Today we’re going to talk about a 1031 Exchange disclaimer.
Why do we care about a disclaimer? Because here’s the problem: The 1031 Exchange disclaimer that we’ll talk about has a lot of big words and words that we will need to know in the process of our 1031 Exchange.
Real quick, a 1031 Exchange is when you sell one rental property and buy another rental property with very specific rules and timetables. This enables you to defer your taxes, sometimes forever, and build generational wealth for your family, just like the big boys do.
This disclaimer was copied from a 1031 Exchange Qualified Intermediary website.
Here’s what it says:
An Exchanger should always consult with competent, independent legal and/or tax advisors to determine the applicability of any IRC 1031 tax deferred exchange benefits.The gain, not the profit or equity, from the transfer of investment property is subject to the combination of federal and state capital gain taxes and the federal taxes on the gain due to the depreciation taken on the property. Remember, it is possible to have little or no equity in the investment property being transferred and still owe taxes!
The first term is “exchanger.” Guess what? That’s you. You’ll see this term throughout your transaction, from your intent to your Closing. Because you are not a seller, you’re not a buyer, even though you think so. You are an exchanger.
The next term is “always.” This is very important because always is a very important consideration in an Exchange. Always consult with “competent, independent.” So competent means check them out. Who is competent? Do they have experience? Do they have education? What does it mean by competent?
Competent, experienced, educated, knowledgeable.
How about independent? Does that mean you could ask your brother-in-law? it mean that you might look on TurboTax or another type of online service?
Does that mean that it can be one of the other people in your transaction?
Who should you be consulting with? Remember always competent and independent. Legal or tax advisors. Legal or tax. Legal and/or tax advisors. So you’re going to always consult with competent, independent, legal, and/or tax advisors.
Why are you going to do this? Because you’re going to determine the applicability of a 1031 Exchange. Maybe it’s not the right thing for you. You need to know in advance. You need to know if the benefits are appropriate in your situation, and a legal and or tax advisor will tell you that. Otherwise, don’t waste your time and don’t go for 1031 Exchange. But you need to follow the rules.
Here’s their caveat. The gain, not the profit or equity, from the transfer of the investment property. Hmm. Gain, not the profit or equity. And notice they said “transfer.” They didn’t say “sale.” Another important word, even though I didn’t underline it. Notice “transfer.” Sort of like the “Exchanger” word. They’re calling it a transfer because it is an Exchange, even though it’s not simultaneous.
Again, investment – needs to be held for investment. And it is property, meaning real property.
Again, the gain, not the profit or equity from the transfer of investment property is subject to the combination of federal and state capital gains taxes, and federal taxes due on the gain due to “Depreciation taken” on the property. So we have taxes are subject to the combination of federal and state capital gain taxes and the federal taxes on the gain due to “Depreciation taken” on the property.
What they don’t say in this disclaimer is it might be Depreciation taken or not even taken on this property. And probably the most important caveat in this disclaimer is for you to remember that it’s possible to have little or no equity in the investment property being transferred and still owe taxes.
Oh, and if we haven’t met, my name is Maxine Golden. I’m a longtime real estate broker, and I started the 1031 Exchange Lady Channel because I believe that you deserve the same tax breaks as the big investors. The law says you deserve them, and you do. So don’t just take my word for it. Ask your tax advisor or ask the I.R.S. They will tell you the same thing.
So I specialize in helping rental property owners like yourself find experienced real estate agents in cities across America to help them with their 1031 exchanges. If you have any questions, ask me in the comments, and if not, look below and book a call. I look forward to seeing you in the next video.