Preserve Equity, Build for the Future Using a 1031 Tax Exchange

Thinking of trading up on an investment resort property? If so, look into 1031 Tax Exchanges (based on IRS Code Section 1031), which allow taxpayers to defer taxes on capital gains resulting from the sale of investment real estate, often a sizable sum since combined Federal and State taxes can run as high as 38 percent.

With an exchange, owners are able to preserve equity, while still selling the property. The underlying concept is that an exchange of like-kind property for like-kind property does not generate funds, which can be taxed since the profits go directly into the new or replacement property. To accomplish this, sellers hire a Qualified 1031 Intermediary (QI) to document the sale as an exchange and to receive the funds from the sale. The QI then delivers the funds directly to the closing agent for the replacement property who deeds the property to the taxpayer.

Central to a 1031 Exchange is the interpretation of like-kind property. While the common assumption is that like-kind implies land for land or a condominium for a condominium swap, the interpretation of like kind is actually less literal. Rather, it defines like kind as meaning that both the replacement and the original property must be used as an investment. So land, condominiums, single-family homes and motels can all be exchanged for one another as long as they are used in the exchanger's business or held as an investment. The amount of debt held on the replacement property must be the same as the amount of debt on the original.

1031 Exchanges are complex mechanisms and like all IRS requirements very specific. For example, exchangers have 45 days from closing to identify properties they intend to purchase and 180 days to complete the purchase. Purchase and Sale agreements must include verbiage indicating the intent to affect a 1031 Exchange.

The 45-day time frame used to be onerous for sellers. Now, they can opt for a Reverse Exchange, in which an additional third party called "the exchange accommodation title holder" (EAT) acquires title to the replacement property until the original property sells. Reverse Exchanges shift the 45- and 180-day time frame to the selling side of the transaction. With an Improvement Exchange, which also uses an EAT to hold the replacement property, sellers can build investment properties from the ground up or improve existing properties. The improvements have to be built and paid for during the 180-day period.

If you are interested in a 1031 Exchange, the first step is to consult your tax advisors as well as an attorney or CPA who is knowledgeable with 1031 Exchanges. Make sure that your real estate professional knows you plan to conduct an exchange and be sure that he or she is familiar not only with the process but also with the specific documentation and time frame mandated by the IRS.

This article is intended to inform readers, but does not constitute any financial or legal advice.

Neda Dabestani-Ryba is a Realtor in Maryland. She is a member of the President's Circle of Top Real Estate Professionals. She can be reached at (800) 536-3806 or visit her website for more information: http://neda.dabestani.pcragent.com/

Prudential Carruthers REALTORS is an independently owned and operated member of Prudential Real Estate Affiliates, Inc., a Prudential Financial company. Equal Housing Opportunity.

---

FSBO: For Sale By Owners Chapter IV [part 1]

Like a monarch, Red Haring reigned in the deep leather... Read More

Five Ps of Selling Houses

1. Planning:Know Your Target BuyersThink about your neighborhood and the... Read More

New Homes in Ridgefield

Location:Frequent travelers will absolutely delight in this town! As part... Read More

Destin Florida Triples In 3 Years

Do you want to see something that is absolutely amazing?... Read More

What Can I Realistically Earn In A Lease Purchase Business?

If you're looking at Lease Purchasing as a business, you'll... Read More

Find Out If There Are Sexual Predators Nearby Before You Buy A Home or Property!

When looking for a new home or property, buyers ask... Read More

Strata Title Hotel Investments

Want to know why Strata Title Hotel Investments can be... Read More

How to Negotiate a Successful Short Sale

Anyone who has ever profited from doing a short sale... Read More

The Best Way To Get Real Estate Listings

The Real Estate Industry is HUGE and is a golden... Read More

Selling Investment Houses: Props & Profits

New Marketing and Design Psychology ideas help you stage homes... Read More

What Does It Take To Be A Donald Trump in Real Estate?

Since you are a business oriented person, you might be... Read More

Types Of Real Estate - An Investors Choice

There are different types of real estate, and different ways... Read More

Cheap, Bargain, Real Estate; Good Deals, Below Market, Low Priced Properties Are Available...

Cheap, Bargain, Real Estate; Good Deals, Below Market, Low Priced... Read More

Real Estate Investing - The Marvel Of Home Depot And Lowes

Repairing a rental home (or your own home) use to... Read More

Fraud in Real Estate, Are You Being Victimized? - Part II

The phone range and Peter was on the other end... Read More

Seven Tips in Choosing Maui Income Properties

Aloha! If you are interested in choosing a Maui income... Read More

Why Real Estate?

Five months ago I was faced with a decision to... Read More

Tenants in Common (TIC)

Tenants in Common is a way of sharing ownership of... Read More

Real Estate Investors Kick Away $1,000

Those new to real estate investing often fail to take... Read More

11 Steps Away From Buying a Home

There is no doubt that the market for houses has... Read More

No More Estate Agent Fees

Follow a few simple guidelines, and marketing your own home... Read More

Rental Property Management - Ten Questions

Why hire rental property management? Because doing it all yourself... Read More

Does Staging Work?

Staging can involve minimal effort on the part of a... Read More

Use Targeted Decorating To Get A Higher Price For Your House

This article will show you how to sell your home... Read More

Boston Real Estate - Interest Rates and Inventory Must be Analyzed when Selling Your Boston Home

When selling your Boston home, it's good practice to be... Read More

Selling a House is Easy

The thought of selling a house strikes fear into most... Read More

Buying a House in Scotland

Buying a house in Scotland is slightly different from buying... Read More

Take The Guess Work Out Of Your Wholesale Property Purchases

We have become very concerned by the number of readers... Read More

Should You Sell Your Home Yourself?

Are you thinking about selling your home? Would you like... Read More

Spain Excellent Choice for British SIPP Investors

Second homes in favourite holiday destinations such as Spain are... Read More

Real Estate Bubble: Fact or Fiction?

The real estate market buzz across the country these days... Read More

Miami Property Booming for Foreign Investors

Miami tourism is growing and so is the Miami property... Read More

Credit Help: Buying Real Estate -- Not the Same as Buying Cars

Credit for Buying Real Estate is Different than Credit for... Read More