1031 Tax-free Exchange: Once Complicated, Now Easy

Date: 12/02/2003

December 3, 2003

Taxes are no fun…except a little when you can beat them…or at least defer them.

If an American buys a piece of real estate in another country…then eventually sells it for a profit…he owes capital gains taxes both in the U.S. and (maybe) in the jurisdiction where the property resides. Here's a way to defer the U.S. part of that capital gains burden: like-kind exchange it.

You may have heard of this strategy (officially known as Section 1031) with regards to U.S. assets, but most people don't realize you can put it to work for you offshore, too.

Buy a beachfront lot in Nicaragua, sell it for 100% gain, then put the sales proceeds into an apartment in Buenos Aires or an island villa in Panama. Do that within 180 days of the sale, and you owe no capital gains tax to Uncle Sam. It's got to be offshore proceeds into offshore proceeds. You can't like-kind exchange the profits from the sale of an apartment in Omaha for the purchase of an apartment in Paris…and once the money has been invested in an apartment in Paris, to continue to take advantage of the like-kind exchange loophole, you've got to keep it outside the States (though not in France and not necessarily in an apartment…but, importantly, in an investment, not a residence).

"I DON'T KNOW HOW THIS EVER MADE IT PAST THE IRS WATCHDOGS"

If you ever bought and sold property, you may already know about the 1031 Tax-free Exchange. But chances are you didn't take advantage of it. Most investors simply don't have the time or expert legal advice to do so. That is a shame because in my experience the 1031 Tax-Free Exchange is one of the best investment strategies the IRS has ever allowed. I don't know how this ever made it past the IRS watchdogs, but it did. And thankfully, it has survived many attempts to close it down.

I learned of this loophole from an attorney friend. The time he spent explaining the strategy to me one-on-one would normally cost about $5,000 in legal fees. Now that I understand how the 1031 Exchange works, I can use it in the future to take advantage of the huge tax savings or deferrals.

A MUST READ BEFORE YOU INVEST IN ANY U.S. OR NON-U.S. PROPERTY

Now I've decided to take all the information my attorney and I had researched for 1031 and make it available to you immediately. Our new report, "Like Kind Exchanges for Real Estate: What You Need To Know To Sidestep The Taxman", is now available to you as an easy-to-use resource that could save you thousands, perhaps even millions, of dollars in legal fees and taxes.

You can use the 1031 tax-free exchange for rental houses, commercial properties, retail stores, even vacant land--any property you hold as an investment.

We know someone who has had rental houses for years, and doesn't want the headaches of managing them anymore. So he is selling off his houses and buying an apartment complex, which will be professionally managed. Without using a 1031 exchange, his taxes would eat up most of the profits. So he has decided to trade one property for another and will use all of his profits (including the 15% that he would have paid to the government as capital gains) to leverage a purchase into a bigger and better apartment complex.

My attorney's next door neighbor flips real estate. He buys a property at a good price…makes some improvements…and then sells it for a nice profit. But by the time he pays the capital gains taxes on each property, and pays back some depreciation, he only has a little equity left to start another project. By using a 1031 exchange he now saves a lot of money on each and every flip, and grows his equity by leaps and bounds.

SO HOW MUCH WILL A 1031 TAX FREE EXCHANGE SAVE YOU?

Let's say you bought a property worth $100,000, and it's now worth $375,000. If you sell it outright, you will pay $55,000 in federal capital gains tax. Let's say your state has a 10% capital gains tax rate in addition to the federal tax. That's another $27,500. Most people have taken advantage of depreciation for investment real estate over the years, so let's figure another $28,000 in paying back the taxes on the depreciation. That's a grand total of $110,500 in taxes that you owe because you sold the property. If you were planning on reinvesting all your profits back into real estate, and using them as a 25% down payment on the new property, here is what you could buy.

First, without using a 1031 tax-free exchange your after-tax investment could only buy you a property worth $1,058,000.

By using a 1031 taxable exchange that avoids the taxes, you could reinvest in a property worth $1,500,000.

That's $442,000 more property than you could have bought without your tax savings.

Now let's take the investment one stage further. If you were getting a 15% return from your new property, it would generate $225,000 a year in annual income. Not a bad deal for investing a little time to take advantage of a great tax break.

EVERYTHING YOU NEED TO GET IT DONE RIGHT

The author of The Like Kind Exchange Report is Matthew J. Turner, International Living's corporate attorney. Matt has many years experience in real estate transfers, both on and offshore. His father is a respected commercial property developer in the D.C. area, and Matt is invested in several properties himself. In preparing the report, Matt not only put together an outstanding easy-to-understand overview on the 1031 Exchange, but also created a packet of easy-to-use legal forms that makes upgrading your real estate investments a breeze. Never before have I come across a report that so clearly can help you:

* Side-step capital gains taxes on many investment exchanges

* Reinvest in much larger, more valuable properties with less capital

* Increase cash flow

* Keep you abreast of tax law changes that might affect your investments

You can get this new 1031 Exchange report, packet of legal forms, and online support for the low price of $149. Accessing such high quality research on your own through any qualified attorney would cost you thousands more…

…and not getting this information at all could cost you a tremendous windfall from your next real estate investment.

To have your 1031 tax-free exchange program rushed to you today click here to order.

Sincerely,

Lief Simon,
Editor, Global Real Estate Investor
Contributing Editor, International Living

P.S. Order online today and you will immediately receive as a BONUS the special 1031 Exchange "Members Only" website and password information. The website will allow you to post any questions on our message board where our attorney will then monitor and address any issues. You will also find important notices about tax law changes, and much, much more!