1031 EXCHANGE? IF YOU HAVE AN INVESTMENT PROPERTY ANYWHERE IN THE COUNTRY AND YOU WOULD LIKE TO SELL WITHOUT PAYING CAPITAL GAINS TAX THEN PLEASE READ ON..... 

Have you ever heard an investor talk about a 1031 Exchange then wonder what are 1031 Exchanges and why would you want to do something like that? 

While the actual 1031 Exchange transaction can be quite complex, the basic concept of a 1031 Exchange is to sell an existing investment property, maybe a single family home on a golf course, with a capital gain and use that money to buy a different investment property, like a condo on the gulf in Naples. The main reason most people use this procedure is to defer the capital gain tax that would be due on the sale. It gets its name “1031" from section 1031 of the Internal Revenue Code that allows for these transactions. It may also be known by other names, such as, 1031 tax exchange, 1031 like kind exchange, IRS 1031 exchange, tax deferred exchange, 1031 real estate exchange, 1031 tax free exchange, Starker exchange, reverse 1031 exchange, as well as many more. 

A 1031 tax deferred exchange is a very structured deal. There are very specific requirements pertaining to the properties, the timing, the people necessary to assist, the title, and the disposition of the money. However with proper guidance, it is not really difficult, and the benefit of being able to build wealth is tremendous. As with any investment, individuals intending to use this devise should discuss this tax deferred exchange with their legal and tax advisors. 

There a few basic rules that you need to understand before proceeding. All properties must be investment properties, either for appreciation such as bare land, or income producing such as rental property. You need to prepare a list of properties you may want to buy within 45 days from the day of closing of your sale. There is no exception to this deadline. Again from the day of closing on your property, you have 180 days to close on the purchase(s) of the properties from the 45 day list. Also there are absolutely no exceptions to the deadline. You must use a Qualified Intermediary (QI) to prepare the legal documents for the exchange and to hold your money from your sale until the purchase. The use of a QI (also known as an Accommodator) is required by the IRS, and must be independent and not related in any way to you, either by family, friendship, or business. You must take title in exactly the same name on the new property as you held it on the old property. And finally, in order to defer all of the capital gain taxes, you must buy property equal to or greater in value than the property you sold, as well as reinvest all of the cash proceeds. Read more 1031 rules at the IRS website.

As a note of warning, you should be very cautious and selective when choosing Qualified Intermediaries. They will be holding your money, so you want to insure its safety. My advice would be to find an experienced organization that can demonstrate their professionalism and knowledge of all 1031 tax exchange issues. Make sure they are bonded, and that they hold your money in a separate account for each transaction. You should also make sure that they are easily accessible to answer any questions you may have at no charge, and are available to offer assistance locally. Due diligence is required, just like hiring any professional. 

Please understand that this article is very elementary regarding 1031 exchange information and that there are many complex issues that must be considered before going ahead. My intention here was to give you a very brief understanding of the process. There are also numerous items and variations, such as boot, like kind, a 1031 reverse exchange, a build-to-suit exchange, or a Starker 1031 exchange, that I have not addressed in this short piece. But by assembling the right team of professionals, including your legal/tax advisor, an experienced and bonded QI, and a knowledgeable Realtor, doing a Section 1031 Exchange can be a very rewarding experience. 

If you would like to know more and not wait for future articles, especially why Naples, Bonita and Southwest Florida are the ideal locations for your next investment, please contact me, a 1031 Exchange specialist, at your convenience. I would like to help. 

Dick Dovorany                   

Call today for more information:   239-293-1969

1031 Tax Exchange Glossery of Terms

1031 Tax Exchange Glossery of Terms

1031 TAX DEFERRED EXCHANGE:
A deferred Exchange is defined as an exchange in which, pursuant to "An Agreement", the taxpayer transfers property held either for productive use in a trade or business or for investment and subsequently receives another property to be held either for productive use in a trade or business or for investment.

