Tax Deferred Exchanges
The Real Estate investment specialists at Ruth Realty understand the processes and procedures involved in properly identifying potential properties for 1031 tax exchanges.
We can help you evaluate prospective properties and guide you through the 1031 Tax Exchange procedure quickly and easily. For those of you who may not be familiar with the process or the possibilities, here is a quick overview of the program.
IRC Section 1031
Often investors do not realize taxation on a personal residence is far different than taxation on income or investment property. The Taxpayer Relief Act of 1997 changed Internal Revenue Code treatment for the sale of a personal residence to allow a single taxpayer a $250,000 exclusion from capitol gain. Married couples receive a $500,000 exclusion. The taxpayer must have resided in the property two of the last five years. This exemption may be used once every two years.
- But, if an investor sells property they pay tax. However, if the property qualifies for preferential treatment under Internal Revenue Code Section 1031 it is treated quite differently. IRC Section 1031 states: "No gain or loss shall be recognized if property held for productive use in trade or business is exchanged solely for property of like kind."
- Therefore, an investor using IRC Section 1031 can exchange raw land for a rental home, an apartment complex for a shopping center or rental homes for an office building. The use of the property is the factor in determining tax treatment, not the type of property being exchanged.
- Treasury Regulations effective June 10th, 1991 validated the delayed exchange and simplified the exchange process. These regulations which included the use of Qualified Intermediaries, were welcomed by real estate professionals and investors who were previously uncertain about the viability of 1031 transactions.
Benefits of Exchanging
Prior to 1979, trading properties was at best complicated. Completing a tax deferred exchange meant properties had to be "swapped" simultaneously. This made exchanging properties complicated and risky, if not impossible. In 1979 a ruling from the U.S. 9th Circuit Court of Appeals enabled the non simultaneous or "delayed" exchange to qualify for tax deferral. This finally allowed investors the time they needed to find other suitable properties without delaying and/or losing the sale of their property while they found suitable "new" investment properties.
- For many years, investors held on to their properties long after they would have sold them because their sales translated into the paying of substantial taxes on the capital gains.
- Now, the true power of exchanging has the ability to meet investment objectives without losing equity to taxation.
Commonly Asked Questions About 1031 Exchanges
- Exchanging can range from a simple swap of two properties to a complex, multi leg, multi-party transaction involving construction and/or reverse exchanges.
- What is the difference between a sale and an exchange?
A sale is an exchange of real property for cash. A sale and repurchase of like kind property following the Internal Revenue Service guidelines is an exchange; a "non-taxable" sale. The Real Estate investment specialists at Ruth Realty know how to properly write the purchase and sale documents to ensure compliance with IRC Section 1031 for simultaneous and delayed exchanges.
- Can an investor trade several small properties for one large one?
Yes. An investor can also trade one large property for several smaller ones. When selecting replacement property, investors must adhere to the Treasury guidelines regarding property identification. It is particularly important for your Real Estate professional to understand this point or the exchange may be disallowed which could result in substantial capital gains taxes.
- Can an investor take some of the cash and exchange the remainder?
Yes. Any cash received can be subject to capital gains tax. If done properly, this won't effect partial deferment of the remainder.
- What if I want to sell now, but can't find what I'm looking for yet?
We can arrange delayed tax deferred exchanges with the closings on the "new" property up to six months after the relinquishment of the first property.
- Can an investor carry back a note on their property?
Yes. There are several different ways to handle this type of an exchange. Tax and or legal counsel should always be consulted in this type of transaction.
- Can assets other than real estate be exchanged?
Yes. Taxes can be deferred using IRC Section 1031 on most personal property including but not limited to, businesses, planes, boats, trucks and equipment. Let us show you how you can turn real estate investments from just depreciation into depreciation and appreciation.
For more information on 1031 Tax Exchanges contact