1031 Tax Deferred Exchange By Gus Trantham Pg 2

IRS 1031 TAX DEFERRED EXCHANGE

Text Box: Myth: A Tax Deferred Exchange is the simultaneous exchange of two pieces of property. Fact: That would be very rare indeed Instead, a taxpayer has 45 days after the closing of the relinquished property to identify replacement property, and 180 days after closing of the relinquished property to actually close on the purchase of the replacement property. Myth: An exchange requires two parties who want to “trade” for each other’s property. Fact: Most exchanges actually involve four parties who may not even know each other: the taxpayer, the buyer of taxpayer’s property (relinquished property), a seller of the replacement property, and a qualified intermediary. Exchanges can also involve multiple properties. Myth: Property must be exchanged for like-kind property which means the same kind of property, such as a rental house for a rental house. Fact: Like-kind has been interpreted to mean virtually any kind of real estate You could exchange a duplex for an undivided interest in a shopping center, or perhaps a ranch for a downtown high-rise. The combinations are virtually limitless. Myth: Tax Deferred Exchanges are difficult to accomplish and very few transactions actually qualify. Fact: Under new IRS regulations and through the use of a qualified intermediary, Tax Deferred Exchanges are relatively easy to accomplish. Any investor who wants to sell property and reinvest in real estate should consider the benefits of a Tax Deferred Exchange.

Text Box: 1. To defer the tax due upon the sale of property, the property owner may exchange a property interest he or she owns for an interest in like-kind property (replacement property.) 2. The easiest way to structure a Tax Deferred Exchange is to use a qualified intermediary. The taxpayer actually deeds the relinquished property to a purchaser and later, when the exchange is completed, accepts a deed to the replacement property from the seller of that property. The intermediary holds the funds from the “sale” of the taxpayer’s property until a suitable replacement property can be located. The intermediary never has to receive title to either the relinquished or the replacement property. 3. A taxpayer has 45 days after the closing of the relinquished property to identify replacement property, and 180 days after the closing of the relinquished property to actually close on the purchase of the replacement property. 4. Before committing to an exchange, a taxpayer should be aware of the potential tax consequences by consulting qualified counsel. For example, if a taxpayer receives cash or is relieved of debt, not all of the gain will be deferred. Other things to consider include 1) the effect the exchange will have on the tax base of the replacement property; 2) the effect of both on the exchange; and 3) the effect of tax recapture rules on the exchange. Your qualified intermediary should be able to advise you on these issues or will recommend a qualified advisor. 5. By deferring the tax which would be due if the property were sold, an investor can increase available investment cash up to a third, allowing a significantly larger reinvestment and the opportunity to control even more real estate.

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