REPLACEMENT PROPERTY:
New property, property being acquired or the target property being brought by Exchanger. (formerly refferd to as Upleg property, now commonly called Phase II property).

EXCHANGER:
Taxpayer, Client.

RELINQUISHED PROPERTY:
Old property, property being sold by the Exchanger. (Use to be called the Downleg property, now commonly called Phase I property).

BASIS:
Method of measuring investment in property for tax purposes. Example: Original cost, plus improvements, minus depreciation taken.

GROWTH FACTOR:
Interest earned during the exchange, payable at the end.

SIMULTANEOUS/CONCURRENT:
An exchange without any time span between the sale and buy.

LIKE-KIND PROPERTY:
Any real property for any other real property if said property(ies) are held for productive use in trade or business or for investment purposes.

SEQUENTIAL DEEDING:
Property is actually deeded to the Intermediary and the Intermediary deeds to the ultimate owner.

DIRECT DEEDING:
Vested owner deeds directly to the ultimate owner. Does not eliminate the duties of the Qualified Intermediary to acquire and transfer the relinquished property and acquire and transfer the Replacement Property.

IDENTIFICATION PERIOD:
The replacement property must be identified within 45 days of the close of escrow/closing the relinquished property. This 45 day rule is very strict and is not extended if the 45th day should happen to fall on a weekend or a legal holiday.

EXCHANGE PERIOD:
The replacement property must be received by the taxpayer within the "Exchange Period", which ends on the earlier of 180 days after the date on which the taxpayer transferred the property relinquished, or the due date for the taxpayer’s tax return for the taxable year in which the transfer of the relinquished property occurs (such as April 15th). Due to the Taxpayer’s ability to extend the date of payment, the exchange period is usually 180 days.

CONSTRUCTIVE RECEIPT:
Control of the cash proceeds without actual physical possession by Exchanger or their agent.

BOOT:
Taxable situation, whether Cash or Mortgage (Debt Relief).

EXCHANGE AGREEMENT:
A deferred Exchange is defined as an exchange in which, PURSUANT TO AN AGREEMENT, the Exchanger transfers the relinquished property and subsequently receives the replacement property.

THEREFORE, AN EXCHANGE AGREEMENT IS VITAL.

SAFE HARBOR:
Term used to identify the requirements to protect the Exchanger’s money as well as the "Qualified Intermediary."

DEFERRED EXCHANGE:
This term is now used in place of "Non-Simultaneous Exchange" or "Starker Exchange". This is the type of an exchange where the Exchanger utilizes the exchange period described above.

QUALIFIED INTERMEDIARY:
Intermediary is the company who acts as the accommodator in the exchange. A qualified intermediary is identifed as follows:
1.) Not a related party to the Exchanger, (e.g. agent, attorney, broker, etc.);
2.) Receives a fee;
3.) Acquires the relinquished property from the Exchanger; and
4.) Acquires the replacement property and transfers it to the Exchanger.

TAX REFORM ACT OF 1984:
In the Tax Reform Act of 1984, Congress addressed the IRS's continued displeasure with the Starker decision by amending Section 1031 to allow Delayed Exchanges; but only if all of the exchange property is identified and acquired within specific deadlines (see Exchange Period). And most important in the Conference Report accompanying the 1984 Act, Congress specifically reaffirmed that a "sale" followed by reinvestment in like-kind property does NOT qualify for tax deferral under Section 1031. So to qualify for tax deferral, it is still quite essential to carefully structure an exchange to avoid actual or constructive "receipt" of proceeds of sale and to prevent characterization of the transaction as a taxable sale and reinvestment.

1991 REVISIONS:
Basically the IRS held a hearing to try and "clean up" the Tax Reform Act of 1984 and to provide uniform terminologies, which are included herein. One of the main results for this revision is that IRS finally had a change of attitude toward Delayed Exchanges by accepting them instead of fighting them.

 STARKER:
Name of the taxpayer in U.S. Court of Appeal's case which authorized Delayed Exchanges.