Planning an Exchange

Planning an Exchange

Planning can maximize benefits
Very little forethought is required to set up an exchange. You can even call a few hours before closing and we can usually prepare the documents required to establish an exchange. However, a little planning can help  maximize the tax and economic benefits from an exchange.

Planning should start with an analysis of the property (relinquished property) you intend to sell or exchange. What is the likely sales price of the property? What is your tax basis? What is the estimated tax if you sell? How much will you save with an exchange?  If you have an accountant or if you intend to retain an accountant to help with the reporting requirements of your exchange, he can assist with the tax calculations. If you do not intend to use an accountant, you should be able to make these calculations.

If you intend to use a real estate broker to assist in selling your property, select this professional early and ask her to assist in determining the market value of your property.

Analysis Of Tax Savings

After determining a the market value of the relinquished property and estimating the tax if you sell the property, calculate the tax saved by an exchange.

To fully defer all taxes, all cash proceeds will have to be re-invested in replacement property and you must have an equal or greater mortgage on the replacement property.

Ask your real estate broker to prepare a “net sheet” or pro-forma closing statement to estimate the cash from the sale of your relinquished property.  If you do not want to invest all proceeds from the sale of relinquished property,  consult with 1031 Exchange Corporation to properly structure the removal of cash from your exchange. There are strict rules governing when and how funds can be removed from an exchange. Now you should determine the minimum value your replacement property must have to fully defer all tax.

Acquisition Plan

Begin planning for the purchase of replacement property early in the exchange. Determine whether to exchange into one replacement property or multiple properties. If you intend to seek multiple properties, consult with us regarding the structure of your exchange. Planning at this stage can maximize the utility of your exchange and give you maximum flexibility in acquiring replacement properties.

Begin your quest for replacement property as soon as possible. You can contract for replacement property at any time in the exchange: even before you sell the relinquished property. Just don’t close the purchase of replacement property prior to the purchase of  relinquished property (unless you are going to do a reverse exchange).