A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.

The Role of Qualified Intermediaries

Under section 1031, any proceeds received from the sale of a property remain taxable. For that reason, proceeds from the sale must be transferred to a qualified intermediary, rather than the seller of the property, and the qualified intermediary transfers them to the seller of the replacement property or properties. A qualified intermediary is a person or company that agrees to facilitate the 1031 exchange by holding the funds involved in the transaction until they can be transferred to the seller of the replacement property. The qualified intermediary can have no other formal relationship with the parties exchanging property.

 When You Want a 1031 Exchange

As an investor, there are a number of reasons why you may consider utilizing a 1031 exchange. Some of those reasons include:

• You may be seeking a property that has better return prospects or may wish to diversify assets.
• If you are the owner of investment real estate, you might be looking for a managed property rather than managing one yourself.
• You might want to consolidate several properties into one, for purposes of estate planning, for example, or you might want to divide a single property into several assets.
• Reset the depreciation clock (explained below)

The main benefit of carrying out a 1031 exchange rather than simply selling one property and buying another is the tax deferral. A 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.

It’s important to keep in mind, though, that a 1031 exchange may require a comparatively high minimum investment and holding time. This makes these transactions more ideal for individuals with a higher net worth. And, due to their complexity, 1031 exchange transactions should be handled by professionals.

 What Is Depreciation and Why Is It Important to a 1031 Exchange?

Depreciation is an essential concept for understanding the true benefits of a 1031 exchange.

Depreciation is the percentage of the cost of an investment property that is written off every year, recognizing the effects of wear and tear. When a property is sold, capital gains taxes are calculated based on the property’s net-adjusted basis, which reflects the property’s original purchase price, plus capital improvements minus depreciation.

If a property sells for more than its depreciated value, you may have to recapture the depreciation. That means the amount of depreciation will be included in your taxable income from the sale of the property.

Since the size of the depreciation recaptured increases with time, you may be motivated to engage in a 1031 exchange to avoid the large increase in taxable income that depreciation recapture would cause. Depreciation recapture will be a factor to account for when calculating the value of any 1031 exchange transaction—it is only a matter of degree.

Choosing a Replacement Property: Timing and Rules

Like-kind property is defined according to its nature or characteristics, not its quality or grade. This means that there is a broad range of exchangeable real properties. Vacant land can be exchanged for a commercial building, for example, or industrial property can be exchanged for residential. But you can’t exchange real estate for artwork, for example, since that does not meet the definition of like-kind. The property must be held for investment though, not resale or personal use. This usually implies a minimum of two years’ ownership.

To receive the full benefit of a 1031 exchange, your replacement property should be of equal or greater value. You must identify a replacement property for the assets sold within 45 days and then conclude the exchange within 180 days. There are three rules that can be applied to define identification. You need to meet one of the following:

• The three-property ruleallows you to identify three properties as potential purchases regardless of their market value.
• The 200% ruleallows you to identify unlimited replacement properties as long as their cumulative value doesn’t exceed 200% of the value of the property sold.
• The 95% ruleallows you to identify as many properties as you like as long as you acquire properties valued at 95% of their total or more.

The Different Kinds of Like-Kind Exchanges

There are a number of possibilities for making 1031 exchanges that vary in their timing and other details, each creating a set of requirements and procedures that have to be followed:

• 1031 exchanges carried out within 180 days are commonly referred to as delayed exchanges, since, at one time, exchanges had to be performed simultaneously.

• Build-to-suit exchangesallow the replacement property in a 1031 exchange to be renovated or newly constructed. However, these types of exchanges are still subject to the 180-day time rule, meaning all improvements and construction must be finished by the time the transaction is complete. Any improvements made afterward are considered personal property and won’t qualify as part of the exchange.
• If you acquire the replacement property before selling the property to be exchanged, it is called a reverse exchange. In this case, the property must be transferred to an exchange accommodation titleholder(which can be the qualified intermediary) and a qualified exchange accommodation agreement must be signed. Within 45 days of the transfer of the property, a property for exchange must be identified, and the transaction must be carried out within 180 days.

Don’t Get the Boot While You’re Replacing Your Property

Like-kind properties in an exchange must be of similar value as well. The difference in value between a property and the one being exchanged is called boot.

