Real Estate 101 – Understanding the 10 31 Exchanges

But what is the advantage of joining a real estate club?

Real estate investment clubs and real estate investment groups are increasingly popular across the country. They provide a forum for real estate professionals and investors to share information and experiences on the stock market, options trading, residential and commercial properties, bank loans, estate investments and other real estate related topics. Some clubs even offer real estate seminars and continuing education programs that can help members stay up to date on developments in their field of interest. And can it really make a difference to your financial well being?

Historically, section 1032 exchanges have always been an important provision of the federal tax code. They have functioned as a reliable and stabilizing stimulant not just to the real estate sector but also to the overall economy, yet almost every campaign cycle there are consistently attempts to either revise or abolish them. Perhaps the biggest reason they continue to be such an important tax provision is the difference they make between what you owe as an individual for state and local taxes and what you owe as a corporation or business for the same taxes. As property prices fluctuate and vary from area to area, investing in another property within the same state can offer a higher perceived value than purchasing another property within a different state altogether.

the more he pays in taxes, until distribution is actually taken

Another advantage of exchanges is the ability to “gift” profits to other investors without having to pay any gift tax or capital gains tax. This has become especially popular among real estate investors to defer the capital gains tax and instead let the proceeds accrue in profit until distributions are made. This allows people to retain more of their profits instead of paying taxes on them immediately. However, the longer one waits before making a distribution.

In order to qualify for the exchange of their properties, a person or entity must first qualify for the non-distributable basis. Properties must meet the required criteria in order to qualify for this status. Properties that have been owned for less than three years and are “as is” are not eligible for this status. The only exceptions are properties that have been repaired and restored to “like new” condition.

The second requirement is that the investor must also qualify for a transferable basis

Transferable basis means that the investor may begin to live in the property immediately upon the completion of the transaction. After this date, the real estate investor must pay capital gains taxes on the difference between the purchase price and the selling price. Properties held for less than a year are not transferable. Properties that qualify for this status must close by the end of the year.

Because the original contract establishes the rules for non-distributable and transferable properties, investors who desire to utilize the exchange process must also follow these requirements. If an investor wishes to exchange a non-distributable property for a transferable property, he or she will need to arrange for a transferable certificate. Investors can obtain these certificates from real estate brokers who also hold licenses to perform the exchange. Investors will also need to consult local rental property offices for applicable regulations. These regulations vary by state.

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