REAL ESTATE MARKETING: 1031 Exchange Overview

1031 Exchange Overview

The Dos and Do Nots In a 1031 Exchange

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or of investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."

1031 exchanges provide investors with one of the best tax strategies for preserving the value of an investment portfolio. By using an exchange the investor is able to defer the recognition of capital gain taxes that would otherwise be incurred on the sale of investment property. To qualify as an exchange the relinquished and replacement properties must be qualified "like-kind" properties and the transaction must be structured as an exchange. Using Investment Property Exchange Services, Inc. as the "Qualified Intermediary" will provide the investor with the necessary reciprocal transfer of properties to create the exchange and the "Safe Harbor" protection against actual and constructive receipt of the exchange funds as required by 1031.

Dos and Do Nots In a 1031 Exchange

DO: Advanced planning for the exchange. Talk to your accountant, attorney, broker, lender and Qualified Intermediary. As a realtor I cannot provide advice regarding specific tax consequences.

DO NOT: Miss your identification and exchange deadlines. Failure to identify within the 45 day identification period or failure to acquire replacement property within the 180 day exchange period will disqualify the entire exchange. Reputable Qualified Intermediaries will not act on backdated or late identifications.

DO: Keep in mind these three basic rules to qualify for complete tax deferral:

Use all proceeds from the relinquished property for purchasing the replacement property.
Make sure the debt on the replacement property is equal to or greater than the debt on the relinquished property.(Exception: A reduction in debt can be offset with additional cash; however, a reduction in equity cannot be offset by increasing debt.)
Receive only "like-kind" replacement property.

DO NOT: Plan to sell and invest the proceeds in property you already own. Funds applied toward property already owned purchase " goods and services," not "like-kind" property.

DO:Attempt to sell before you purchase. Occasionally Exchangers find the ideal replacement property before a buyer is found for the relinquished property. If this situation occurs, a reverse exchange (buying before selling) may be necessary. While the IRS has recently provided guidance for reverse exchanges in Revenue Procedure 200-37, Exchangers should be aware that reverse exchanges are considered a more aggressive exchange variation because some other entity must hold title to either the Exchanger's relinquished or replacement property for up to 180 days pending the completion of the exchange transaction.

DO NOT: Dissolve partnerships or change the manner of holding title during the exchange. A change in the Exchanger's legal relationship with the property may jeopardize the exchange.

Article by:
Warren Neal
www.scottsdale-phoenix-real-estate-connection.com