1031 Tax Exchange Guide for Investors

The §1031 tax deferred treatment of capital gains is one of the best real estate investor vehicles for preserving and building real estate wealth: This provision of the Internal Revenue Code allows property owners to exchange their property for other like-kind property without recognition of capital gains. It makes possible to transfer the financial gain that is realized from the sale of a property into another property without federal capital gains tax at the time of the sale.

Exchange Requirements for Non Recognition of Gain
There are three conditions that must be met to accomplish non-recognition of gain under §1031:
1. The properties exchanged must qualify, and be of "like-kind".
2. There must be an actual exchange not a transfer of property for $ only.
3. The time requirements must be strictly followed.

Qualified Properties
To meet the requirements of §1031, both Relinquished Property and Replacement Property must qualify. In other words, both the property you are selling and the property you are buying must be qualified property of like-kind. If not, your exchange will fail and be classified as a sale. This is so important it needs repeating:

To qualify as a like-kind exchange, the property must be both (1) qualifying property and (2) like-kind property.

For income tax purposes, real estate is divided into four classifications. Classification is made as of the date the transaction is made. The classifications are:

1. Held for business use (§1231)Qualifies

2. Land held for investment (§1221)Qualifies

3. Held for personal use

4. Held primarily for sale (dealer property)

The first two classifications-held for business and held for investment-qualify for §1031 treatment. The second two-held for personal use and dealer property-do not.

Time Restrictions
Under the Regulations, two time limitation periods have been imposed on deferred real estate exchanges. One limitation requires Replacement Property to be identified within a certain time. The other requires Replacement Property to be received by the exchanger within a certain time period. To successfully qualify for §1031 treatment, your exchange must satisfy both tests.

In a deferred exchange, any Replacement Property you receive will be treated as property which is not like-kind to the Relinquished Property if:
the Replacement Property is not "identified" before end of the "identification period", or the identified Replacement Property is not received before end of the "exchange period".

The identification period begins on the date you transfer the Relinquished Property and ends 45 days after.

The exchange period begins on the date you transfer the Relinquished Property and ends on the earlier of 180 days after or the due date (including extensions) for your tax return for the taxable year in which the transfer of the Relinquished Property occurs.

Caution: Sometimes in a deferred exchange, you transfer more than one Relinquished Property and they are transferred on different dates. If this happens, the identification period and the exchange period are measured from the earliest date on which any of the properties are transferred.

Identification
Replacement Property is identified only if it is designated as Replacement Property in a written document signed by you. This document must be hand delivered, mailed, telecopied or otherwise sent before the end of the identification period to a person (other than yourself or a related party) involved in the exchange.

Replacement Property is identified only if it is unambiguously described in the written document or agreement. Real estate is unambiguously described if it is described by its legal description or street address.

Property incidental to a larger item of property is not treated as property that is separate from the larger item of property. Property is incidental to a larger item of property if in standard commercial transactions, the property is typically transferred together with the larger item of property, and
the aggregate fair market value of all "incidental" property is not more than 15% of the aggregate fair market value of the larger item of property.
Here is an example: The Replacement Property is an apartment house complex worth one million dollars. The furniture, laundry machines, and other items that go with the apartment complex should not then exceed $150,000 in value, which is 15% of one million dollars. For purposes of identification the entire apartment complex, including furniture, laundry machines, etc., will be treated as one property.

New Construction Replacement Property
One of the more interesting stipulations is the regulation that permits you to exchange for real property that has not yet been built. A transfer will still qualify for §1031 treatment if the new construction is identified within the 45-day period, and received within the 180-day exchange period. This property must be carefully identified. This identification should include the legal description of the underlying ground and as much other description as possible for the property to be constructed. Also, the new construction must be completed and received in substantially the same form as described in the identification documents.

You cannot exchange for services. Partially completed real property can be received in a like kind exchange if properly identified.

Exchange Requirements
Section 1031 requires an actual exchange of properties. If you simply sell your property and reinvest the money in another property, you will not qualify for exchange treatment, even though it is a simultaneous close.
The secret of a successful deferred exchange is avoiding receipt of money or other property during the transaction. If you receive the cash proceeds from the exchange of your property, you will not qualify for §1031 treatment. While this may sound easy to avoid, it's not. You must overcome the doctrine of "constructive" receipt. The general rules concerning actual and constructive receipt apply to determine if you are in actual or constructive receipt of money or other property before you actually receive like-kind Replacement Property.

You are in actual receipt of money or property at the time you actually receive the money or property. You are also treated as being in receipt if you receive the economic benefit of the money or property. You are in constructive receipt of money or property at the time the money or property is credited to your account, set apart for you, or otherwise made available to you so you may draw upon it at any time. Or if you can draw upon it if notice of intention to withdraw is given. In addition, actual or constructive receipt of money or property by your agent is actual or constructive receipt by you.

The deferred exchange Regulation provides a "safe harbor" that permits you to sell your Relinquished Property and acquire Replacement Property and avoid constructive receipt. This safe harbor is your written contractual agreement with a Qualified Intermediary.

