Why Consider a 1031 Exchange?
Section 1031 of the Internal Revenue Code provides an effective strategy for deferring capital gains taxes from an investment property sale. By exchanging the property for like-kind real estate, property owners may defer their taxes and use the proceeds to purchase a replacement property. Like-kind real estate includes business/investment property but not the owner’s primary residence.
Any property owner or investor who expects to acquire replacement property after selling their existing property should consider a 1031 exchange. To do otherwise would necessitate the payment of capital gain taxes in amounts that can approach 30%. We aim to help investors keep more of their hard-earned money working for them.
Our model allows multiple buyers to co-own high quality commercial real estate through a Tenant-in-Common structure. This gives each investor the freedom to purchase the percentage of the property that best fits their current investment plan—anywhere from one to one hundred percent. Our “have it your way” approach gives you access and flexibility. No matter the amount of your exchange, we can cover it down to the penny. Each buyer receives their own deed to the property and benefits from all of the income, tax shelters, and appreciation it provides.
Exchanging Hassle For Happiness.
Tenant issues, fixing toilets, and painting walls is hard work. Have you ever considered owning quality commercial real estate? With our passive lease structure, you can leave the headaches of being a landlord behind. We deliver fully managed properties with better returns than your current real estate investment, giving you more time to do the things you love. Our co-ownership model makes it possible for any investor to utilize and 1031 exchange to buy into high quality commercial real estate. Rest assured that our portfolio is rock solid. We rigorously vet every property that we offer.
The Basic Rules of an Exchange
- The purchase price of the replacement property must be equal to or greater than the relinquished property’s net sales price
- All equity received from the sale of the relinquished property must be used to acquire the replacement property
- Your replacement property must be purchased with the same entity by which it was sold
What Qualifies as a Like-Kind Property
- Property held for investment
- Rental/income property
Also, a single property may be exchanged for several, or vice versa. This means that almost any property that is not a personal residence or second home is eligible for exchange under Section 1031
Three rules exist for the correct identification of replacement properties.
- The Three Property Rule dictates that the Exchanger may identify three properties of any value, one or more of which must be acquired within the 180 Day Exchange Period
- The Two Hundred Percent Rule dictates that if four or more properties are identified, all properties’ aggregate market value may not exceed 200% of the value of the Relinquished Property
- The Ninety-five Percent Exception dictates that in the event the other rules do not apply, if the replacement properties acquired represent at least 95% of the aggregate value of properties identified, the exchange would still qualify
The Exchanger has a maximum of 180 days from the closing of the relinquished property or the due date of that year’s tax return, whichever occurs first, to acquire the replacement property. This is called the Exchange Period. The first 45 days of that period is called the Identification Period. During these 45 days, the Exchanger must identify the property used for the replacement property. The identification must:
- Be in writing, Signed by the Exchanger
- Received by the facilitator or other qualified party (faxed, postmarked, or otherwise identifiably transmitted through Federal Express or other dated courier services, or digital signature)
This must all occur within the 45 day period. Failure to accomplish this identification will cause the exchange to fail
Many investors have a love/hate relationship with their residential rentals for apparent reasons. They love them because their renters pay off the asset within a period of time, turning the investment into a positive cash-flowing asset. They hate them because of tenant shuffling, painting walls, replacing carpets, mowing grass, and the list goes on. It is beneficial to exchange into a high-quality commercial asset for the zero landlord responsibilities and the increased return.
Owning a Residential Rental
• Property Type: Residential Rental
• Sales Proceeds: $410,000
• Monthly Rental Income: $1,700
• Monthly Expenses: ($300)
• Monthly Profit: $1,400
• ROI: 4.10%
Owning a Commercial Property
• Property Type: Commercial Real Estate
• Ownership: $410,000
• Monthly Rental Income: $2,050
• Monthly Expenses: ($0)
• Monthly Profit: $2,050
• ROI: 6.00%
In the example below, let’s say that you have an investment property that you purchased in 1992 for $100,000. Today, let’s say you have sold the same property for $500,000. You can take the cash from the deal, but you may pay upwards of 30% to Uncle Sam. If you were to move the money into the stock market, the total amount you would have to invest after paying taxes is $354,800. $145,200 is a lot of money to give up. If you were to use a 1031 exchange and roll all of the proceeds into a high-quality commercial property, ALL of your taxes would be deferred in perpetuity, meaning ALL of your hard-earned money will continue earning money for you indefinitely.
- Purchased in 1992
- Purchase price: $100,000
- Land value: $20,000
- Anticipated Net proceeds from sale: $500,000
- Net proceeds: $500,000
- Depreciation recovery: $80,000 * .25 = $20,000
- Federal capital gains: $400,000 * .20 = $80,000
- NIIT: $400,000 * .038 = $15,200
- State taxes: $400,000 * .075 =
- Total tax: $145,200
- Total amount to invest: $354,800
Millcreek Commercial Property
- Net proceeds: $500,000
- Depreciation recovery: Deferred
- Federal capital gains: Deferred
- NIIT: Deferred
- State taxes: Deferred
- Total tax: Zero
- Total amount to invest: $500,000
View One Of Our Webinars on Section 1031
Watch Spencer Taylor, Millcreek Commercial Co-Founder, talk about the Benefits of a 1031 Exchange.
Safe, Secure, and Stable Returns
You get a rigorously vetted property that is fully-managed, giving you more time to do the things you love. Leave behind the hassles of traditional residential real estate.
Millcreek Commercial is one of the best and safest ways to invest in Commercial Real Estate. These guys have great products for everyone. I am always confident that when I refer clients to them, they will be well taken care of.