ABC’s of 1031 Exchanges

By Alan Rosenthal

A 1031 exchange is named after the section of the Internal Revenue Code that states: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment." 1031 is also called a “like-kind”, a term used to identify the types of properties allowed, such as commercial, farm and bare land, residential rental or industrial.

Basically under this section, you can exchange a property, receive a tax exemption from capital gains and not pay the depreciation recapture. This is great because every year we receive phantom depreciation on our taxes and when we sell, we need to pay the government recapture taxes. Even though our rental investment property is increasing in value, the government views the property structure, not land, as reducing to zero for the first 27.5 years. By doing a 1031 exchange, you can defer the depreciation instead of recapturing it and allow your investment portfolio to build and defer taxes. These advantages give the investor power over the money they make on the sale. And since you are deferring the taxes, the government will give you the difference as an interest-free loan and allow you to use the gains from the relinquished property to buy another.

There are three qualifications to follow in doing a 1031 exchange. The first being identification, meaning that you must identify your new “like-kind” asset within the first 45 days of the transfer of the relinquished property. The property needs to meet on of these three rules in order for it to be identified: the 3-property, the 200 percent or the 95 percent rule. The first is exactly what it sounds like, three properties at any market value. The second is any number of properties provided that the combined fair market value does not exceed 200% of the property sold. The 95 percent rule is any number of properties at any combined fair market value on the condition that your net gain is 95% of the total. If your property meets one of these three stipulations, then you move into the next stage.

The exchange period has two specific and unchangeable time limitations. The deadline for acquisition of your new property is before the first 180 days or by the due date of your tax return for the year in which you relinquished the property, whichever occurs sooner. Finally to obtain full tax exemption your replacement property needs to have an equity and value equal to or greater than the relinquished one.

For example, if the closing date for your relinquished property is October 1, 2007, the 45th day is Thursday November 15 and the 180th is Friday March 28, 2008. If your due date for tax returns is March 20, 2008, then that is your acquisition deadline. It is a good idea to mark these dates on your calendar so you don’t forget and let your tax exemption fall through your fingers. 1031 exchanges are a great way to save money and allow your investments to grow tax deferred.

To learn more about how Real Estate Investments can help secure your family's financial future, go to Dr. Alan Rosenthal's website at FinancialHealthRealEstate.com where you can find more great investment information. And while you're there, please sign up for your FREE Financial Health Real Estate Starter Package full of tips, newsletters and much more. Plus, you are cordially invited to attend one of his real estate investment workshops by visiting FinancialHealthRealEstate.com/UpcomingEvents.html. For additional information listen to one of Dr. Alan Rosenthal’s investment talks at FinancialHealthRealEstate.com/InvestmentTalks.html.


Home About Dr. Rosenthal Rave Reviews Upcoming Events Credit Repair Solutions Articles and Resources Products Ask Dr. Rosenthal Schedule an Appointment FAQs Blog Contact Us	ABC’s of 1031 Exchanges By Alan Rosenthal A 1031 exchange is named after the section of the Internal Revenue Code that states: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment." 1031 is also called a “like-kind”, a term used to identify the types of properties allowed, such as commercial, farm and bare land, residential rental or industrial. Basically under this section, you can exchange a property, receive a tax exemption from capital gains and not pay the depreciation recapture. This is great because every year we receive phantom depreciation on our taxes and when we sell, we need to pay the government recapture taxes. Even though our rental investment property is increasing in value, the government views the property structure, not land, as reducing to zero for the first 27.5 years. By doing a 1031 exchange, you can defer the depreciation instead of recapturing it and allow your investment portfolio to build and defer taxes. These advantages give the investor power over the money they make on the sale. And since you are deferring the taxes, the government will give you the difference as an interest-free loan and allow you to use the gains from the relinquished property to buy another. There are three qualifications to follow in doing a 1031 exchange. The first being identification, meaning that you must identify your new “like-kind” asset within the first 45 days of the transfer of the relinquished property. The property needs to meet on of these three rules in order for it to be identified: the 3-property, the 200 percent or the 95 percent rule. The first is exactly what it sounds like, three properties at any market value. The second is any number of properties provided that the combined fair market value does not exceed 200% of the property sold. The 95 percent rule is any number of properties at any combined fair market value on the condition that your net gain is 95% of the total. If your property meets one of these three stipulations, then you move into the next stage. The exchange period has two specific and unchangeable time limitations. The deadline for acquisition of your new property is before the first 180 days or by the due date of your tax return for the year in which you relinquished the property, whichever occurs sooner. Finally to obtain full tax exemption your replacement property needs to have an equity and value equal to or greater than the relinquished one. For example, if the closing date for your relinquished property is October 1, 2007, the 45th day is Thursday November 15 and the 180th is Friday March 28, 2008. If your due date for tax returns is March 20, 2008, then that is your acquisition deadline. It is a good idea to mark these dates on your calendar so you don’t forget and let your tax exemption fall through your fingers. 1031 exchanges are a great way to save money and allow your investments to grow tax deferred. To learn more about how Real Estate Investments can help secure your family's financial future, go to Dr. Alan Rosenthal's website at FinancialHealthRealEstate.com where you can find more great investment information. And while you're there, please sign up for your FREE Financial Health Real Estate Starter Package full of tips, newsletters and much more. Plus, you are cordially invited to attend one of his real estate investment workshops by visiting FinancialHealthRealEstate.com/UpcomingEvents.html. For additional information listen to one of Dr. Alan Rosenthal’s investment talks at FinancialHealthRealEstate.com/InvestmentTalks.html. ©2008 Financial Health Real Estate, Inc.