A.D. CANTELMO REALTY/TONY CANTELMO
BROKER
TONY CANTELMO





A.D. Cantelmo Property Management
Our Business is Property Management in Orange County California


Get rich and defer taxes


We all love the ability to make money and not pay any taxes and anyone who denies that is either lying or they need some specialized help. The problem is that so many people don’t know how to do it. I was talking to a young family who just bought a home and they wanted some information on how to get into the rental property business. We talked for a long time and in the end of the conversation, I threw in a bonus. I explained how they could grow their rental business and defer taxes by doing a 1031 exchange. They had no idea what I was talking about and unfortunately few people are familiar with the law and that means the loss of opportunity to make money

To me, Real Estate is a great way to invest your money and the opportunity to grow tax free makes it even more inviting. Lets look at the 1031 exchange law:

1st Requirement: Like-Kind Property

The first requirement for a 1031 exchange (rollover) is that the old property to be sold and the new property to be bought are like kind. This is frequently one of the most misunderstood concepts involving 1031 exchanges. Like-kind relates to the use of properties. As a result, the old property as well as the new property, must be held for investment or utilized in a trade or business. Vacant land will always qualify for 1031 treatment whether it is leased or not. Furthermore commercial property may be used to purchase a rental home or a lot may be sold to buy a condo.
Section 1031 expressly states that property strictly held for resale does not qualify for an exchange. This means that investors and developers who strictly “flip” properties do not qualify for exchange treatment because their intent is resale rather than holding for an investment. There are numerous court cases seeking to determine the dividing line between held for resale and investment. Intent appears to be the single most significant factor in determining the difference.

2nd Requirement: 45 Day Identification Period

The Internal Revenue Code requires that the new property be identified within 45 days of the closing of the sale of the old property.
The 45 days commence the day after closing and are calendar days. If the 45th day falls on a holiday, that day remains the deadline for the identification of the new properties. No extensions are allowed under any circumstances. If you have not entered into a contract by midnight of the 45th a list of properties must be furnished and must be specific. It must show the property address, the legal description or other means of specific identification.
Up to three potential new properties can be identified without regard to cost. If you wish to identify more than three potential replacements, the IRS limits the total value of all of the properties that you are identifying to be less than double the value of the property that you sold. This is known as the 200% rule. Accordingly, more than three properties may be identified as replacements however, if the taxpayer exceeds the 200% limit the whole exchange may be disallowed. As a result, the logical rule for investors is to keep the list to three or fewer properties. It is the responsibility of the qualified intermediary to accept the list on behalf of the IRS and document the date it was received however, no formal filing is required to be made with the IRS.

3rd Requirement:: The 180 Day Purchase Period

This rule is simple and straight forward. Section 1031 requires that the purchase and closing of one or more of the new properties occur by the 180th day of the closing of the old property. The property being purchased must be one or more of the properties listed on the 45 day identification list. A new property may not be introduced after 45 days. These time frames run concurrently, therefore when the 45 days are up the taxpayer only has 135 days remaining to close. Again there are no extensions due to title defects or otherwise. Closed means title is required to pass before the 180th day.

4th Requirement: Use of a Qualified Intermediary

Sellers cannot touch the money in between the sale of their old property and the purchase of their new property. By law the taxpayer must use an independent third party commonly known as an exchange partner and/or intermediary to handle the change. The party who serves in this role cannot be someone with whom the taxpayer has had a family relationship or alternatively a business relationship during the preceding two years. The function of the exchange partner/intermediary is to prepare the documents required by the IRS at the time of the sale of the old property and at the time of the purchase of the new property. The intermediary must hold the proceeds of the sale in a separate account until the purchase of the new property is completed. The taxpayer is entitled to the interest of these funds and must treat the interest as ordinary income during the period of escrow.

5th Requirement: Title must be mirror image

Section 1031 requires that the taxpayer listed on the old property be the same taxpayer listed on the new property. If you and your wife are married and sell the old property than you and your wife must also be on the title to the new property. If a trust or corporation is in title to the old property that same trust or corporation must be on title to the new property.
If only the husband is on the old property, but his wife is required to be on title to the new property to help qualify for the loan, one solution to avoid this problem prior to the sale would be for the husband to Quit Claim his interest to himself and his wife. Similarly, if shareholders of a corporation or partners in a partnership or members of a LLC are desirous of selling their respective corporate interest, this is prohibited. What qualifies for 1031 treatment is real estate and not partnership interests. To accomplish this objective the entity must be liquidated and deeds must be issued to provide the respective partners with a tenants in common interest in lieu of a partnership or related interest.

6th Requirement: Reinvest Equal or Greater Amount

In order to defer 100% of the tax on the gain of the sale of old property, the new property must be of equal or greater value. There are actually two requirements within this rule. First, the new property has to be of greater or equal value of the one which is sold. Secondly, all of the cash profits must be reinvested. In reality you may deduct closing expenses and commissions from the sale of the property being sold. If the property is being sold for $500,000.00 and the actual net amount after closing expenses is $465,000.00 all that is required to be spent for the replacement property is a total of $465,000.00. Closing expenses associated with the purchase may be added into the purchase, as well as capital improvements completed within 180 days together with furnishings. In fact, a taxpayer may make an unlimited number of capital improvements as well as spend up to 15% of the acquisition cost on personal property.

