1031 starker tax exchange
Too many people mistakenly make themselves liable to pay capital gains taxes when they exchange an investment property with another. They simply haven’t been told about the 1031 tax exchange, the law which enables you to reorganize your investments without actually paying capital gains. Lots of people also mistake the 1031 tax exchange as a way by which they will not pay taxes 
well they say taxes and death you can’t run away from them. Simply and in summary, the 1031 tax exchange tells the IRS that you really did not stop investing, it is just that you found a better investment and re-organizing your money. That said, it means that you’re not going to take any money out of the property.
Generally, the IRS does not refer in specific to real estate, but calls it “Like-Kind exchanges”. In that sense, if you have an investment property or a business personal property, then you can exchange it for a like-kind without paying taxes. This includes a car to a car, land to a land, house to a house …etc. They clearly also state that such exchanges do not apply to inventory items so you can’t do exchanges for office supplies for examples.
In order to complete a 1031 tax exchange in real estate, one has to be very careful with time and to file the correct forms in a timely manner. In the current market, the best way is to first list your property and to clearly mark the listing as a part of 1031 tax exchange. You then either should have a property in mind, or keep looking for properties during the time your property is being listed. The replacement property should be more expensive than the original one. You will also need to use ALL the cash proceeds from the previous deal.
Once you get a contract and have a settlement date, start negotiating a contract on one of the properties you identified. The settlement date of the new property has to be after the relinquished one. It also has to fall within the correct time frame, otherwise you will end up paying capital gains tax on any proceeds you get.
During this process you will need to have a title company that can act as a safe harbor for your money and that has an attorney that can give you consultation if you need, in order to correctly complete the process. And of course you will need a real estate agent to represent you during the negotiations.
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January 27th, 2008 at 9:24 am
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