If a replacement property is of lesser value than the property sold, the difference (cash boot) is taxable. If personal property or non-like-kind property is used to complete the transaction, it is also boot, but it does not disqualify for a 1031 exchange.

The presence of a mortgage is permissible on either side of the exchange. If the mortgage on the replacement is less than the mortgage on the property being sold, the difference is treated like cash boot. That fact needs to be considered when calculating the parameters of the exchange.

Expenses and fees impact the value of the transaction and therefore the potential boot as well. Some expenses can be paid with exchange funds. These include:

• Broker’s commission
• Qualified intermediary fees
• Filing fees
• Related attorney’s fees
• Title insurance premiums
• Related tax adviser fees
• Finder fees

• Escrow fees

Expenses that cannot be paid with exchange funds include:

• Financing fees
• Property taxes
• Repair or maintenance costs
• Insurance premiums

Exchanging Partners: Drop and Swap 1031 Exchanges

LLCs can only exchange property as an entity, unless they do a drop and swap, in case some partners want to make an exchange and others do not.

Interest in a partnership cannot be used in a 1031 exchange—partners in an LLC do not own property, they own interest in a property-owning entity, which is the taxpayer for the property. 1031 exchanges are carried out by a single taxpayer as one side of the transaction. Therefore, special steps are required when members of an LLC or partnership are not in accord on the disposition of a property. This can be quite complex because every property owner’s situation is unique, but the basics are universal.

When one partner wants to make a 1031 exchange and the others do not, that partner can transfer partnership interest to the LLC in exchange for a deed to an equivalent percentage of the property. This makes the partner a tenant in common with the LLC—and a separate taxpayer. When the property owned by the LLC is sold, that partner’s share of the proceeds goes to a qualified intermediary, while the other partners receive theirs directly.

When the majority of partners want to engage in a 1031 exchange, the dissenting partner(s) can receive a certain percentage of the property at the time of the transaction and pay taxes on the proceeds while the proceeds of the others go to a qualified intermediary. These procedures are called “drop and swap.” It is the most common procedure in these situations.

A 1031 exchange is carried out on properties held for investment. A major diagnostic of “holding for investment” is the length of time an asset is held. It is desirable to initiate the drop (of the partner) at least a year before the swap of the asset. Otherwise, the partner(s) participating in the exchange may be seen by the IRS as not meeting that criterion. If that is not possible, the

exchange can take place first and the partner(s) who want to do so can exit after a reasonable interval. This is known as a “swap and drop.”

1031 and Estate Planning

One of the major benefits of participating in a 1031 exchange is that you can take that tax deferment with you to the grave. If your heirs inherit property received through a 1031 exchange, its value is “stepped up” to fair market, which wipes out the tax deferment debt.

This means that if you die without having sold the property obtained through a 1031 exchange, the heirs receive it at the stepped-up market rate value, and all deferred taxes are erased. An estate planner should be consulted to take maximum advantage of this opportunity. Tenancy in common can be used to structure assets in accordance with your wishes for their distribution after death.

 I am not qualified to provide tax advice.  Please contact a professional for all questions.  Listed below are two companies I have had success with. 

Darlene Miller                                                                                
Exchange Assistant
First American Exchange Company
18500 Von Karman Avenue, Suite 600, Irvine, CA 92612
Direct: 949.885.2498
Office: 949.885.2440
Fax: 866.757.4996
Email: DarMiller@firstam.com
Web: www.firstexchange.com

 Spectrum Exchange Corporation

Claire Westberg

Camp Verde, AZ 86322
928-284-9840 (Main)
928-284-1478 (Fax)
800-822-1031 (Nationwide)

Prescott is loved for it's small home town appeal and history. Wyatt Earp, Doc Holliday and his girlfriend, Big Nose Kate roamed the Palace Saloon on Whiskey Row in the late 1870's. The Palace opened in 1877 and still operates, making it the oldest business in Arizona. On July 14, 1900, a major fire struck Prescott, destroying five full city blocks, including most of Whiskey Row. It became known as "The Great Fire".  The owner and the patrons of the bars helped load the bar and the liquid gold across the street onto the courthouse square, and continued drinking while the fire was being extingushed. The historic court house is surrounded by lush green grass and sidewalks making it a great place to cool off and walk around the square.  Summer concerts and art festivals are enjoyed when permitted. Whiskey Row presently has several saloons, gift shops, candy, dress, jewelry shops and  several really great restaurants.   A town that has charm, history and most city amenties.  Don't forget to bring your dog as we are very pet friendly!

