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1031 Exchanges Defer Uncle Sam

October 4th, 2007 · No Comments

I noticed a nice description on 1031 like kind exchanges on Inmanwiki.com today. It’s a great vehicle to keep your money working for you and put off paying Uncle Sam for a while. Just because its an exchange, you do not have to buy and sell simultaneously. Rather an intermediary holds the money until you identify a property to buy within a specified time frame. You can use a title company or real estate attorney for the intermediary. I’ve recently completed two 1031 exchanges and I would suggest using an attorney vs a title company for this. My personal experience with Gulf Atlantic/Land America Title was the worst customer experience I’ve ever had.

A 1031 exchange is an exchange of business/investment property solely for business or investment property of a like-kind that can defer the tax liability associated with the sale on an investment property.

If you exchange business/investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.

Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.

Like Kind Properties
Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.

Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.

Tenancy in Common Investments
A popular way to identify like kind replacement properties is to purchase an undivided fractional interest in an investment grade property through a Tenant in common investment or a TIC.

To fully defer one’s tax obligation, they must exchange into a property of equal or greater value, they must roll all of their sale proceeds into the new property and they must replace all the debt they may have had on the “sold” property. One can make up for a lesser debt amount by adding an equal amount of cash.

If you’re fortunate enough to be making a big profit from properties you own, then a 1031 exchange is a great option. It’s particularly useful for commercial properties but also great for selling rental homes.

Tags: Real Estate Tips