Replacement Properties Purchase Do’s and Don’ts

Do’s

Do purchase your replacement property in the U.S. or U.S. Virgin Islands.

  • Foreign investment property does not qualify.

Do acquire property with equal or greater debt.

  • Unless the debt reduction is replaced with cash, you pay tax on the debt reduction and you have no funds from the exchange with which to pay the tax.

Do reinvest all exchange proceeds.

  • You pay tax on proceeds not reinvested.

Do plan ahead so you can settle on your replacement property within the 45 day identification period.

  • Real property has unforeseen pitfalls and after forty-five days you cannot add an identification.
  • The 45 day identification period is written in stone and all three identified properties can disappear.

Do identify three, or the maximum number of properties.

  • You have this option, and with real property certainties can become disasters with a surprise survey or environmental report.

Do contract with a Qualified Intermediary that is both bonded and full time.

  • A professional Qualified Intermediary will remind you of your deadlines and if an employee absconds with your money, the bond company will replace them so you can complete your exchange.

Don’ts

Don’t buy a real estate mutual fund or an REIT.

  • Only real "like kind" property qualifies for replacement property.

Don’t reinvest the proceeds in property you already own.

  • Do this and you lose the benefits of the exchange!

Don’t dissolve partnerships or change the manner of holding title during the exchange (without consulting an expert on exchange entities).

  • Do this and you lose the benefits of the exchange!

Don’t proceed as if you have 180 days to complete your exchange.

  • Time is important. Exceed this time limit and you lose the benefits of the exchange!

Don’t go to settlement unless your Qualified Intermediary’s documents are at settlement

  • Do this and you lose the benefits of the exchange!

Don’t file your income taxes for the year in which you do your exchange until you complete your exchange.

  • Do this and you lose the benefits of the exchange!
Testimonials

Our partnership had developed a shopping center in the mid-80s, and in 2002 it was opportune for us to sell. But a straight sale would have meant a tax not only on our gained value, but also on the accrued depreciation — and that would have left next to nothing after taxes. So we knew a 1031 exchange was for us.

Marilee Hill knows the exchange process in detail. And she is constantly in touch with firms offering investment-grade properties specifically structured for exchanges. We ended up with a diversified portfolio, as part-owners of four solid, well-managed income producers: an office park, apartments, a net-leased office building, and another shopping center. And the capital gains tax? Indefinitely deferred.

Jay Silberman

Our tax situation was both complex and difficult. A real professional, truly knowledgeable, was necessary to guide us throught the maze. We are extremely pleased that we met, employed and worked with Marilee Hill. All of our problems were solved, and the results were way beyond our expectations.

G. Raymond and Martha Ellen Bodie
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General Disclosure
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Information provided on this website is for educational purposes only, and is not a guarantee of performance. Offerings of the type discussed herein are available only via private placement memorandum, and are limited to accredited investors.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication

1031 Risk Disclosure:

There is no guarantee that any strategy will be successful or achieve investment objectives;

Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

Potential for foreclosure – All financed real estate investments have potential for foreclosure;

Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.

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