Q - What are the benefits of a 1031 exchanging v. selling?
A Section 1031 exchange is one of the few techniques available to postpone
or potentially eliminate taxes due on the sale of qualifying properties.
By deferring the tax, you have more money available to invest in another
property. In effect; you receive an interest free loan from the federal
government in the amount you would have paid in taxes.
Any gain from depreciation recapture is postponed.
You can acquire and dispose of properties to reallocate your investment
portfolio without paying tax on any gain.
Q - What are the requirements for a valid exchange?
Qualifying Property - Certain types of property are specifically excluded
from Section 1031 treatment: property held primarily for sale; inventories;
stocks, bonds or notes; other securities or evidences of indebtedness; interests
in a partnership; certificates of trusts or beneficial interest; and choices in
action. In general; if property is not specifically excluded, it can qualify for
Proper Purpose - Both the relinquished property and replacement property
must be held for productive use in a trade or business or for investment.
Property acquired for immediate resale will not qualify. The taxpayer's personal
residence will not qualify.
Like Kind - Replacement property acquired in an exchange must be "like-kind"
to the property being relinquished. All qualifying real property located in the
United States is like-kind. Personal property that is relinquished must be
either like-kind or like-class to the personal property which is acquired.
Property located outside the United States is not like-kind to property located
in the United States.
Exchange Requirement - The relinquished property must be exchanged for other
property, rather than sold for cash and using the proceeds to buy the
replacement property. Most deferred exchanges are facilitated by Qualified
Intermediaries,(a QI) who assist the taxpayer in meeting the requirements of Section
Q - Why is a Qualified Intermediary needed?
The exchange ends the moment the taxpayer has actual or constructive receipt
(i.e. direct or indirect use or control) of the proceeds from the sale of the
relinquished property. The use of a QI is a safe harbor established by the
Treasury Regulations. If the taxpayer meets the requirements of this safe
harbor, the IRS will not consider the taxpayer to be in receipt of the funds.
The sale proceeds go directly to the QI, who holds them until they are needed to
acquire the replacement property. The QI then delivers the funds directly to the
Q - Does the Qualified Intermediary actually take title to
No, not in most situations. The IRS regulations allow the properties to be
deeded directly between the parties, just as in a normal sale transaction. The
taxpayer's interests in the property purchase and sale contracts are assigned to
the QI. The QI then instructs the property owner to deed the property directly
to the appropriate party (for the relinquished property, its buyer; for the
replacement property, taxpayer).
To learn moreabout 1031 Tax DeferredExchanges, and how they work for you, and your future, call Abode Realty and Bob Sechena at (406) 727 - 0352. Or complete the short form below.