In the summer of 1990, the I.R.S. came out with the long awaited rules on Deferred Exchanges. Section 1.1031 of the Internal Revenue Service Code laid out the procedure for turning a sale and purchase type transaction into an exchange.
The 1031 tax deferred treatment of capitol gains is one of the best real estate investor vehicles for preserving and building real estate wealth. These new rules allow owners of certain types of like kind Real Property to sell their property and buy other like kind property without paying the Capital Gains Tax. It makes possible a transfer of the financial gain that is realized from the sale of a property into another property without federal capital gains tax at the time of the sale. The like kind provision for Real Property includes land, rental and business property. Any of which can be exchanged for the other. The like kind provision for Personal Property is much more restrictive. This type of property must be in productive use in a business (depreciable property), and can be only exchanged for the same type of property.
There are two qualifications beyond the property to carry an exchange through. First, an opening escrow must be established for the entire proceeds of the selling property to ensure tax deferment and second, you have only 45 days from closing to identify the replacement property and 180 days total to complete the closing of the replacement property.
There are strict guidelines to be followed in the process of a 1031 exchange and this should be handled by a qualified intermediary.
The 1031 exchange allows property owners to move up to bigger buildings increasing potential income and wealth without suffering the current burden of capital gains.
At Magnusson Balfour we pride ourselves in finding the right exchange properties to preserve your real estate wealth.
By Paul Lajoie