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THE BENEFITS

O

F
A
1031
Exchange
HE CURRENT REAL ESTATE CRAZE
T
of flipping homes and other properties,
buying for the purpose of selling for
a profit, has stoked new interest in an
underutilized financial tool that has been
available to investors for nearly a century. total depreciation taken during the original investment.
Investors both current and prospective should take As with any dealings with the IRS, there are rules for
a good, hard look at Section 1031 of the Internal the 1031 exchange:
Revenue Code and consider a
BY TOM DMYTRIW
1031 exchange, a once little- • The relinquished property and the replacement
known but now increasingly popular way to keep from property must both be investment real estate proper-
giving money to the government–at least temporarily. ties located in the United States–and your personal
The 1031 exchange has been part of the IRS Code residence cannot be involved in the deal.
since 1921, but it was all but dormant until an awaken-
• The real estate investor must trade only “like kind”
ing in the 1990s. The concept behind this tax-deferred
real estate–properties that are similar in nature or
exchange is that an investor can transfer the equity in
character.
one property to a new property and basically maintain
• The new property must be worth more than the old
the same investment with a different asset.
property, both in value and equity.
As long as all proceeds from the sale are invested in the
new property, the IRS actually considers the deal to be one
• A neutral third party, commonly called a facilitator
continuous investment. As a result, no capital gains tax is
or a qualified intermediary, should be involved in
due on the profit from the sale of the relinquished asset.
the transaction. This person takes possession of the
A 1031 exchange is especially useful for investors who
proceeds from the sale of the property, uses the funds
buy and renovate properties and subsequently reinvest
to purchase the new property, then transfers title of
the profits in more valuable real estate.
the property to the investor.
A 1031 exchange is an extremely powerful tool for inves-
• The replacement property must be clearly identi-
tors seeking to increase the size of their real estate holdings.
fied in writing within 45 days of the closing of the
Being able to transfer equity into more valuable properties
relinquished property.
without having to pay a tax bill is the pot of gold at the • The closing for the replacement property must occur
end of the rainbow for those who know where to look. within 180 days of the closing of the relinquished property.
Investors must remember that in a 1031 exchange,
their capital gains tax is deferred but not eliminated. If With such an attractive option available for real estate
you sell your property during your lifetime and do not entrepreneurs, both seasoned and novice, an increasing
qualify for a tax-deferred exchange, you will have to pay number of savvy investors are already taking advantage of
taxes both on the capital gains and the recapture of the the 1031 exchange. More will soon follow suit.
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75_1031TaxInfo.indd 75 11/28/07 2:22:04 PM
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