Theatre, hiking, biking, kayaking on one of our lakes and dining at our great restaurants are enjoyed by locals and many Phoenix visitors looking to get out of the summer heat.   We enjoy all 4 seasons and the air is some of the cleanest in the nation.  Prescott Valley is our neighboring community that has many amenities including the entertainment district and lots of shopping.  The homes are priced slightly lower than in Prescott.

Purchase a great home with golf course views, state of the art athletic centers, downtown living or out in the country for a primary, second or rental investment. 

Ask me about beautiful homesite for sale in Prescott Lakes with no building time restrictions.  
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Don't see what your looking for?  Let's connect and let me send you a complimentary link of properties that fit your lifestyle in Beautiful Prescott Arizona!

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PRESCOTT LAKES, an 1150-acre Master Planned Community with a private signature Hale Irwin Golf Course. The course is challenging to golfers of all skill levels, the par 72 course plays from 4,724 to 7,216 yards in length and offers six tee options for every hole. 

Fifteen established communities, gated and non-gated, enjoy one of the finest recreational and social opportunities of the 14,000 sf, $3.8 million Athletic Club, Bar-Grill, terrace dining and banquet facilities. Prescott Lakes features custom homes, patio, condo, townhomes and homesites.  Beautiful 12 acres of scenic lakes with panoramic views the Granite Dells, San Francisco Peaks, Granite Mt., Mingus Mt., and pine-covered Thumb Butte. 

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 Non-gated communities include Pinnacle Views, Summit I, II, III, Stoney Creek, The Retreat and Bridgeway Manor. 

Prescott Lakes Residents enjoy hiking, biking, and walking through seven Petroglyph Preservation Parks and acres of natural open spaces. Take fitness to a higher level at Prescott's finest work-out center at the Prescott Lakes Athletic CLUB with state-of-the-art equipment and facilities. The CLUB has space for other healthful activities ... aerobics, Pilates, stretching, yoga, table tennis plus many other activities, Outdoor tennis and pickleball courts. Get a game together on the basketball or volleyball courts. Come and enjoy swimming indoors and out, outdoor pool with 30-meter lap lanes and large open swim area + 169 sf whirlpool Spa.  

Prescott Lakes HOA Master Fee  08/14/2020, may change annually. $35 per month (paid quarterly), Neighborhood Fees vary by community, Athletic Club Fee $141 per month.  Golf membership is available Separately.   

Check out these Prescott Lakes homes!

Prescott Lakes Homes    

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Home Sales Hit a Record-Setting Rebound!

“The sales recovery is strong, as buyers were eager to purchase homes and properties that they had been eyeing during the shutdown…This revitalization looks to be sustainable for many months ahead as long as mortgage rates remain low and job gains continue.”

With mortgage rates hitting an all-time low, dropping below 3% for the first time last week, potential homebuyers are poised to continue taking advantage of this historic opportunity to buy. This fierce competition among buyers is contributing to home price increases as well, as more buyers are finding themselves in bidding wars in this environment.

Home prices rose during the lockdown and could rise even further due to heavy buyer competition and a significant shortage of supply.” 08/10/2020 Chief Economist for National Association of Realtors.

Here is a snapshot of our Prescott and Quad Cities Market:

If your planning on a vist to Prescott and the Quad Cities, let's do some planning ahead so if you find that perfect home, your in a great position to seal the deal.

1. Call me at least 24-48 hrs. in advance of arriving so we can make appts.              to view select properties.
   
2.  Don't just get pre-approved, Get Underwriting Approval 
3.  Bring required documentation for the Arizona contract

Great Homes Under 500K

And while your in Prescott and the Quad Cities, be sure and have good fun!

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Five Great Lakes in Prescott Arizona

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What's the difference between a Buyer's Agent Vs. a Seller's Agent?

