Tony's Tax Tips

The Tax Chess Board Part 8

This article originally appeared in the Pasadena Star News on May 20, 2006.

THE TAX CHESS BOARD – An important piece on the tax chess board is the ownership of real estate. If the real estate appreciates, it increases your net worth and you do not have to pay any income tax. Some of the tax consequences of disposing of real estate can be deferred by selling and accomplishing a 1031 exchange. What happens if you want to accomplish a 1031 exchange and have already found the investment property you want to acquire? The problem is you have not sold the investment property you currently own. What can you do?

C. Anthony Phillips, CPA

REVERSE 1031 EXCHANGE – You immediately engage the services of an experienced accommodator, like Downstream Exchange Company.  They would assist you in accomplishing a reverse 1031 exchange by helping you navigate the maze of Federal and State tax laws as well as the rules, regulations and revenue procedures of the Internal Revenue Service.  If you successfully follow their directions, you would be able to acquire another investment property first, sell your investment property later and still defer all or some of the resulting Federal or State tax.

WHY WOULD YOU WANT TO DO A REVERSE 1031 EXCHANGE? – The principle benefit is that you can defer the gain from the sale of your investment property into the newly acquired investment property.

OTHER REASONS FOR DOING A REVERSE 1031 EXCHANGE - For the past few years, it has been easier to sell your investment property than purchase a new one.  To take advantage of this situation, many real estate investors have been finding their new investment properties first and then selling the investment property they currently own after the purchase.

YOU MAY NOT WANT TO DO A REVERSE 1031 EXCHANGE – The principle reason is that a reverse 1031 exchange requires that you deposit sufficient cash with your accommodator for them to purchase your replacement property before you sell your old property.

OTHER REASONS TO AVOID DOING A REVERSE 1031 EXCHANGES – You generally incur two transfer costs for either your old or new investment property.  Also, during the time your accommodator is accomplishing a reverse exchange, the County Assessors Office will reassess either your old or new investment property, depending on the reverse exchange method your accommodator uses.  Another reason is that the cost and complexity of a reverse exchange is much greater than a regular exchange.

FOR MORE INFORMATION ABOUT A REGULAR OR REVERSE 1031 EXCHANGE – Call Downstream Exchange Company; at 626-796-1031 (great number isn’t it?)  You may speak to Karen Petersen, Vineet Dubey or my son, Derek Phillips.  You can also visit our web site at www.DownstreamExchange.com.

Tony Phillips, CPA has a certified public accounting firm, Phillips & Company in Pasadena and is President of Downstream Exchange Company which helps investors save taxes when they sell their investment property.

The above is not intended to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.