Qualified Intermediary
A Qualified Intermediary is a person (or company) who, for a fee, acts to facilitate the deferred exchange by entering into an agreement with you for the exchange of properties. It's OK for your transferee to be your agent, but only if the transferee is a Qualified Intermediary.

The Qualified Intermediary does not provide legal or specific tax advice to the exchanger, but will usually perform the following services:

1. Coordinate with the exchangers and their advisors, to structure a successful exchange.

2. Prepare the documentation for the Relinquished Property and the Replacement Property.

3. Furnish escrow with instructions to effect the exchange.

4. Secure the funds in an insured bank account until the exchange is completed.

5. Provide documents to transfer Replacement Property to the exchanger, and disburse exchange proceeds to escrow.

For a full 1031 Tax Report EMAIL US

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LIBOR Loan Programs

How does the LIBOR index compare to other indexes?

Over the past ten years, the LIBOR index has followed a pattern very similar to that of the U.S. T-bill. And like T-bill, LIBOR rate changes historically have been in smaller increments, while the Prime Rate has tended to move more sporadically and in larger increments.

HISTORICAL LIBOR INDEX

LIBOR is an abbreviation for the "London Interbank Offered Rate," and is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. LIBOR is used as a base index for setting rates of some adjustable rate financial instruments, including Adjustable Rate Mortgages (ARM's).

See Historical 10-Year Chart

Why Pay Principal?

For the first 12 years of a fixed rate mortgage your paying almost 85% in interest to the bank so the amount of equity you build by paying a full payment will almost make you turn upside down. Why not use that money to pay off credit card debt, take a vacation, save for your children's future or any other privilege that you can start seeing the benefits today. The real estate market will only continue to grow according to many industry analysts!!!

Check out the many advantages of a LIBOR ARM Loan!

* Lower Monthly Payments
* Increased Purchasing Power
* The Lowest Possible Interest Rates
* Interest options from 5 to 15 years
* 6 Month Adjustment Schedules
* Available in All 50 States

What Type of Properties Qualify for LIBOR-ARM Loans?

* Owner-occupied primary residences & second homes
* Single-family homes
* Condos & townhouses
* 1-4 family multifamily units
* Investor single-family homes

Before making any financial decision please consult with your financial advisor for the most accurate information available. This should be used only a reference and not as a basis for making any financial decision.