No matter if it’s your First home or you are a Seasoned Buyer, you need a professional who will represent you and guide you through tons of paperwork, stampedes of buyers competing for the same home with low inventory.  And, once you received an accepted contract, assist with lender requirements, home inspectors, potential repairs and the title company.  A buyer’s agent will guide you through the home-buying process and be at your disposal for any questions or concerns throughout the sale.   

The process can be complex and at times stressful—especially if you are a first-time buyer. Having a real estate pro by your side can make all the difference. 

 So what is a buyer's agent? 

A buyer's agents help real estate buyers navigate the real estate market; they can also save you tons of time and money on the road to your new home. 

Benefits of using a buyer's agent when buying real estate 

"As a Buyer’s Agent, here’s what they will do for you:

• Assist you in getting pre-qualified for your home.  Documentation is required in the Arizona contract advising the Seller if your purchasing the home with a loan or paying cash. If you do not have proper documentation, the Seller can and more than likely, reject your offer.   
• Find the right property.After spending time with you and determining what you are looking for and what fits your budget, I will schedule appointments to tour homes that fit your requirements.   As a resident of Prescott since 1994, I can also explain the ins and outs of various properties and neighborhoods, to help you decide which area may be right for you, and explaining the pros and cons of various options, like should you buy a home with a leased solar, how often do you pump a septic tank or finding you a home with all city utilities.  You do not need to spend days running around Prescott and the Quad Cities which is exhausting.  I can assist you with neighborhoods that will fit you and your families lifestyle.   
  
• Negotiate the offer. As a buyer's agent I will advise you on a price to offer and present it to the seller's agent. Then I will negotiate on your behalf and write up the contracts for you.  This is where my experience in negotiating deals can save you money and help you avoid pitfalls like a fixer-upper that's more trouble than it may be worth.
• Recommend other professionals. As a buyer's agent I will be able to refer you to reliable mortgage brokers, home inspectors, movers, and other real estate professionals. This can also help expedite each step of the process and move you to a successful real estate sale.
  
• Help overcome setbacks.  If the home inspection report or appraisal bring in new issues, I can advise you on how to proceed with the transaction, and then act as a buffer between you and the sellers and their broker. If negotiations become heated or hostile, it's extremely helpful to have an experienced professional keeping calm and offering productive solutions. 

Buyer’s Agent Vs. A Seller’s Agent.   What's the difference? 

 Buyer's agents are legally bound to help buyers, whereas listing agent, the real estate agent representing the home listing—have a fiduciary duty to the home seller. 

"That's why it's in your best interest as a buyer to get an agent who is there to represent you.” 

"Think about it this way: If you were getting sued, would you hire the same attorney as the person suing you? Of course not. You need someone who will diligently fight for your interests and rights." 

If you walked up to the listing agent at an open house, you might gush about how you love the home and want to buy it, but add that you will need to move soon—because your family is expanding or the lease on your rental is coming up.  A seller's agent could then use this information against you by informing the sellers that time is not on your side and you would most likely pay full price.   

Yet make this same confession to the buyer's agent you're working with and this professional would know to keep this information private from sellers (and their agents), so it can't be used against you. 

What is a Buyer Broker Agreement? 

This is an agreement between the Buyers and their agent to agree to work exclusively together and you won’t work with other agents for a specific time.   As your agent, I will work diligently reviewing properties that fit your requirements. I have access to all properties in the MLS in Prescott and the Quad Cities.   When you go into a new home showroom, I will go with you and if you move forward, use my expertise with advice and pitfalls of the home building process.   

How much do buyer's agents cost? 

Home buyers don't need to worry about the expense of hiring a buyer's agent. Why? Because the seller pays the commission for both the seller's and buyer's agents as per the agreed upon listing contract.    

Will you get a break if you work directly with the listing agent?  

 Not likely as the listing agents' job is to represent the Seller and bring in the highest price possible. They will be happy to collect both sides of the commission.

I excel in Buyer's Representation with over 3 decades of success. 

Check out this link: 
Twenty Homes 400K<

Don't see what your looking for, let's connect and let me send you more Prescott and Quad City properties that fit your lifestyle.  From affordable to over the top fabulous!  928 713-3426