 Norton Network For Homes & Loans
is experienced in real estate investing, and can assist and advise the
investor through their purchase.
Internal Revenue Code
Section 1031 Tax-Deferred Exchanges
In general, the Internal Revenue Code imposes taxes when property on
which there is a gain is transferred. However, Section 1031 of the
Code is an exception to this general rule, allowing 100% of the gains
from the disposition of business or investment property to be deferred
into new replacement property. T hese deferred gains, as well as the
gains from the new property, are not taxed until the new property is
transferred and fails to qualify for tax deferral.
To qualify for this deferral, strict adherence to Section 1031 and all
of its rulings is imperative. Therefore, taxpayers must structure
the transaction as an exchange of one property for another of “like
kind,” as opposed to a sale for cash or other non-like kind property and
then reinvestment into new property.The 1031 Financial Advantage:
Leverage
When the tax liability in a transaction is deferred, the taxpayer
receives an increase in available capital that can be applied to the
acquisition cost of the replacement property. This is how
deferring taxes with a Section 1031 exchange provides the power of
leverage. An investor not paying taxes has more buying power than
the one paying taxes, with the potential to increase appreciation, cash
flow, and tax benefits.
The 1031 Strategic Advantage: Flexibility
There are many investment strategies the taxpayer can employ utilizing
Section 1031. Here are a few examples:
- Consolidate many properties into one for ease of management.
- Diversify one into many for ease of future divestment.
- Relocate properties geographically to take advantage of trends.
- Change property taxes (real estate exchanges only).
- Improve investment performance.
- Adapt to changes in needs and abilities, and other life
transitions.
- Replace older properties with newer ones.
Nine Easy Steps to Tax Deferral
Most exchanges, whether simultaneous or delayed, involve three (3)
parties: the taxpayer (exchanger), the buyer who is acquiring the
taxpayer’s old property (relinquished property), and the seller who is
selling to the taxpayer a new property (replacement property). To
realize all of the benefits of a 1031 tax deferral, the taxpayer must
add a fourth party: a qualified intermediary who facilitates the
transfer of the properties and retains control of the funds pursuant to
IRS-prescribed safe harbors. The process (except for reverse
exchanges) follows these nice simple steps:
- Tax Advisor: The taxpayer should consult with a tax
or financial advisor to determine if a tax-deferred exchange is
appropriate and is compatible with overall investment goals.
- Contract of Sale: The taxpayer signs the contract
to sell the relinquished property to the buyer.
- Contact LandAmerica 1031 Exchange Services: When
escrow is opened on the relinquished property, the taxpayer contact
a LandAmerica 1031 office to set up and execute the Exchange
Agreement. The Exchange Agreement must be executed before the
first transfer of the first relinquished property.
- Closing Relinquished Property: At transfer of the
relinquished property, LandAmerica 1031 directs transfer of title to
the buyer and the sale proceeds are delivered to LandAmerica 1031.
- Timing: To effect a deferred exchange, the
relinquished property must transfer before the replacement property
is acquired. (However, with the favorable IRS Revenue
Procedure 2000-37, it is now permissible to do a reverse exchange by
acquiring the replacement property prior to the transfer of the
relinquished property to a buyer. Reverse exchanges must be
structured with different documents. Please contact a
LandAmerica 1031 office for more information on reverse exchanges
and request a copy of our booklet, 1031 Reverse Exchanges.)
- Identification Deadline: Within 45 days of transfer
of the relinquished property, the taxpayer notifies LandAmerica 1031
in writing (forms provided), of the identified replacement
properties.
- Notification: The taxpayer notifies LandAmerica
1031 when identified property(ies) are contracted for purchase and
escrow is opened.
- Acquisition Deadline: The taxpayer closes escrow on
the replacement property within 180 days from the transfer of the
relinquished property. Note: Taxpayer should not file a
tax return while exchange is pending.
- Enjoy: The taxpayer enjoys the benefits of
tax-deferred savings!
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