Real Estate Tips
1031 TAX DEFFERED EXCHANGES IN A NUTSHELLTax deferred exchanging is an investment strategy that should be considered by anyone who owns investment real estate. Anyone involved with advising or counseling real estate investors, including real estate agents, lawyers, accountants, financial planners, enrolled agents, tax advisors, escrow and closing agents, lenders, should know about tax deferred exchanging. WHAT IS TAX DEFERRED EXCHANGE? A tax deferred exchange is simply a method by which a property owner trades one property for another without having to pay any federal income taxes on the transaction. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. But in an exchange, the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold. These exchanges are sometime called "tax free exchanges," because the exchange transaction itself is not taxed. Tax deferred exchanges are authorized by section 1031 of the Internal Revenue Code. The requirements of Section 1031 and other sections must be carefully met, but when an exchange is done properly owner simply disposes of one property and acquires another property. The transaction must be structured in such a way that it is in fact an exchange of one property for another, rather than a taxable sale of one property and the purchase of another. Today, a sale and a reinvestment in a replacement property are converted into an exchange by means of an exchange agreement and the service of a qualified intermediary - a forth party which helps to ensure that the exchange is structured properly. The IRS's regulations make exchanging easy, inexpensive, and safe. MISCONCEPTIONS ABOUT EXCHANGING People often fail to consider tax deferred exchanging as an investment strategy because they are misinformed about the requirements of exchanging. However, once their misconceptions have been cleared up, property owners usually find that section 1031 is worth considering. Here are a few misconceptions about 1031 exchanges. Myth: Exchanges require two parties who want each other"'s properties.Fact: Two-party exchanges are possible, but in reality, such two-party swaps rarely occur. Today an exchange is accomplished with the help of qualified intermediary and usually involves four principle parties: the exchanger (the taxpayer), a buyer for the relinquished property, a seller of the replacement property, and the intermediary. The parties often do not know each other, and their properties may even be located in different states. Myth: The like-kind requirements limits an exchanger's options.Fact: Property must be exchanged for "like-kind" property. But "like-kind" simply means that real property must be exchanged for real property. All real property is like-kind, so a whole interest may be exchanged for a tenancy in-common interest; one property may be exchanged for more than one property; a duplex may be exchanged for a four-plex; a single family residence may be exchanged for a motel; vacant land may be exchanged for personal property. Personal property may be exchanged for other like-kind personal property. Myth: In a exchange, title on the exchange properties must be passed simultaneously. Fact: The properties do not have to close at the same time. However, in a deferred exchange, the replacement property must close in 180 days after the closing on the relinquished property. In a reverse exchange, the replacement property is acquired first and the relinquished property must close within 180 days.
