Take Cover

style='font-size:12.0pt;mso-bidi-font-size:10.0pt'>By:2'> Dave Owens

font-family:"Times New Roman"'>Whether real estate is your game or you’re a

business owner who needs to sell your current building so you can relocate to a

bigger, better area, be sure to do your homework before you sell your next

piece of real estate. There is a powerful investment tool out there that can

not only help you accomplish a variety of investment goals, but it can also help

you take advantage of upgrading your business locale. The tool is the Section

1031 Tax Deferred Exchange. A 1031 Exchange is a widely-used method to defer

federal and state income taxes on real estate sales. Allowed by the Internal

Revenue Code under Section 1031, the exchange says a property owner may sell

the property and not pay any capital gains taxes on the sale if the owner buys

new real estate property within a specified time period. The main benefit of a

1031 exchange is deferral of income taxes, but there are many other advantages.

mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>The 1031 Exchange

Advantage

font-family:"Times New Roman"'>1.mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'> The exchanger has

more buying power because the federal and state income taxes are deferred. This

enables him to leverage himself up greater than he could have if he had paid

the tax liability. The additional equity to reinvest will make him a more solid

buyer and help him get financing.

font-family:"Times New Roman"'>2.mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'> Investors can

participate in exchange after exchange to create a pyramid effect. This tax

liability is forgiven upon the death of the investor as the heirs get a

stepped-up basis on the inherited property.

font-family:"Times New Roman"'>3.mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'> The exchanger has

greater selling power and more flexibility with the selling price because he

does not have to inflate the sales price to try to cover some of the capital

gains that would normally be due upon the sale of an investment property.

font-family:"Times New Roman"'>4.mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'> The exchanger can

acquire a replacement property with greater income potential. He can sell raw

land and acquire income-producing property. For example, the exchanger can

acquire a building with more units or in a better rental location.

font-family:"Times New Roman"'>5.mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'> The exchanger has the

opportunity to consolidate several hard-to-manage properties in to one

easy-to-manage property or diversify several small properties into one large

property. It provides an excellent opportunity for relocation or expansion of a

current business or investment.

6. An exchange can also help an investor acquire a

less management-intense property.

font-family:"Times New Roman";font-style:normal'>All of the above culminates

into one significant power -- tmso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>he ability to create

pyramiding wealth accumulation in real estate ownership.

mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>Does Your Property

Qualify Under Section 1031?

font-family:"Times New Roman"'>Now that you’ve learned about the Section 1031

advantages, you’ll want to make sure that the property you own qualifies. And,

if the property is used for trade, business or investment purposes, chances are

it does. Any property held for productive use in a trade or business or

property held for investment purposes can be exchanged for any like-kind

property. The property may be real or tangible personal property such as an

apartment building, raw land, single family rental, shopping center, 30-year or

more leasehold interest or equipment. Like- kind property refers to the nature

of the property (i.e. held for use in a business or for investment) not the use

of the property – so a shopping center may be exchanged for an apartment

building or an apartment building may be exchanged for raw land. Furthermore,

one property can be sold and three properties acquired; or four properties can

be sold and one acquired.

font-family:"Times New Roman"'>The properties that do not qualify for a section

1031 exchange are stocks, bonds, partnership or LLC interests, personal

residences and stock in trade or inventory.

mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>The Rules and the

Basics of the 1031

font-family:"Times New Roman"'>A 1031 exchange can be easy to perform. There

are certain rules you must follow. First, you must use a qualified intermediary

to help facilitate your real estate transaction. A qualified intermediary will

complete an exchange agreement, hold the escrow funds during your transfer and

coordinate with your closing agents. A qualified intermediary is a neutral

party and cannot be your accountant, attorney, real estate agent or banker.

font-family:"Times New Roman"'>Second, once you have sold the relinquished

property, you have 45 days from the date of such sale to identify the

replacement property. This 45-day period starts from your first real estate

closing and consists of 45 calendar days, not business days. Finally, you must

purchase your replacement property within 180 days of the relinquished property

sale.

font-family:"Times New Roman"'>But you can’t buy just any property. You have to

follow the four basic guidelines for an exchange:

tab-stops:list .5in'>mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>(1)style='font:7.0pt "Times New Roman"'> style='font-size:12.0pt;mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>The

replacement property must be equal to or greater in value than the relinquished

property.

tab-stops:list .5in'>mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>(2)style='font:7.0pt "Times New Roman"'> style='font-size:12.0pt;mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>The

equity in the replacement property must be equal to or greater than the equity

in the relinquished property.

tab-stops:list .5in'>mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>(3)style='font:7.0pt "Times New Roman"'> style='font-size:12.0pt;mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>The

replacement property must be encumbered by equal or greater debt than the

relinquished property.

tab-stops:list .5in'>mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>(4)style='font:7.0pt "Times New Roman"'> style='font-size:12.0pt;mso-bidi-font-size:10.0pt;font-family:"Times New Roman"'>All

net proceeds must be used in acquiring replacement property.

font-family:"Times New Roman"'>Basically, you have to “buy up,” to do an

exchange, but, contrary to one misconception regarding 1031 exchanges, you

don’t have to “swap” properties. Although this was required in the original

code, it is rarely done now. The 1031 exchanges now enable you to sell the

property to someone totally unrelated to the person from whom you are buying the

new property.

font-family:"Times New Roman"'>Your real estate exchange can occur on the same

day -- a simultaneous exchange. Or, you can purchase your replacement property

in the future -- a delayed exchange. If you have a delayed exchange, your funds

are deposited into an interest-bearing joint trust account and the interest

will be taxable to you, the exchanger.

font-family:"Times New Roman"'>When the exchange is complete you should not

immediately sell the replacement property. The IRS has not set a specific time

requirement for holding replacement property, but the holding period must be

long enough to show your intent to hold such property for investment or use in

a trade or business.

font-family:"Times New Roman"'>Finally, you can do something called a reverse

exchange. This is where you buy the new property before you sell your original

real estate. A reverse exchange can be accomplished by using a technique called

“parking” -- a qualified intermediary purchases your new property and holds it

for you until you sell the original property. Reverse exchanges are extremely

complex.

font-family:"Times New Roman"'>

font-family:"Times New Roman"'>Section 1031 is a great investment tool so be

sure to check all your options when selling real estate property.The

information given here should help you decide whether or not you’re interested

in or qualified for the advantages of the 1031 exchange. However, this is basic

1031 exchange information. For specifics and to confirm a 1031 exchange is an

option for you, be sure to consult your tax or legal advisor.

font-family:"Times New Roman"'>

font-family:"Times New Roman"'>Dave Owens is a CPA and the President of 1031

Real Estate Exchange Services. He is also the owner of Island Financial

Service, a Sanibel-based accounting firm.