7th Requirement: Reverse Exchanges

Title To Both Properties Cannot Be In Same Name at Same Time
All previous requirements are applicable…..and then some. A reverse may come in handy when a seller does not yet have a buyer for the property that he wishes to sell and is afraid of losing the new property he wishes to acquire. In the fall of 2000, the IRS issued a revenue procedure that established the concept of an exchange accommodation title holder (which is actually another name for a qualified intermediary). Simply put, a taxpayer may not have both the old as well as the new property titled in their name at the same time and still qualify for a reverse exchange.
The IRS has set up guidelines which allow the taxpayer to acquire the new property before the old property is sold provided title is taken in the name of the exchange accommodation title holder (typically a limited liability company which is created). Under this scenario an entity, other than the taxpayer, will hold legal title in what is commonly referred to as a qualified parking arrangement until such time as the old property is sold. The old property must be sold and closed within 180 days of first acquiring title to the new property. As soon as the old property is sold the proceeds are then directed to the exchange accommodation title holder at which time the property may be deeded out of the parking arrangement directly to the taxpayer. This procedure is actually quite simple provided cash is utilized to fund the new purchase. The vast majority of lenders simply will not lend funds to a third party entity and only to the taxpayer.
If financing the new property cannot be avoided then title must be conveyed out of the taxpayers name to a straw person prior to acquiring the new property. This will avoid having title to the old property and title to the new property being in the taxpayer’s name at the same time which is a prohibited transaction. Although this is an acceptable procedure to the IRS the conveyance to the straw person must be reported as an arm’s length transaction the straw person will then convey title to the ultimate purchase. This is an expensive proposition in Florida as Documentary Stamps must be paid on the conveyance to the straw person and then once again on the sale to the ultimate third party purchaser.

Summary

In conclusion, there are countless scenarios involving 1031 exchanges with each and every one being unique with its own set of facts and circumstances. If you understand the seven technical requirements set forth above, you clearly understand 95% of all aspects of Section 1031 of the Internal Revenue Code. If you have questions, or have facts or circumstances which you are uncertain of, I would greatly encourage you to consult a CPA or an attorney who has experience and is knowledgeable with 1031 tax deferred exchanges.


Information from
Ronald S. Webster Attorney






A.D. Cantelmo Property

Management Specializes in Property Management in Orange County Ca.

Tenant/ Property Service
 
Marketing Property
We market your property on all the major Real Estate websites, including Zillow, Trulia, Realtor.com, and the Multiple Listing Service

Showing your Property
We make sure your Property is shown to all Qualified, interested parties. We never allow Unchaperoned shwings

Screening Tenants
We have a detailed tenant screening process. We run Credit, Criminal and Eviction checks. we check rental history, and use our more then 10 years of Property Management experience to place the Best Tenant possible in your Property

Open 7 Days a week

Contact Tony
714-313-7413
If you have hours that do not coincide with normal business hours, No Problem.


 

Featured Listings

 

Email Agent

Enter your email address and I'll reply as soon as possible.

 
Realtor Equal Housing Opportunity Multiple Listing Service
 

What my clients are saying  

5 reviews 5.0 star rating 1/21/2016 I was tired of using a large management team to manage my investment property. I felt I was always on the back burner. I was recommended to Tony from a business associate, he assured me I would be very pleased. Well that was an understatement, Tony is amazing. He's above all honest and always available for my concerns. I'm not as well versed as other investors with property management and maintenance and tenant relations, Tony has been an excellent partner and has guided me through quite a bit of needed repairs and worked far beyond what was expected to help turn my little investment into quite a prosperous investment, If what your looking for is prompt return calls, honest direction and someone very knowledgeable with general contractors and real estate laws, Tony is your man. Angela

 

~ Angela

5 reviews 5.0 star rating 1/21/2016 I was tired of using a large management team to manage my investment property. I felt I was always on the back burner. I was recommended to Tony from a business associate, he assured me I would be very pleased. Well that was an understatement, Tony is amazing. He's above all honest and always available for my concerns. I'm not as well versed as other investors with property management and maintenance and tenant relations, Tony has been an excellent partner and has guided me through quite a bit of needed repairs and worked far beyond what was expected to help turn my little investment into quite a prosperous investment, If what your looking for is prompt return calls, honest direction and someone very knowledgeable with general contractors and real estate laws, Tony is your man. Angela

 

~ Angela

"10 out of 10 I am so Happy Since I left my old company and I joined AD Cantelmo Property Co I am stress free I live in a different state and this company watches my house and always Mr Tony Cantelmo is on top of things I really want to thank you for what you do for me and I would really Recomend this Company to any and every one Thank You again. Shawn" ------------------- "I need to trust the people I work with and I trust Tony. He stays on tops of things, communicates well, and gets things done. He not only gets things done but he gets things done the right way. Jim"

 

~ Shawn

More Reviews

Want to Know How Much Your Home is Worth?

Get Your FREE Home Market Analysis Report Right Now!

YES, SHOW ME NOW