Vikki & Stephanie ~ Tampa Realty Solutions

1031 Tax Deferred Exchanges

Often investors do not realize taxation on a personal residence is far different than taxation on income or investment property. The Taxpayer Relief Act of 1997 changed Internal Revenue Code treatment for the sale of a personal residence to allow a single taxpayer a $250,000 exclusion from capital gain. Married couples receive a $500,000 exclusion. The taxpayer must have resided in the property two of the last five years. This exemption may be used once every two years.

If an investor sells appreciated property they pay tax. However, property that qualifies for preferential tax treatment under Internal Revenue Code Section 1031 is treated quite differently. Investors often mistakenly believe they must acquire a property exactly like their relinquished property. They are surprised to learn a wide variety of properties can be considered "like-kind."

The Key To A Successful Like-Kind Exchange Is To Plan Ahead

Choose the Qualified Intermediary Safe Harbor
Choose a good tax advisor, either a CPA or attorney
Exchange only investment property
Replacement property owner must be the same as the relinquished property owner
Identify replacement property within 45 days of the close of the relinquished property
Identify replacement property within the United States and the District of Columbia
The replacement property closing must be within 180 days of the relinquished property

Rules To Identify Replacement Property

The General Rule:
Sale price is equal to, or greater than, the relinquished property

The IRS Identification Rules:

Three Property Rule-The Exchanger may identify three (3) properties of any value; or

200% Rule-The Exchanger may identify any number of properties if the total fair market value of what is identified does not exceed 200% of the sale price of the relinquished property; or

95% Rule-If the Exchanger identifies more properties than permitted under the two rules above, the Exchanger must acquire 95% of what was identified.

How is the identification made?

The identification must be made to a party to the exchange (i.e., the Qualified Intermediary)
Identification must be in writing and signed by Exchanger
The identification must include street address or legal description-"unambiguously identified in writing"
The identification must be delivered, within 45 days of the close of the relinquished property

1031 Tax Deferred Exchanges