Please critique my understanding of the 1031 process.

As I understand it, #1 list to sell a property I want to unload. #2. Start looking for other properties. (Does it have to be more expensive?)

#3 Search for a middleman to escrow funds. (Who?) #4 Get my house under contract to sell. #5 identify some new properties I want to 1031 in to. (What constitutes a selected property?) #6 get a property under contract. #7 sell mine, money to escrow. #8 buy new one with funds from escrow.

And you have to identify that property within 45 days of closing on the sale, then close on the purchase within 180 days of the sale. They must be the same kind of properties.

This defers the taxes on the property, so you just put it off until later. Which is great if you plan to give the property to your heirs, but may not be helpful if you want to sell later.

The property you buy does not have to be more expensive, but if it isn't, you take money out and there are tax consequences on that. The third party escrowing the funds (because you can't take it in hand yourself) needs to be bonded and insured and will charge a fee for that.

I've never had interest in 1031 exchanges, but you can study all options. Go to Wikipedia and search 1031 exchange.

I wanted to highlight that you can not handle the funds. The third party company mentioned above is hired for this purpose.

I once had a landlord pull a check from his shirt pocket and begin to tell me how he needs to find a house, yadda yadda yadda. (Large checks, large amounts of money bore me).

I asked to whom was the check written and the answer was to him " I just can't cash it". I advised him to go back to the settlement attorney and start over.

The idea of a 1031 exchange is to deffer the taxes, lots of them. Federal long term capital gains are 20%. Here in California the State tax is as high as 13.3%. Then if you make over 200k, there's the affordable care act tax of 3.8%. An on your depreciation, you'd have to repay that amount by 25%. So taxes are high. But where you have a hot market, it's not that easy to find your up-tick, exchange property.

So before you go selling your property, I'd examine the market and see how easy it will be to replace it. You don't have to spend all of your funds or find something for more money, but that's called "boot" and you'd have to pay taxes on the difference.

The 45 day time period to identify up to 3 replacement properties goes by quickly. So your options are:

a) like kind property

b) TIC -Tenancy in Common (with partners)

c) Royalty, such as a oil lease, producing wells, etc.

You should consult an expert. Also your intermediary, the company that hold your fund, the third party, need to be licensed, bonded and insured. I used a service IPX1031 with a 100 million dollar bond.

I have done many 1031 exchanges and saved millions in taxes. I also sold properties, paid the taxes, banked the fund and then when the market dropped (like 50%) I reinvested those funds.

Also when you sell you'll have to pay commission and closing costs, an extra 8%.

There is also something called a reverse exchange. That's where you buy your replacement property first (with an accommodator) and they sell your property. But for that you need to be rich with extra cash in hand.

Basically correct. A competent CPA or Title/Closing office should be able to fill you in on the specific details, and if this is your first time doing a 1031 I highly recommend hiring a competent CPA who works with REIs.

Have them run the numbers to be sure you're not trading a property that is performing excellently for one that is sub-par. A loss of net profit usually costs you more than the savings on taxes gained from new depreciation. Also, keep in mind you will carry over your current property's adjusted basis to the new property. The capital gain is only deferred, not eliminated, by acquiring a new property via the 1031 exchange.

Only death followed by inheritance eliminates capital gain, when the property is transferred to new owners (heirs) with a stepped up basis at current Fair Market Value.

Bottom line: the purpose of a 1031 is trading a current investment to get a better performing investment without getting hit with taxes today. Keep that in mind as you decide whether or not to make this move.

Keep in mind that you are not saving taxes by doing 1031 exchange, you only defer them. The IRS has more time and patience than you, and those capital gain taxes will be paid someday.