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Tips for Crofton Investors on Using a 1031 Exchange

Crofton residents are not the only owners of Crofton real estate. 

Investors own hundreds of Crofton homes, townhomes and condos, too – and thousands in the Greater Crofton area including Odenton, Gambrills, Bowie, etc.  In fact, this number is growing due to residents choosing to rent, rather than sell in this down market, and also due to the fact that savvy investors know this is a great opportunity to “buy low.”

It’s also a time for experienced real estate investors to re-examine their portfolios and make a determination if their current investments are the best ones to keep, or if they should consider using a 1031 exchange to acquire different properties.

James Brennan
While I’ve often handled listings and sales in exchange transactions, I can’t call myself an “expert” on the subject.  That’s why I turned to James Brennan, Principal and Corporate Counsel at ES Group for help in providing tips to local real estate investors. 


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How can you use a 1031 exchange in a down real estate market?

Many investors own “dormant” real estate equity.  What I mean by this is they have equity trapped in land or unprofitable real estate.  If properly executed they could sell their property and re-leverage their equity into income-producing real estate that creates a steady stream of cash flow. Most retirees that built wealth through real estate have liquidity problems.  However, if you have enough cash flow you often do not need as much liquidity!  Think of a landowner with 2,000,000 worth of land in the suburbs of Washington, DC.  If the landowner took a haircut on the property and sold it for 1,900,000 or even 1,800,000 than he can monetize the equity by re-investing it via a like-kind exchange into a triple net lease asset such as a CVS, Walgreens, or even simply an apartment building.

What is a Section 1031 Exchange?

Under section 1031 of the Internal Revenue Code , the exchange of certain types of property may defer the recognition of capital gains.  I like to think of it as the “sister provision” for Section 121 of the Internal Revenue Code.  Section 121 deals with primary residences and the $500,000 Exemption.  Section 1031 is the tax benefit that the IRS and Congress put into place for investment real estate. All real property is “like-kind” so you can “swap” from land to an apartment building and from an apartment building into retail.

What is a Qualified Intermediary and Why Do You Need One?

This is the Question that keeps me employed! A qualified intermediary is a third party that has not acted as your real estate agent, attorney, or CPA within the last two years.  The Internal Revenue Service created a Safe Harbor provision that indicated use of a Qualified Intermediary will help bulletproof your 1031 exchange transaction and assure that you will be in compliance with the provisions.  Finally, if you need the plain English version- an intermediary is a special-type of escrow account custodian where the proceeds are parked after the sale of the old property and before the new property purchase.

Tax formWhat taxes do you defer with Section 1031?

You defer Federal Capital Gains Taxes, State Capital Gains Taxes, and Depreciation Recapture Taxes. So don’t just focus on the 15%. Your federal and state liability if you cash out is usually between 25 and 40%.   That is why most clients swap until they drop!!! 

Why do you suggest investors should keep exchanging?

A strategy of a series of exchanges keeps your equity working for you without constantly taking IRS haircuts and when you expire (die) your heirs get a stepped-up basis in your property and your capital gains liability essentially disappears or gets reduced dramatically as the basis gets increased to the fair market value at your death.

Okay, now you see why I asked a guest blogger to address the topic of 1031 Exchanges – that’s some good information, don’t you agree?  Clearly James Brennan IS an expert, and someone who can answer any questions for you that are not covered in this post. 

Contact him by email at [email protected] or call him at (703)801–4178.  Please mention you saw his post here on “Focus On Crofton.”

P.S.  Now is a GREAT time buy Crofton area real estate for investment, with both prices and interest rates at or near bottom.  Of course, the best way to find the GREAT deals is to contact me directly, but here’s a link you can use to conduct an online HOME SEARCH at your own pace.

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