A Tool to Keep Your Wealth!


Even with some relief in the capital gains tax, investors still see their equity gains depleted significantly with a sale. Real estate investors have only one vehicle for preserving and building their real estate wealth: The Section 1031 Tax-Deferred Exchange.


Section 1031 of the Internal Revenue Code allows investors to defer or "postpone" paying income taxes on gains from the sale of investment real property, if the proceeds are re-invested into "Like-Kind" property, in other worlds property held for investment or for a productive use in a trade or business.

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The following is a brief synopsis of the 1031 exchange:




Like Kind refers to the type of property being exchange. You can exchange any real estate investment for any other type of real estate investment -- for example, a farm for an apartment, vacant land for a duplex, warehouse for a motel, and so on. In most cases your personal residence is not Like-Kind property.

Exchanging Up


To accomplish a fully tax-deferred exchange, the rule of thumb is... Exchange for a property of even value or more value. So for instance if you have a $100,000 farm you could exchange this equity for a $200,000 apartment building. The equity in the farm becomes a downpayment on the apartment. This must be completed in a simultaneous exchange or use of an IRS qualified Accomodator. The funds from the sale of the first property cannot go through your hands or it becomes immediately taxable.

Boot


To the extent that you do not exchange for a property of equal value the remainder of the proceeds coming from the exchange property is considered boot and this is taxable. Also if something other than real estate is received such as personal property. This becomes taxable in the transaction.



In a Simultaneous Exchange your old property is exchanged for a new property at the same time in a consolidated closing. Often, there are practical reasons that this is not possible. Maybe you have a buyer for your old property but haven't found and acceptable replacement property before closing is necessary. Maybe you want to use the equity in another property to exchange into a new property that is being constructed but not finished. Therefore it becomes necessary to complete a "delayed" exchange.


Delayed Exchanges

In a Delayed Exchange, your old property is sold with the funds going to an IRS Accomodator which holds the funds until a closing can take place on a replacement property. In 1984, Congress authorized Delayed Exchanges in Section 1031 and in 1991 additional regulations were written to facilitate Delayed Exchanges.


Time Considerations

In a Delayed Exchange, you are required to "identify and designate" your new property on or before 45 days from the transfer of title on your old property. A Closing must occur all of the replacement properties with 180 days from transfer or the end of your tax return year in which the old property closed, whichever is earlier.


Identification

IRS limits the number of properties identified to three or 200% of the old property value. This must be done in written instructions to your Accomodator no later than the 45th day.

The information contained herein is for informational purposes only. The author is not a licensed attorney or accountant, and is not

to be considered rendering such legal advice. Legal and tax counsel is recommended in every exchange transaction.

If you would like to discuss your situation, please email:

Stephen R. England sengland@ipexneb.com