Thursday, May 04, 2006
1031 LIKE-KIND EXCHANGES/TIPS
Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.
Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
The first step in benifiting from this often unknown tax advantage is to obtain the support of a real estate professional, an experienced accountant, a tax attorney and a intermediary service.
A real estate professional can help identify new property to be acquired as replacement property within 45 days of the relinquished propertys closing. You must close on the new property within 180 days of the closing of the relinquished property.
The exchange agreement will be between you and the intermediary. Most real estate exchanges involve relinquishment of one to three investment properties for one to three replacement properties. The replacement aggregate fair market value may not exceed 200 percent of the relinquished fair market value.
The process itself is straightforward but precise. If every requirement is not met, the exchange may be damaged, allowing the IRS to declare that a sale and a purchase have taken place vs. an exchange and thus capital gains tax would be due.
Ensure that a 1031 exchange clause, drafted or approved by a competent attorney, is placed in the contract to sell the investment property. An independent third-party intermediary, unrelated to the owner, should be used to handle the funds. Make sure the transaction will qualify for Section 1031 treatment before starting the process.
Your tax accountant can help with your personal finances and whether such a transaction is suitable with other investment strategies.
Study other possibilities. There is even a "reverse" exchange where you can close on the second property first and then sell the initial holding. By educating yourself, you can be successful in minimizing your tax expenses.
Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
The first step in benifiting from this often unknown tax advantage is to obtain the support of a real estate professional, an experienced accountant, a tax attorney and a intermediary service.
A real estate professional can help identify new property to be acquired as replacement property within 45 days of the relinquished propertys closing. You must close on the new property within 180 days of the closing of the relinquished property.
The exchange agreement will be between you and the intermediary. Most real estate exchanges involve relinquishment of one to three investment properties for one to three replacement properties. The replacement aggregate fair market value may not exceed 200 percent of the relinquished fair market value.
The process itself is straightforward but precise. If every requirement is not met, the exchange may be damaged, allowing the IRS to declare that a sale and a purchase have taken place vs. an exchange and thus capital gains tax would be due.
Ensure that a 1031 exchange clause, drafted or approved by a competent attorney, is placed in the contract to sell the investment property. An independent third-party intermediary, unrelated to the owner, should be used to handle the funds. Make sure the transaction will qualify for Section 1031 treatment before starting the process.
Your tax accountant can help with your personal finances and whether such a transaction is suitable with other investment strategies.
Study other possibilities. There is even a "reverse" exchange where you can close on the second property first and then sell the initial holding. By educating yourself, you can be successful in minimizing your tax expenses.
