New legislation took effect January 1, 2018 that made some changes to 1031 exchanges. However, most of the changes took aim at “personal property” and left most of the advantages of 1031 real estate swaps intact.
1031 exchanges are a way to avoid paying capital gains taxes on real estate when buying and selling “like-kind” properties by rolling the money into another investment property. The established, broad definition of like-kind did not change with this legislation, so a mini-mart could be sold and a duplex purchased. More on the definition HERE.
The only catch is that the investor cannot touch any of the cash, or it is subject to immediate tax. It is therefore in their best interest to roll as much as possible over through an intermediary.
It is this role that is affording savvy bankers an opportunity to take advantage. The following are some typical fees associated with 1031s that banks can levy:
1. Setup fee. This is an administrative fee or basic fee for each new 1031 transaction. It covers preparing the Exchange Agreement and other documentation, liaising with the closing agent, obtaining the funds to be escrowed, etc. Typical fees are between $800 - $1,200.
2. Property fee. In the common case of a multi-property exchange, a charge may incur for each additional property involved. Average fees are around $250.
3. Expedition fee. As 1031 exchanges face very stringent deadlines, it is frequently necessary to rush the process at one step or another. Common fees for this are around $250 per instance.
4. Proprietary fee. Other fees can be levied by your institution for such items as escrow fees or reverse exchange fees, at your discretion.
If this is an area of opportunity you are exploring, CONTACT US to see how our software can accommodate your needs.
Also known as a like-kind exchange, a 1031 swap or exchange is named after the tax code of the same number. Essentially, it allows for the swap of one business or investment asset for another, with either no or limited tax due at the time of the exchange.
There are no limits to the number of times or dollar amounts you can move around with these investments. So theoretically, you could buy a property for $100K, see it appreciate $20K, and instead of selling it and paying capital gains tax, roll the entire amount into a new property. Let’s say you buy a new, $120K property. It appreciates to $150K, you roll it over. And on and on.
By using 1031 swaps, you would avoid paying taxes indefinitely. Say you finally want to retire one day—you would then cash out and owe a one-time, long-term payment based on the capital gain rate (currently 15%).
So, what qualifies for a 1031 swap? It is generally real estate, and “like-minded” cuts a wide swath in IRS terms. For example, you could swap out a cattle ranch for a strip mall. A gas station for an apartment complex, etc. They have to be investments, not personal property. There are exceptions to this, but we will avoid them for the purposes of this article.
There are a couple other rules that apply to 1031s. Since the sale of one property rarely syncs up with the purchase of a new one, the provision allows for a “delayed exchange,” giving you extra time. However, there are limits. A replacement property must be designated within 45 days of the closing of sold property. You must also close on your replacement property 180 days after the sale date.
Important to note that any cash you touch in the process will effectively kill the swap, with all its tax benefits in tow. This has opened up an opportunity for banks to fill the custodial role of intermediary. You can read more about that HERE.
Thinking about expanding your business reach? Looking to move ahead in a hot new area of opportunity but not finding the room in your budget? Or maybe you want to finally launch that REITs or portfolio management startup?
Whatever the reason, you need to make sure that your initiative gets legs under it from the beginning and has the support of reliable software.
We understand that your business needs and, subsequently, your functionality needs can change sometimes faster than your budget may allow. MIMICS is happy to offer financing options that can work with your individual situation.
But what does that look like?
Generally, our software is purchased with a one-time license fee, 50% of which is due at signing and the rest at the end of implementation. However, if that 50% is not in your current budget, we are willing to set up a monthly payment schedule.
So how does that work?
We take the total cost of the software you are licensing (license fee and annual maintenance) and work out the amortization schedule for repayment with a reasonable interest rate, and you simply make the monthly payments while we get you up and running. We offer 3 different term options: 1-year, 2-year and 3-year.
So, if an upfront licensing cost is keeping your implementation on the back burner, know that you do have options. Contact our Sales department with any questions, or to explore these financing options in more depth.
If you have identified an area of opportunity that is not being addressed or that could be improved by our software, it may be time to think about a custom solution.
“Custom solution” may seem abstract, but essentially, it is usually an area of functionality that would improve your overall workflow. Everyone’s operations are different, and the flexibility of our software enables us to customize it meet almost any need.
To demystify it a bit, let’s walk through how a typical customized solution comes to be:
1. You identify an area of opportunity, be it a new business venture or an improvement to a current process.
2. You contact us either via the support portal or through our sales department with your request.
3. We work closely with you, back and forth, to define complete specifications of the required work.
4. Once the specifications are completed and agreed upon, we send them to our relevant programming/consulting/training team to get an estimate for the hours required for the work.
5. We inform you of the estimated hours required, and the estimated cost associated with that work.
6. If you find that acceptable, we draft a Programming, Consulting, or Training Services Contract (PSC, CSC, or TSC) for the requested work. This includes the definition of the required work, the estimated hours and cost. In the case of larger jobs, we ask for a 50% down payment before work begins.
7. After receipt of the signed contract and down payment (if applicable), we perform the contracted work and track all hours used.
8. When the work is completed and installed, you will be informed, and provided any instructions that may be required. We then invoice for the balance due, based on the actual hours used (not to exceed the contracted amount).
If you have questions, or would like to get started on a customization, CONTACT US.
Your business needs are not static; they are dynamic and evolving. MIMICS software is built with growth and adaptation in mind.
MIMICS was born over forty years ago by addressing the specific functionality needs of our first client. It’s a principle that still guides us today and the ability to customize our software to meet those unique individual needs of our clients still sets us apart. If it doesn’t exist, we build it. Simple as that.
Client Capital One addressed some pain points, such as manually processing NACHA files over $99 million, and capturing and entering 1099 data for Euro customers. We worked closely with them to clearly identify the issues and nail down specifications to create custom solutions. As a result, they were able to mitigate 23 identified risks. READ MORE HERE.
We are currently working with multiple banking prospects who approached us about 1031 swaps. 1031s allows customers to postpone paying tax money earned for selling a property if they reinvest the proceeds in a similar property.
Many clients have also approached us about new IFRS 9 regulations. A replacement of IAS 39, IFRS 9 goes into effect in 2018. It addresses three main areas, which are: classification and measurement, impairment and hedge accounting.
These are just a few examples of some of the customizations that are possible. Additionally, we can customize forms or reports to your specifications, as needed.
If you have functionality needs that are new or changing we can help. As a general guideline, the process looks like THIS. Feel free to contact us through the support portal or via our SALES department. We look forward to growing with you!