Feb 10th: 1031 Exchanges with Alaine Bry Raven

Feb.10th we had a lunch time seller’s workshop which started with a market briefing by Monica. As we all know the real estate market has been going up for quite some time and quite “a bit”. It continues to go up. Recent observation in our daily experience is that there are still a lot of buyers making their bids. We do see more buyers in the lower price range properties and there is also a shift from single family house to condo and town homes. Basically, it is a “whatever it works with my budget” for many frustrated potential buyers who want to get into the market first and trade up later. The presentation went on to highlight market segments that will make good choices for 1031 exchange since many of our clients have successfully invested at the right timing and on the right property type and are now looking to taking profit and exchange into higher values investments while deferring tax.

Our guess speaker, Alaine Bry Raven, from First American Exchange Company, explained in details what an exchange is and how to get it done for many different purposes in a very structured and easy to understand manner. Internal Revenue Code Section 1031 applies to “property held for productive use in a trade or business or for investment,” and it allows for the deferral of capital gain tax if such property is exchanged solely for property of “like-kind.” The broad definition of like kind can help investors in many ways. For example, owners tired of the property management headaches of several properties can leverage their equity into one larger one. IRC Section 1031 also has broad geographic application, applying to real estate throughout the United States. For example, if properly structured a couple owning rental houses in California who have kids attending college out of state can exchange their California rentals for investment properties that their children can rent from them while attending college.

Many investors exchange real estate all of their lives and leverage their unused tax dollars to purchase real estate that generates greater and greater returns. Once investors retire, they can then sell real estate and take. the cash, paying the lowest capital gain tax possible due to their income tax retirement bracket.

Even better yet, investors can leave their real estate holdings to their children, who will inherit the property at a stepped up basis, thereby eliminating any gain that had accumulated throughout the years!

When you sell your primary residence you may be able to save thousands of dollars by taking advantage of one of the best available tax breaks.

There are two important tax propositions for us to know.

Proposition 60 & 90 are two of the most commonly known tax propositions available to homeowners. California law allows any person who is at least 55 years of age (at the time of sale of their primary residence) who resides in a property eligible for the Homeowner’s Exemption (place of residence), or currently receiving the Disabled Veterans’ Exemption, to transfer the base-year value of the original property to a replacement dwelling of equal or lesser value within the same county (Proposition 60), or in a participating county. (Proposition 90).

Only a limited number of counties have adopted the provisions of Proposition 90.
In order to benefit from either of these propositions, a form must be submitted to the county you are moving to.

To receive retroactive relief from the date of transfer, you must file your claim form within three years following the purchase date (or, if the home is newly constructed, within three years of completion of the home). Specific claim forms, filing fees and procedures will vary from county to county.

You are allowed this transferred tax base only once. However, the Legislature has created an exception if a person becomes disabled after receiving the property tax relief for age, the person may transfer the base-year value a second time because of the disability. A separate form for disability must be filed.

Proposition 58 is not as well known. This proposition allows certain transfers (sales, gifts, inheritance, etc.) of real property between parents and children be excluded from reassessment (transfer of primary residence, transfer of the first $1,000,000 of real property other than primary residence), as well as transfer of real property between spouses.

Structure of an exchange transaction – all the different components and the rules that govern the suitability and relations between components.
Such as property type, exchange status, same taxpayer requirement, fully exchange or partial exchange, timing of exchange and reverse exchange, identification rules and deadlines, etc.
Attendees to our workshop left very satisfied knowing how to do an exchange as well as being aware of the market condition and having a clear direction as to where to put their money in the next round of investment during the exchange.