| One of the most powerful tools in a real estate
investor's bag of tricks is the 1031 Exchange. When used
properly it can defer the tax on capitals gains almost
indefinitely. A 1031 Exchange is really very simple. You
don't actually have to trade one property for other... you
just must use the gain from the sale of a income producing
property to buy another income producing property. There are
a few simple rules you must follow. One rule is that you
have to complete the transaction within a prescribed time
period.
The other requirement of a 1031 Exchange is that you must
never personally touch the money from the sale of the first
property. Certain people and companies are in business to
act as an "Intermediary" in exchanges. Their primary job is
to collect and hold the funds from the buyer of the first
property and deliver them to the seller of the property you
are acquiring. And that's where the trouble starts.
In the past few years some Intermediaries have
disappeared and the funds they were holding from many deals
vanished along with them. Often the investor's losses
amounted to from hundreds of thousands to millions of
dollars.
Oh yes, there have been other problems. Some
Intermediaries "co-mingle" the monies they are holding for
exchangers. That means that all of their exchange client's
money is held in one account under the Intermediary's name.
If the
Intermediary is sued for some reason all money in the
account may be frozen. If the freeze lasts beyond the
prescribed time limit (180 days) for exchanges the investors
are out of luck. There are no extensions possible of the 180
day deadline. Now the investors must pay income tax on all
those capital gains.
With the huge increase in real estate values in many
areas recently, investors should be using 1031 Exchanges.
There is just no better way to protect their profits and
build net worth. But they must also protect those profits
from careless intermediaries.
Make sure that your exchange funds are held in a separate
exchange account that holds only your money and no one
else's. That account must be separate not only from other
client's monies, but also separate from the intermediary's
assets.
Each of the accounts should have the client's name on it
something like this: "The Exchange Kings, as intermediary
for Barbie and Ken Investor". That account must have the
investor's tax ID or social security number on the account.
Now, no matter what goes wrong with the intermediary, your
exchange funds will remain protected and accessible.
It's great to exchange a property for profit. Just don't
exchange that profit for an unexpected loss.
Mark Walters mentors real estate investors with free
videos offered at
http://www.CashFlowInstitute.com
Article Source:
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