1031 TAX EXCHANGES PROTECT
AGAINST CAPITAL GAINS

   In today's investment market there are very few avenues to protect yourself from taxes.  The IRS has afforded one avenue through "1031 like kind exchanges".  This exchange allows an individual to sell and purchase properties without having to pay the Capital gains tax on the sale of their initial property.  This capital gain is deferred to the next property and will be realized once the future property is sold and the seller takes their profit in the form of cash or other securities.  The exchange is a very straightforward process and has certain rules that must be followed to be a true exchange.  First a person must understand what like kind properties are.  Properties that may be exchanged are those held for investment purposes and cannot be a primary residence.  The property can be raw land, condos, apartments, commercial properties, or any other type of real estate that the exchanger may hold.  The properties that are exchanged do not have to be exactly the same type of real estate.  This means that you can exchange a rental condo for raw land, office buildings or any other type of property held for investments.

   Once a person has decided to exchange properties, they must contact an intermediary.  This is a third party that will hold the assets until such time that the exchange is complete.  The documentation for the sale has to state that the seller is performing a 1031 Exchange and will be at no expense to the buyer.  The wording is very important and you should contact a professional well versed in 1031's to get it exact.

   The intermediary in trust then holds the proceeds from the sale until the exchange is completed;  at no time during the exchange process can the seller receive any cash from the sale of the original property.  If the exchanger does receive any cash this is called boot and is subject to capital gains tax.  The seller has 180 days to complete the exchange to meet IRS guidelines.  The exchanger also must declare the properties they intend to purchase within 45 days within close of the first sale to remain within compliance.  The declaration of properties is also a very important part of the exchange and again you should contact a professional in regard to the exact details to be sure that you remain in compliance.

   Once the exchanger has determined the property to be purchased they then proceed in a normal fashion to close the transaction.  There is one exception in the fact that the intermediary will use the proceeds from the original sale to close the transaction  for the new property.  After the closing the intermediary will then transfer the title of the new property to the exchanger.  This transaction and the events in it will satisfy the IRS that you have not realized any capital gains from the sale of one property but you have moved those gains to another property or properties.

   The 1031 Exchange is an excellent route for anyone to take who buys and sells real estate for investment reasons but it is very important that they follow the guidelines to protect themselves from any tax liability.  An exchange allows an investor to use leverage to move up in property values, move their real estate holdings as their needs change, or simply invest and create new income possibilities.

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