Hey BNB peeps! Let’s talk more about saving money when selling an investment property in order to buy another one.
You don’t want to end up like the poor rabbit in the painting.
More about 1031s
Here is a little detail you want to keep in mind when calculating how much capital gains you could get stuck with in selling your property, after all, the reason you are doing a 1031 is to avoid paying taxes on capital gains (CGs).
If you determine that you are not going to have any taxable gains, you do not need to do a 1031.
Simple formula to remember to estimate the amount of gain that will be subject to CGs: Sale price minus Commissions and escrow costs minus Depreciation value of the home.
Key thing: You do not deduct your mortgage from the capital gain calculation.
Another Key thing: The value of your sale does not include your Depreciation.
For example: If you sell a home for $1,000,000 ($1M) and your commission and escrow are $50,000 and your depreciation is $400,000, your Capital Gains would be… $550,000.
BUT, the value of your sale would be …. $950,000
This calcalation is important to get straight in your effort to think through your 1031.
You do not want to underestimate your sale price of your “relinquished property” when you are trying to conduct a 1031 Exchange.
Again, a 1031 Exchange is designed to help people who are selling an investment property to buy another investment property while protecting them from paying taxes on their capital gains.
Now about calculating the value of the relinquished property, there is a qualification for a proper 1031: You must buy into a property that is at least EQUAL OR GREATER VALUE.
So take the previous example: If you are going to purchase a “replacement property” for $750,000, you will need to either buy another property within 180 days or buy another qualified investment property so that your total reinvestment meets or exceeds $950,000 to have a valid 1031 transaction.
In other words, if you only plan to spend $750,000 to purchase a replacement and you think you are done – PLEASE think again. This one transaction will not qualify the 1031.
Better yet, go and talk to a 1031 Exchange Officer for a reputable 1031 firm and ask him or her these important questions ( DISCLAIMER: I am not a professional or certified 1031 dude, but I want you to make sure you’ve got all your facts together).
Worst comes to worst, you can park the remainder of your unused 1031 funds into a special 1031 “fund” that will be the equivalent to buying a replacement property if you cannot find the right property to purchase and use all of your proceeds, but it would be helpful if you have all the numbers figured out before you begin the process, especially if you are only intending to target one investment property.
A last note for today: If you decide to do a 1031, be prepared for some escrow delays as doing the necessary paperwork or setting up LLCs is extra work, requiring special contracts, registering LLCs, and often requires some additional government oversight (more paperwork).
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