

Mortgages and Leases of Convenience 231

The Phantom 233

Accountants and Lawyers—Yours and Theirs 235

Sloppy Contracts 237

Nonstandard Standard-Looking Contract Forms 239

CHAPTER 11 Closing Section 1031 Exchanges:The Qualified Intermediary’s Point of View 241

Acknowledgment of Contribution for This Section 241

Introduction 242

The Qualified Intermediary 243

Disqualified Parties 244

Using Principals as the Intermediary 245

Baird Exchange—The Seller as the Accommodator 245

Alderson Exchange—The Buyer as the Accommodator 245

Alderson or Baird Exchanges 247

The Professional Intermediary 248

When to Use an Intermediary 248

Simultaneous Exchanges 248

Delayed Exchanges 249

Responsibilities of Intermediary 251

Exchange Agreement 251

Assignment Agreement 254

Exchange Closing Instructions 254

Step by Step—How Does This Look? 254

How to Work with Your Closers 256

Finding the Right Closer 258

How to Select an Intermediary 259

CHAPTER 12 Putting It Together for Successful Transactions 263

Summary 263

WYSIWYG 264

Deal Out the Negative 268

How Positive Thoughts Are Connected to Real Estate Investing 268

The Electrical Energy of Success 268

MASTER LIST OF TERMS AND CONCEPTS YOU NEED TO KNOW 271

INDEX 275

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