1031 TAX FREE EXCHANGES
How Can You Purchase a Property in Ponte Vedra
Beach and Dispose of Other Appreciated Real Estate Without Being Taxed on the Gain?
 The answer to this question is found in the
"like-kind" exchange rules of Internal Revenue Section 1031.
A like-kind exchange is any exchange of property held for
investment or for production use in a trade or business exchanged for a similar property.
As long as the exchange is real estate, (land and/or buildings) exchanged for real estate,
it should qualify.
Assuming your exchange qualifies, here's how the tax rules
work -- in a straight asset-for-asset trade with no debt, you will not report
any gain from the exchange. You will retain the same basis in your new property as you
had in your old property. Example: You sell a house (investment property) in
Virginia for $300,000 for which you paid $100,000 in 1970. You exchange it for a lot in
Ponte Vedra Beach for $300,000. There is no tax on your $200,000 profit.
But often, the properties are not equal in value and require
some cash or other non-like-kind property to be included in the transaction. This cash or
other property is known as "boot". If boot is involved you will have to recognize
your gain, but only up to the amount of boot you receive in the exchange. In these
situations, your basis in the like-kind property will be equal to the basis in the
property you gave up.
Example: Bob exchanges land (investment property) in
New York with a basis of $100,000 for a house in Ponte Vedra Beach (investment property)
valued at $220,000 plus $15,000 in cash. Although Bob's total gain on the exchange is
$135,000 ($235,000 in value for an asset with a basis of $100,000), he only has to
recognize $15,000 as taxable. Bob's basis in the new building will be $100,000 (the
original basis in the land he gave up -- $100,000, plus the $15,000 gain recognized, minus
the $15,000 boot he received). No matter how much boot you receive, you will never
recognize more than your actual "realized" gain on the exchange.
In most instances, a buyer or seller may not have access to
property that will qualify the transaction under the tax-free exchange rules. This is a
little trickier, but you can still realize the benefits by engaging a qualified
intermediary to facilitate the like-kind exchange. Click on
chafin@comcast.net for
suggestions on an intermediary.
There can be a number of special circumstances involved that
may impose additional qualification and compliance aspects to a transaction. Internal
Revenue Code and Treasury Regulations relating to the proper and timely identification of
replacement property are critical. Failure to comply with these rules may result in your
transaction not qualifying as a like-kind exchange under Section 1031. Click on
chafin@comcast.net for
information to ensure that all the required terms are addressed.
For more information on 1031 Tax Free Exchanges And
for information on Properties for which to exchange Send Me
Email.
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This Site Was Last Updated 01/17/2008
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