| If your problem is listed below, a 1031 exchange may or
may not be your solution. 1. Are you a landlord that
doesn't want to manage property anymore?
2. Do you want to sell your investment property, but
don't want to pay huge amounts of Capital Gains Tax?
3. Is your current income property not producing enough
income?
4. Do you have a low adjusted basis and not much debt on
your rental?
5. Is your credit rating less than perfect?
If you answered yes to any of the above 5 questions, a
traditional 1031 property exchange into another like-kind
property might just put you right back to square one!
Let's address each of the 5 problems one at a time.
1. If you exchange your current property for another of
equal or greater value you still are faced with the same
landlord/tenant problems that you currently have. Sure, you
could hire a property manager, but why is it that you
currently don't have one?
2. A 1031 property exchange into a like-kind property
does defer the payment of Capital Gains tax if you carry
over all your equity and at least the same amount of debt.
However, since your new property costs you at least as much
as you sold the last for, your property taxes will most
likely increase. The cost of your new investment has
probably just gone up.
3. If your positive cash flow is currently nothing to
write home about, your new property will have to justify
higher rents, be located in an area with lower property tax,
or have fewer maintenance costs. Otherwise, the chances of
additional passive income are very slim.
4. Your adjusted basis will carry over as is to the new
property, so you will receive the same depreciation benefits
as on the prior property, unless you pay more for your
exchanged property. Most likely a wash.
5. A poor credit score may result in a higher interest
rate or poorer terms on your new mortgage, assuming you
don't own your current property free and clear. Again, this
translates into higher ownership costs. You will also pay
two sets of closing costs in the transaction.
One more thing to consider is the time it may take to
sell your current property, find a replacement property and
secure all funding. This must be done within the 1031
specific time frames. Think of the times that escrows have
fallen through and loans have dragged on forever and
sometimes never closed at all.
Considering your dilemma and possible pros and cons, will
a 1031 property exchange put you farther ahead, further
behind, or at best put you right back in the same boat you
are in now?
If the answer to the last question was not "farther
ahead", let me suggest that you look into a 1031 exchange
that has a slightly different twist.
It's called a 1031 exchange into a tenant in common
property. This might just put you in the "farther ahead"
category and solve many of your problems. Instead of
exchanging into another solely owned investment property,
you will get a fractional proportionate share of an A grade
commercial property. You will have a deeded interest equal
to your share of ownership (your exchange amount).
If done properly:
1. You will no longer be responsible for the property
management
2. All capital gains will be deferred.
3. You can get a contractual monthly income from the
equity transferred (usually 6-7%)
4. Your carryover basis is the same, but you can acquire
extra non- recourse debt without qualifying and receive a
higher interest deduction on your monthly income, thus
making it less taxable.
5. The debt you acquire with the TIC (assuming your
debt/equity ratio is within the accepted guidelines does not
require you to obtain a mortgage or pay it down. This is
called non-recourse debt. Your credit score does not become
a factor, and the closing can be done in a matter of days,
not weeks or months.
Now, ask your self again. Would a 1031 exchange into a
tenant in common solve your problems? If the answer is
"yes", what are you waiting for?
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