A TAX-FREE WAY to ROLLOVER YOUR PROPERTY INVESTMENT
In the early 1990s, The Internal Revenue Service (IRS) tax code
was changed to offer commercial real estate investors a way to
literally swap investment or business properties without having
to pay capital gains tax on money that is being used to reinvest
in another property.
The 1031Code-Basic Rules The 1031 Exchange derives its name
from Section 1031 of the IRS Tax code. This part of the code
allows the investor to defer payment of capital gains taxes on an
investment property, by placing proceeds of the sale with an
intermediary . The funds are temporarily held until a replacement
property is identified. The funds are then reinvested, within a
specific time frame, in a like-kind property or properties of equal
or greater value.
In order to be eligible for the 1031 exchange, the property
involved must be used either for investment or business
purposes. Investment properties such as stocks, bonds, notes,
securities or interests in a partnership are not exchangeable
under the code.
Simultaneous - Delayed - Reverse- Improvement - Types
of Exchange
The Delayed Exchange is most widely used. This type of
exchange happens when an investor sells the first property
before finding a second property. The clock starts ticking when
the first property is sold, and the investor has 45 days from
that point to identify the second investment for exchange.
At the same time, proceeds from sale number one are placed in
a qualified escrow account until the closing on the second
property takes place.
There are several types of 1031 Exchanges to suit the investor's
needs. For instance, there is the Reverse Exchange, where a
replacement property is purchased before the first property is
sold. There is also the Improvement Exchange, which allows the
investor to acquire a property, make improvements, and then
make the replacement with the improved property and the
simultaneous exchange, which is a back-to-back sale.
The Exchange Facilitator
While this rare gift from the IRS is very much appreciated by
investors, there are strings attached in the form of rules and
qualifications, so working with a knowledgeable intermediary is
highly recommended. A qualified intermediary offers a "Safe
Harbor" for the exchange to take place. A qualified intermediary
is anyone who handles the exchange of property and funds;
however, the person you choose cannot be an acting
accountant, attorney and realtor who worked in a professional
capacity for the past two years. There are many 1031 Exchange
professionals available, but it is usually best to choose the
intermediary who has a great deal of experience. One mistake
can cause a great deal of stress and money for the investor.
*Information Source - Everything You Ever Wanted to Know
about 1031 Exchange Professionals, Longmont, CO.
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