-->

1031 Exchange: What it means to you?                                   Performing a 1031 tax deferred exchange allows you to roll-over all of the proceeds received from the sale of an investment property into the purchase of one or more other like-kind properties. At closing, proceeds are transferred to a third party (called a facilitator or qualified intermediary) who holds them until they are used acquire the new property. Delay Capital Gains Taxes Capital gains taxes are deferred if all of the exchange funds are used to purchase like-kind investment property. The deferment is like getting an interest-free loan on the tax dollars you would have owed for a cash sale. More equity is retained, and that helps you move into properties of higher value each time you perform a 1031 exchange. What's Eligible? A 1031 exchange is possible when you sell real estate held for investment purposes. A 1031 exchange cannot be used for the sale of your personal residence. Exchanged properties must be like kind. For a real estate exchange this means real-property for real-property, but not necessarily land for land or a rental house for another rental house. Take a look at  the IRS code for specifics on “like-kind” You can exchange a single property for multiple properties, or purchase one property from the proceeds of several. Proceeds not used to purchase new investment property are taxed as a cash sale. "In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business." -IRS Translating Qualifying Properties The classification of properties exchanged determines if the property qualifies for Section 1031 treatment. A. The IRS's 4 classifications of Real Estate: Property held for personal use. (Personal Property) Property held primarily for sale. (Dealer Property) Property held for productive use in a trade or business. (Business Property) Property held for investment. (Investment Property) The last two qualify for Section 1031 tax deferral, the first two do not. Both the property received and the property sold must be of "Like Kind". It is your use of the property that determines its classification. What the other party does with the property does not affect your tax status. B. Like-Kind Property Like-kind refers to your use of the property and not to its grade or quality. "1031" property may be mixed as to type and still be like-kind. As an example, you may exchange land for a duplex, or a commercial building for a retail store, etc. (See page 14.) Property held outside the USA and its territories does not qualify for exchange with property held within the USA. C. Partnership Interests Your interest in a partnership cannot be traded for an interest in another partnership. Exception: The partnership as an entity can exchange real estate it owns for other like-kind real estate. D. Transfer between Spouses There are no income tax consequences in entering into financial transactions between spouses. In addition, most transfers incident to a divorce are tax free. However, transactions with a former spouse are normally subject to tax unless they qualify for non-recognition under the provisions of Section 1031. E. Sale/Lease Back as an Exchange A lessee’s interest in a lease with a term of 30 years or longer in real property is considered like-kind to other real property. In addition, property which is subject to a lease can be, even if the lease is for a term of 30 years or longer, the subject of a tax free exchange. However the receipt of prepaid lease payments in an exchange for a 30-year or longer lease is taxed as ordinary income and will not qualify for tax-free exchange treatment. F. Business Assets The personal property assets of one business can be exchanged for like-kind assets of another business and will be held as a like-kind exchange under Section 1031. The real property is treated the same as any other exchange. The like-kind requirements for personal property are much more stringent than for real property (e.g., a truck cannot be exchanged for a car, nor can a barge be exchanged for a cargo ship). G. Vacation Homes & Properties This type of property does not qualify if it is used solely for personal use. It may qualify if rented, and you can provide documentation of the rental income.   *Information deemed to be correct, but not warranted. We recommend you consult your tax advisor or Starker Services for professional advice and consultation specific to your needs.   Reference: About Home Buying and Selling  www.about.com