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Asset Preservation's
Thanks to IRC #1031, a properly structured exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC #1031 (a)(1) states:
"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."
To understand the powerful protection an exchange offers,
consider the following example:
An investor has a $200,000 capital gain and incurs a tax liability of approximately $50,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold.
Only $130,000 remains to reinvest in another property.
Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $520,000 new property.
If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.
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As the above example demonstrates, exchanges protect investors from capital gain taxes as well as facilitating significant portfolio growth and increased return on investment. In order to access the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process and the IRC. For instance, an accurate understanding of the key term "like-kind" - often mistakenly thought to mean the same exact types of property - can reveal possibilities that might have been dismissed or overlooked. API is your resource to obtain accurate and thorough information about the entire exchange process.
"The Ever-Changing World"
Identification Rules
"It's esential to adhere to these requirements"
The identification period in a delayed exchange begins on the date the Exchanger transfers the relinquished property and ends at midnight on the 45th calendar day thereafter. To qualify for a ?1031 tax deferred exchange, the tax code requires identifying replacement property:
In a written document signed by the ExchangerHand delivered, mailed, telecopied, or otherwise sentBefore the end of the identification period toEither the person obligated to transfer the replacement property to the Exchanger [generally the "Qualified Intermediary"] or any other person involved in the exchange other than the taxpayer or a disqualified person.
The replacement property must be unambiguously described (i.e. legal description, street address or distinquishable name). The type of property should be described in a personal property exchange.
Additional Issues
Exchangers acquiring a property which is being constructed must identify this property and the improvements in as much detail as is practical at the time the identification is made. Exchangers who intend to acquire less than a 100% ownership interest in the replacement property should specify the specific percentage interest. Exchangers should always consult with their tax and/or legal advisors about the specific identification rules and restrictions.
Any properties acquired within the 45-day identification period are considered properly identified. An investor has the ability to substitute new replacement properties by revoking a previous identification and correctly identifying new replacement properties as long as this is done in writing within the 45-day identification period. Although Exchangers can identify more than one replacement property, the maximum number of properties that can be identified is limited to:
A. Three properties without regard to their fair market value ("3 Property Rule")
B. Any number of properties so long as their aggregate fair market value does not exceed 200% of the aggregate fair market value of all relinquished properties ("200% Rule")
C. Any number of properties without regard to the combined fair market value, as long the properties acquired amount to at least ninety five percent of the fair market value of all identified properties ("95% Exception").
Information Provided by
Asset Preservation, Inc.
National Headquarters: 800-282-1031 or info@apiexchange.com
This information is not intended to replace qualified legal and/or tax advisors. Every taxpayer should review their specific transaction with their own legal and/or tax counsel.
© 2000 Asset Preservation, Inc.
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