The section 1031 exchange is easy. No one should sell one rental property to buy another property! If the desire is to get rid of the old and bring in the new, you can accomplish that with "no" (yep, zero) tax. That's what the tax-deferred exchange is all about - selling the old, getting the new, and PAYING ZERO TAX.

Look at the tax-deferred exchange in another light. You avoid the tax! The tax money stays in your pocket. You might someday sell the property and pay the tax, but until then it is still your money. In effect, you only pay the tax if you sell. Thus, DON'T SELL! If you plan on making money as a landlord, never sell. NEVER PAY TAX on sale of property.

Die, but don't sell! If you die, the previously tax-deferred gains escape the income tax FOREVER. At death, the assets in your estate get marked up to fair market value with NO INCOME TAX CONSEQUENCES.

Example: You bought your first rental in 1940. In 1950, rather than pay tax of $8,000, you traded the old rental and some cash for a new rental. You did the same in 1960, 1970, 1980, and 1990 to avoid another $120,000 in taxes. Today, you have a basis of $500,000 in a building that you could sell for $1.2 million. If you sold, your taxable gain would be $700,000. Don't sell! Die! With death - ZERO TAX on the $700,000 profit.

Death taxes: We are talking about income tax here. Sure, your survivors have to pay estate taxes on the value of your estate. Thus, the government could tax the entire $1.2 million property for estate tax purposes, but with the tax-deferred exchanges you avoided income taxes from 1940 to the date of death by using the tax-deferred exchange strategy.

Planning note: Payment of the income tax does not reduce the estate tax! Payment of the income tax does:

• Reduce the money in your bank account
• Reduce the size of your taxable estate by the lost cash

When you learn how easy it is to accomplish a tax-deferred exchange, you will agree that only those who have had a lobotomy:

• Sell the old rental
• Pay taxes on sale of the old rental
• Use after-tax cash to buy a new rental

Keep all of your brain! Take a few minutes now to learn the "ins and outs" of the tax-deferred exchange. You will thank us over and over again as this strategy adds thousands, maybe millions to your net worth.

The like kind exchange is EASY. You make the trade in almost the same manner as if you sold the old one and bought the new. You simply involve a third party to help you (the exchange facilitator).

Overview of the Exchange

Tax law requires that you pay no tax on the like-kind exchange. In this article, "like kind" means that you trade your rental property for another property that you will use as rental real estate.

Note that "your use" is the focus. If you trade for someone's home because you want to make it a rental property in your hands and it qualifies for tax-deferred exchange treatment.

The players: When thinking about how the exchange works, it is easiest to think of your people:

• You
• Buyer for your existing property
• Seller of the property you want to acquire
• Exchange facilitator (often a lawyer) to hold the properties

To find an exchange facilitator, call your:

• Real estate professional
• title company
• Accountant
• Lawyer

The exchange facilitator is step one. Check fees! Further, you may not engage as the facilitator:

• An employee
• A relative
• A person who acted as your advisor during the prior two years, like your financial planner, lawyer, accountant, investment advisor, real estate agent, or banker

once you have the facilitator, you are on your EASY way to the exchange. Remember that this is easy - and very profitable.

Your ntext steps are simple. First, find the rental property that you want to acquire *your facilitator will buy this property for you). Second, find a buyer for your property.

Once you have the property you want and the buyer for your property, your facilitator concludes the exchange by:

• Buying the property you want
• Trading the property you want to your buyer
• Having your buyer trade the property to you in exchange for the property the buyer wants from you

This can take a matter of minutes. Or, if you like to drag things out, you can have up to 180 days to get the deal done.

If things are not in place, you can worry yourself and everyone else to death with the so called Starker rules. Under the Starker rules, after you transfer your property in the trade, you must:

• Within 45 days, name the property you want in trade
• Within 180 days, have the property transferred to you

Setting up the Exchange for Zero Tax

To make sure that you do not pay any tax on the exchange, do not accept:

• Property that is not like-kind
• Cash (called boot)
• A reduction in your mortgage debt

Cash and other non-like kind property received in an exchange are taxable to the extent of gain. You may deduct from the table cash your expenses for lawyers, real estate commissions, consultants, and closing costs. But if you have cash in your pocket after paying expenses, the extra cash is taxable to the extent there are taxable profits.

Idea: Rather than accept cash, ask the buyer to make improvements to the property you acquire. This way, you make the improvements with some of the government's cash (deferred tax dollars).

You treat mortgage relief as a payment of cash to you. Thus, to the extent you have mortgage relief you can have taxable profit.

Example: You give up a mortgage of $120,000 and obtain a mortgage of $90,000 on the property acquired. You have $30,000 of potentially taxable mortgage relief.

Bad news happens when you assume debt and also receive cash. Tax law does not offset the debt and cash. Thus, you pay tax on the cash.

Tip 1 - Avoid cash

Tip 2 - Avoid mortgage relief

With this combination, you have no taxable income in an exchange.

Benefits from the Exchange

The property designed tax-deferred transaction:

• Results in zero tax
• Rids you of the old property
• Puts you in a more desrable property.

Further, the IRS's zero tax becomes an equity investment in your new property. In this case, the IRS becomes benevolent by:

• Making you an interest-free loan of the deferred taxes
• Expecting no share of the profits should you die (the property gets marked up to fair market value with no income tax consequences)

It's a more friendly IRS - but only when you know what you are doing. In addition, with proper planning, you can use a trade to:

• Avoid recapture of depreciation
• Add more depreciation deductions
• Increase depreciable basis
• Make a new more beneficial allocation of cost to land and building

Technical Points and Ideas

Here are some new rules that you need to know to protect yourself:

• You may not trade property located in the United States for property located outside the United States.
• If you trade with a relative and relative sells the property within two years of the trade, the original trade is taxable.
• If you get into the naming of the replacement property, you may name more than one property during the 45-day period.
• You may earn interest on money in escrow during the exchange.

The exchange should not be difficult. When it gets hard, you need to step back and start asking questions. CPAs, planners, lawyers, and reale state professionals know of like-kind trades, but they talk funny. If you get confused, double check advice from one with advice from another. If there is a conflict, have a three-way phone conversation to clear up any potential problems.

Summary

Defer tax! Make the IRS give you an interest-free loan of tax money so that you can upgrade your rental property portfolio. Remember, you defer tax - put it off - until you sell the property you got in the trade.

To avoid tax entirely, simply die. Ad death, the property gets marked up to fair value and bypasses the income taxes.

The Section 1031 exchange is easy. Avoid incoming cash! Avoid debt reduction! This type of planning produces zero tax.