Why Consider Exchanging Property?
Tax Advantages... A Simple Process
The Thompson Team urges you to consider 1031 Exchanges.
Let's face it... people have been trading with each other since the beginning of time. Most often these exchanges were hand to hand... a simultaneous trade or exchange. Real property was no exception. Trading property was similar to trading baseball cards or marbles. All you had to do was find someone who had what you wanted and persuade that person to trade for something you had.
There have always been simultaneous exchanges of many types of property, both real and personal. But there was no process for relinquishing the property and replacing it at a later date.
That all changed when the Starker family, a large landholder in the Northwest, kicked open the door for delayed tax-deferred exchanges of real estate. The Starker family traded a large area of timberland in the late 1960s but took so long to find a suitable replacement that it appealed to the IRS that a sale, on which taxes were due, had taken place. A lengthy appellate process ensued, with many strange twists and turns. Finally in 1979, the Ninth US Circuit Court of Appeals ruled in favor of the Starker family's "delayed exchange."
As a result of the Starker case, a prescribed method for executing delayed tax-deferred exchanges of investment properties was developed and made part of the IRS regulations in 1984. This section of the tax code, IRS 1031, clarified the rules and opened doors of opportunity for investors.
The IRS introduced regulations into 1031 that allowed the delayed exchange of investment property through the use of a qualified intermediary. These regulations created a clearly defined process for trading property without losing any equity to capital gains taxation.
The true power of exchanging is the ability to meet investment objectives without losing equity to taxation.
An Underused Process
The 1031 process is not used as much as it could be. Why? Probably the biggest deterrent is that many real estate professionals don't know about or understand the process. The Thompson Team does! A second deterrent may be that many investors don't realize that "Like-Kind" property is defined by its use in the hands of "its owner" not by "its type". The key is that exchanged property must be investment property. For example, an investment client is free to acquire any of the following:
The point is that residential and commercial property as well as raw land can be exchanged within the same transaction provided they are all investment properties.
Another use of the exchange process is to extend the holding period of the property to meet long-term capital gains requirements. In the rapidly changing real estate market, it is not unusual for waterfront or rental property to go up in value quite rapidly! The Thompson Team can assist you in the purchase of your dream home or investment property. You might hold that purchase for an undetermined period or decide to sell. In a very short time (less than a year) an offer could be received that almost doubles the purchase price, and the property is sold. Short-term capital gains taxes (15 to 39.6 percent) will be due on the profit from the sale. The seller can avoid a short-term gain by exchanging for another property. In an exchange, not only are the capital gains tax deferred, but the holding period is tacked onto the new property.
The Thompson Team goal is to help our clients achieve the most beneficial transactions in the management of any growth investments they might have.
The Qualified Intermediary
A benchmark requirement for the 1031 exchange process is that "qualified intermediaries" must be used to facilitate all transactions associated with an exchange. Qualified intermediaries are not allowed to act as agents to any party of an exchange. They must also be certain they have not acted as such for at least two years prior to the exchange (except to do other 1031 exchanges).
The intermediary works for both the real estate professional and his/her client and is bound by US Treasury Regulations. The exchanger pays all intermediary fees from relinquished proceeds at closing. Often, interest earned by escrowed funds provides earnings for the exchanger that could exceed the entire cost of the exchange.
With few exceptions, the following are consideteal "disqualified parties" (disqualified from acting as an intermediary) by US Treasury Regulations:
1. Close family members, controlled corporations, partnerships or trusts
in which the person desiring the exchange has a 10 percent or
2. Agents of the investor such as:
Real estate salesperson/broker
Except for routine financial, title closing or trust services by
institution, insurance closing company.
Sometimes people are comfortable where they are in their investment plan. However, someday you may be interested in seeing how income can be maximized and taxes decreased through the use of IRS 1031 Tax Deferred Exchanges. Print this information and please keep in your file for that time!