Sunday, October 30, 2005

1031 LIKE-KIND EXCHANGES an Overview

Like-Kind Exchanges: What Are They?

The "official" definition of a 1031 Like Kind Exchange is a transaction that involves property held for productive use in a trade or business or for investment (except inventory and stocks and bonds) for property of the same type. Unless different property is received (called boot), the exchange is nontaxable in the current year. Generally, if you exchange business or investment property solely for business or investment property of a like kind, no gain or loss is recognized under section 1031.

At 4TERRA, The Eco-Steward Real Estate Company, we define the 1031 Like Kind Exchange as pure possiblity~

Think about farmland out by pastoral Mars Hill, North Carolina for example. You could trade in your apartment complex in a city full of smog, create a land legacy in the moutnains near Asheville,possibly even set aside 10 acres for your private residence, and be totally delighted.

Keep in mind that the regulations concerning section 1031 DO give specific examples of what is or is not like-kind, so it is wise to seek the counsel of your attorney and CPA while you and I are out locating the replacement properties. Let's look at a few wyas this could happen.

Scenario One: Here a like-kind exchange is the simple swap wherein you trade 130 acres that you own in North Florida for a purchase of 130 acres of fantastic beauty we currently have listed here in Western North Carolina. Of course, in reality, it is quite unusual for a seller and the buyer to have exactly the same properties, so that is where the tax deferred exchange comes in handy. In this case, I advise my clients to find a Qualified Intermediary. Let me explain.

Rather than simply selling your investment property and yourself organizing the purchase of the replacement property you can select an Intermediary. If you were to control the funds from the sale and the constructive receipt, you would also trigger capital gain tax. That tax could be 20% of the gain recognized by the sale due to appreciation of the property on my original cost (basis). Higher tax rates could be triggered by depreciation. So, in order to avoid this capital gain tax when you divest your horse farm California, to replace it with a sweet pastured land near Burnsville, (Greater Asheville area) North Carolina you can utilize a qualified intermediary who will help facilitate the exchange and avoid the constructive receipt of the proceeds from the California farm.

Folks with whom I have worked tell me that they much prefer the Deferred Exchange.

A deferred exchange occurs when the property received in the exchange is not received at the same time as the transfer of the property given up. For a deferred exchange to qualify as 1031 Like Kind Exchange, you must comply with the 45-day written notice and receipt requirements.

This gives my clients (and me) a little more time to find just the “right” investment property. Here is where a QUALIFIED INTERMEDIARY really comes in handy. Under the 1031 regulations, s/he enters into a written exchange agreement with you to help facilitate an exchange. Of course, this person cannot be one of your family members, your employees, your real estate broker, or your investment banker. Not to worry, I can refer you to a qualified intermediary if you choose to use one..

Scenario Two:

Let’s say that you and I have found just what you are seeking and that you have signed the contract for the sale of your little organic farm in North Buncombe County --about 25 minutes easy drive fromthe center of Asheville--(your relinquished property.) You then assign that contract to the qualified intermediary you have chosen from the referrals I gave you, and you set in motion two (2) clocks! We (as a team) must keep these two clocks in mind! They run constantly through weekends and holidays.

The first clock gives you a short forty-five (45) days to find a "replacement property." We need to pay close attention, so be sure to let me know well in advance so that I (or the Broker you choose) can be available for you during this crucial time.

Now about that second clock: The second clock requires you to close on your replacement property within 180 days, or when tax returns are due for the year that your relinquished property was transferred. That may seem like a lot of time, but you know how time flies, so be prepared.

I enjoy the Hunt for the Replacement Property. The hills and mountains and “hollers” here in the Asheville area are full of special treasures. It is a real thrill to find them. Once we do find your replacement property, remember, you will have to deliver to your qualified intermediary a clear description of that property. I can help with that.

1) We can make sure that there can be no way that the property can be confused with another property.

2) We can identify up to three (3) properties of any value, or more than three (3) properties, so long as the total fair market value does not exceed 200% of the fair market value of what you are relinquishing.

A general rule you may choose to consider is that the replacement property should be equal or greater in value, debt, and equity, and if your replacement property is less than you may well have a tax liability on the difference. So that's my BLOG overview of the basics involved in like-kind exchanges. It is important to seek professional guidance as early in the transaction as is possible.–

If you are looking for residential, farm and estates, vacant land, mountain getaways, 1031 Like-Kind Exchangeyou can count on me and my team at 4TERRA, The Eco-Steward Realty to serve you well. What do I mean by “served well”? First, it means that we maintain a co-brokerage arrangement with all other real estate firms in the area, and we have complete information and can show all properties currently on the market.

We treasure the heritage of the mountains and valleys, knolls and “hollers” in Western North Carolina. Accordingly, we are sensitive to conscious development of our area.

Next, the 4TERRA TEAM offers a wide variety of real estate services to both buyers and sellers for all types of properties: residential, farm and estates, vacant land, bed and breakfast, mountain getaways, commercial and1031 Like-Kind Exchange investment opportunities. We are also available for consultation in development, conservation and restoration.

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