"INVESTORS CAN MEET MANY OBJECTIVES UNDER IRC 1031"
TAX DEFERRED EXCHANGES - IRC 1031
Section 1031tax deferred exchanges continue to increase in popularity as more investors nationwide discover the wide range of investment objectives that can be easily met through exchanging.
I. PRESERVATION OF EQUITY
A properly structured exchange provides real estate investors with the opportunity to defer 100% of both Federal and State capital gain taxes. This essentially equals an interest-free, no-term loan on taxes due until the property is sold for cash! Often the capital gain taxes are deferred indefinitely because many investors continue to exchange from one property to the next, dramatically increasing the value of their real estate investments with each exchange!
II. LEVERAGE
Many investors exchange from a property where they have a high equity position, or one that is "free and clear", into a much more valuable property. A larger property produces more cash flow and provides greater depreciation benefits, which therefore increase the investors' return on their investment.
III. DIVERSIFICATION
Exchangers have a number of opportunities for diversification through exchanges. One option is to diversify into another geographic region, such as exchanging out of one apartment building in Denver, Colorado, for two additional apartments - one in Los Angeles, California, and the other in Dallas, Texas. Another diversification alternative is acquiring a different property type, such as exchanging from several residential units to a small retail strip center.
IV. MANAGEMENT RELIEF
Some investors accumulate several single family rentals over the years. The on-going maintenance and management of what can be a far-reaching group of properties can be lessened by exchanging these properties for one property better suited to on-site maintenance and management. Exchanging into a single apartment complex with a resident manager is a good example of this strategy.
V. ESTATE PLANNING
Sometimes a number of family members inherit one large property and disagree about what they want to do with it. Some want to continue holding the investment and some desire to sell it immediately for cash. By exchanging from one large property into several smaller properties, an investor can designate that, after their death, each heir will receive a different property, which they can either hold or sell.
Holding Period
IRC �1031 states that property "held for productive use in a trade or business or for investment" must be exchanged for like-kind property. There is much confusion and misinformation among real estate agents and investors on the issue of what is viewed as "held for investment." Most of this confusion stems from the fact that neither the IRS nor the Regulations provide a comprehensive definition of the phrase "held for investment." (The regulations do state, however, that unproductive real estate held by a non-dealer for future use or future appreciation, is held for investment.)
A MORE COMPLETE PERSPECTIVE
There is no safe holding period for property to automatically qualify as being "held for investment."
To qualify for a 1031 exchange, a taxpayer must be able to support that their "intent" at the time of the purchase was to hold the property for investment.
Time is only one factor at which the IRS looks in determining the Exchanger's intent for both the relinquished and replacement properties. The IRS may look at all the facts and circumstances of an investor's situation to determine the Exchanger's true intent for acquiring, holding, and selling properties involved in an exchange. Ideally, an investor would have a variety of ways to support that their intent was to hold for investment purposes.
If the investor has the intent to resell the property for a profit within a short amount of time, and not to hold for long-term investment, then the exchange will probably not qualify for deferral. A consultation with your tax advisor or attorney is always advisable if you have any questions regarding your 1031 status.
Call the knowledgeable exchange professionals at Peabody & Plum Realtors, Inc. for a complimentary consultation regarding your specific investment objectives.
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