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JULES LEWIS REALTOR® Newman-Dailey Resort Properties DESTIN, GRAYTON & SEAGROVE BEACHES 850-837-1071 850-543-5513 Email Us internet@ PremierDestin.com
		1031 Tax Exchange *Preserving Real Estate Wealth*
		The §1031 tax deferred treatment of capital gains is one of the best real estate investor vehicles for preserving and building real estate wealth: This provision of the Internal Revenue Code allows property owners to exchange their property for other like-kind property without recognition of capital gains. It makes possible to transfer the financial gain that is realized from the sale of a property into another property without federal capital gains tax at the time of the sale. Exchange Requirements for Non Recognition of Gain There are three conditions that must be met to accomplish non-recognition of gain under §1031: 1. The properties exchanged must qualify, and be of "like-kind". 2. There must be an actual exchange not a transfer of property for $ only. 3. The time requirements must be strictly followed. Qualified Properties To meet the requirements of §1031, both Relinquished Property and Replacement Property must qualify. In other words, both the property you are selling and the property you are buying must be qualified property of like-kind. If not, your exchange will fail and be classified as a sale. This is so important it needs repeating: To qualify as a like-kind exchange, the property must be both (1) qualifying property and (2) like-kind property. For income tax purposes, real estate is divided into four classifications. Classification is made as of the date the transaction is made. The classifications are: 1. Held for business use (§1231)Qualifies 2. Land held for investment (§1221)Qualifies 3. Held for personal use 4. Held primarily for sale (dealer property) The first two classifications-held for business and held for investment-qualify for §1031 treatment. The second two-held for personal use and dealer property-do not. Time Restrictions Under the Regulations, two time limitation periods have been imposed on deferred real estate exchanges. One limitation requires Replacement Property to be identified within a certain time. The other requires Replacement Property to be received by the exchanger within a certain time period. To successfully qualify for §1031 treatment, your exchange must satisfy both tests. In a deferred exchange, any Replacement Property you receive will be treated as property which is not like-kind to the Relinquished Property if: the Replacement Property is not "identified" before end of the "identification period", or the identified Replacement Property is not received before end of the "exchange period". The identification period begins on the date you transfer the Relinquished Property and ends 45 days after. The exchange period begins on the date you transfer the Relinquished Property and ends on the earlier of 180 days after or the due date (including extensions) for your tax return for the taxable year in which the transfer of the Relinquished Property occurs. Caution: Sometimes in a deferred exchange, you transfer more than one Relinquished Property and they are transferred on different dates. If this happens, the identification period and the exchange period are measured from the earliest date on which any of the properties are transferred. Identification Replacement Property is identified only if it is designated as Replacement Property in a written document signed by you. This document must be hand delivered, mailed, telecopied or otherwise sent before the end of the identification period to a person (other than yourself or a related party) involved in the exchange. Replacement Property is identified only if it is unambiguously described in the written document or agreement. Real estate is unambiguously described if it is described by its legal description or street address. Property incidental to a larger item of property is not treated as property that is separate from the larger item of property. Property is incidental to a larger item of property if in standard commercial transactions, the property is typically transferred together with the larger item of property, and the aggregate fair market value of all "incidental" property is not more than 15% of the aggregate fair market value of the larger item of property. Here is an example: The Replacement Property is an apartment house complex worth one million dollars. The furniture, laundry machines, and other items that go with the apartment complex should not then exceed $150,000 in value, which is 15% of one million dollars. For purposes of identification the entire apartment complex, including furniture, laundry machines, etc., will be treated as one property. New Construction Replacement Property One of the more interesting stipulations is the regulation that permits you to exchange for real property that has not yet been built. A transfer will still qualify for §1031 treatment if the new construction is identified within the 45-day period, and received within the 180-day exchange period. This property must be carefully identified. This identification should include the legal description of the underlying ground and as much other description as possible for the property to be constructed. Also, the new construction must be completed and received in substantially the same form as described in the identification documents. You cannot exchange for services. Partially completed real property can be received in a like kind exchange if properly identified. Exchange Requirements Section 1031 requires an actual exchange of properties. If you simply sell your property and reinvest the money in another property, you will not qualify for exchange treatment, even though it is a simultaneous close. The secret of a successful deferred exchange is avoiding receipt of money or other property during the transaction. If you receive the cash proceeds from the exchange of your property, you will not qualify for §1031 treatment. While this may sound easy to avoid, it's not. You must overcome the doctrine of "constructive" receipt. The general rules concerning actual and constructive receipt apply to determine if you are in actual or constructive receipt of money or other property before you actually receive like-kind Replacement Property. You are in actual receipt of money or property at the time you actually receive the money or property. You are also treated as being in receipt if you receive the economic benefit of the money or property. You are in constructive receipt of money or property at the time the money or property is credited to your account, set apart for you, or otherwise made available to you so you may draw upon it at any time. Or if you can draw upon it if notice of intention to withdraw is given. In addition, actual or constructive receipt of money or property by your agent is actual or constructive receipt by you. The deferred exchange Regulation provides a "safe harbor" that permits you to sell your Relinquished Property and acquire Replacement Property and avoid constructive receipt. This safe harbor is your written contractual agreement with a Qualified Intermediary. Qualified Intermediary A Qualified Intermediary is a person (or company) who, for a fee, acts to facilitate the deferred exchange by entering into an agreement with you for the exchange of properties. It's OK for your transferee to be your agent, but only if the transferee is a Qualified Intermediary. The Qualified Intermediary does not provide legal or specific tax advice to the exchanger, but will usually perform the following services: 1. Coordinate with the exchangers and their advisors, to structure a successful exchange. 2. Prepare the documentation for the Relinquished Property and the Replacement Property. 3. Furnish escrow with instructions to effect the exchange. 4. Secure the funds in an insured bank account until the exchange is completed. 5. Provide documents to transfer Replacement Property to the exchanger, and disburse exchange proceeds to escrow. For a full 1031 Tax Report EMAIL US Back to Top LIBOR Loan Programs How does the LIBOR index compare to other indexes? Over the past ten years, the LIBOR index has followed a pattern very similar to that of the U.S. T-bill. And like T-bill, LIBOR rate changes historically have been in smaller increments, while the Prime Rate has tended to move more sporadically and in larger increments. HISTORICAL LIBOR INDEX LIBOR is an abbreviation for the "London Interbank Offered Rate," and is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. LIBOR is used as a base index for setting rates of some adjustable rate financial instruments, including Adjustable Rate Mortgages (ARM's). See Historical 10-Year Chart Why Pay Principal? For the first 12 years of a fixed rate mortgage your paying almost 85% in interest to the bank so the amount of equity you build by paying a full payment will almost make you turn upside down. Why not use that money to pay off credit card debt, take a vacation, save for your children's future or any other privilege that you can start seeing the benefits today. The real estate market will only continue to grow according to many industry analysts!!! Check out the many advantages of a LIBOR ARM Loan! * Lower Monthly Payments * Increased Purchasing Power * The Lowest Possible Interest Rates * Interest options from 5 to 15 years * 6 Month Adjustment Schedules * Available in All 50 States What Type of Properties Qualify for LIBOR-ARM Loans? * Owner-occupied primary residences & second homes * Single-family homes * Condos & townhouses * 1-4 family multifamily units * Investor single-family homes Before making any financial decision please consult with your financial advisor for the most accurate information available. This should be used only a reference and not as a basis for making any financial decision. Back to Top
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