Real Estate Exchanges

1031 Tax Exchange For Real Estate

Nearly all real property within the USA is considered to be like-kind. The types of real property that may be exchanged include property held in fee, ground leases (with remaining terms of 30 years or more) and undivided interests in real property held as tenants in common (TICs).

Here is a partial list of some of the kinds of properties that qualify for 1031:

• Apartment Buildings

• Farms

• Shopping Centers

• Airport Hangers

• Condos and Town Homes

• Raw Land

• Single Family-Rentals

• Industrial Property, etc.

The next reason that people often structure the sale of real property as 1031 exchanges is because improvements such as buildings have been deprecated down over time - subjecting the sale to a maximum of 25% depreciation-recapture rates (C corporations can be as high as 35%) on the portion of the gain that is attributed to the deprecation.

As a real estate investor, you can depreciate your real estate-business AND investment property.

The 15% capital gain rate is generally known as the "long-term capital gains rate" and is the maximum rate that applies to real estate that you have held for at least 366 days (more than one year). If you held real property for less that one year, then you may be taxed are regular income rates as high as 35%...

The long-term capital gain tax is, generally, much lower than what you pay on your regular income.

If your holding-period has been for less than one year - consider deferring the gain on the sale through a 1031 exchange so that you can meet the greater-than-one-year period before cashing-out on a later sale.

HOLDING PERIOD FOR DETERMINING LONG TERM CAPITAL GAINS:

If you receive a new business or investment property in exchange for old like-kind business or investment property as part of a tax-deferred 1031 exchange, your holding period begins on the day after the date the original (or old) property was acquired. This is because your basis in the new property is augmented by the deferred gains from your old property...

45 Day Identification Requirement: Your replacement-property must be unambiguously designated or identified by you no later than 45 days after the date of the transfer of your relinquished-property. (See 3 Property Identification Rule)

180 Day Exchange Requirement: You must actually receive the benefits and burdens of ownership to your new-like-kind property no later than 180 days after the date of the transfer of your old relinquished-property. This means that you have to actually receive your new replacement-property within the 180 day exchange-period.

Value Requirement: In order to defer all of the gain, your replacement-property typically should be equal or greater in value than your old relinquished-property, and all of your equity (or proceeds) from the sale of your old relinquished-property should be reinvested into your new replacement-property.

1031 Tip: Remember, only real estate that you intend to use for "Investment" or for use in a "Trade or Business" qualifies for 1031 tax deferred treatment. The two main areas to be careful of are:
Personal Use: If you use real property for personal use such as your personal residence or vacation home ~ it may not qualify because it is not used for a qualified purpose.

Dealer Property: If you hold property as ?Inventory? or as your ?Stock in Trade?. i.e. (i) property held primarily for sale; (ii) to customers; (iii) in the ordinary course of your business? it may not qualify for 1031. Ask yourself, how frequently you sell residential lots or convert buildings to condominiums and sell the units, as part of your business. If you are doing enough of this type of activity, you may be a dealer and the real estate may be considered to be inventory.

Nation Wide Tax-Exchange Services: