1031 Exchange Or Keep The Money?
I have a question about the 1031 starker exchange. I have a small rental house which I am selling. It is under contract and will close in about 3 weeks. I’ve owned it 10 years. I built it out of pocket and the land value in 1993 for tax purposes was $10,000 and the improvements were 35,000. I am selling it for $80,000. RE commissions total $4,800 so I will net $76,000.
I looked into to possibly doing the sale as an exchange but decided against it because from with the numbers, it seemed any tax savings would be offset by the attorney’s fees and exchange fees. Also, as I understand it, to do an exchange, one must identify the property to be sold, before it is under contract, correct? After speaking with other investors some told me I should have done an
exchange. One guy told me I can still do one since it hasn’t closed. Others have told me with the property being so small, and the gain not being extraordinary, I should simply sell it and pay the tax and enjoy some of the money for a change. Any thoughts?
I think $76,000 is worth doing a 1031 for. You should decide soon some of these companies are slow. Does the contract state that buyer must cooperate with the 1031? If you are planning on using the money for real estate consider the 1031.
My taxable gain will only be around $30,000 which is why I did not list the property disclosing a 1031 was a requirement. It just appeared that with the numbers involved, the amount saved with the 1031, plus the amount of red tape and annoyances involved wouldn't be worth the hassle.
There is an excellent article about 1031 on this site. read it.
You would have to hire your starker pro before closing so that you do not take possession of your 'boot'. Talk to the pro on this site for costs, then do an internet search and ask contacts.
I agree, this is not that much money to be worth it unless you intend to buy more RE...then you have paid taxes and you did not need to.
Read the 1031 exchange article.
As to what you should do...
It depends on what you really want to do with the money. If you were going to re-invest into real estate in any event then a 1031 may be the way to go.
The capital gains tax rate is pretty low and unlikely to ever go lower. Hence it might be a plus to pay the tax now at the low rate and then use after tax dollars later to invest. There is no specific answer, just a position as to what the future might hold for tax rates.
Well done on the profits!
John
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$30,000.00 in capital gains is not too small to do a 1031 exchange. The cost to do a forward 1031 exchange through most Accommodators is around $750.00. The 1031 exchange would allow you to keep 100% of your cash proceeds working for you in another real estate transaction. It is not too late if your sale has not closed yet.
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land...
They have spoken!
My utmost appreciation, 'NewKid', for an excellent education of all of the details in a very clear and concise format on All of the specific details! I will save!
And Mr. Exeter (above post) is the "Pro" whom I was referring to in my 'less than specific' post about the 1031 'Pro' and article.
You have both helped me as well. Thank you!