1031 Tax Deferred Exchange – Myrtle Beach Real Estate

Posted in General Real Estate , Myrtle Beach Real Estate , Uncategorized

Lately I have been working with several Customers who are looking to initiate or complete a 1031 Tax Deferred Exchange. They both had some good questions.  Here were a few of them!

Glossary –  Relinquished Property, the property you have sold or are trying to sell
                  Replacement Property, the property you are looking to acquire
  
The first and most obvious question, what is a 1031 Tax Deferred Exchange and what is its purpose?
I will try and keep the answer short and sweet.  The number 1031 is in reference to the Internal Revenue Service section it represents. It is the process of selling one investment property and the purchasing of another investment property of equal or greater value while rolling the monetary gain of the Relinquished Property “Tax Deferred” into the Replacement Property.

The theory behind this process is when the property owner has reinvested the sale proceeds into another “like kind” property the economic gain was not actually realized, so there were no funds generated to pay taxes.

Can I perform a 1031 exchange in the sale or purchase of a Primary Residence (the home where you live)?
No, the IRS is very clear on this.  A 1031 Exchange must be for real property that is held for productive use in a trade or business or for investment. A quick list of what can be sold/bought/traded – Vacant Land, Office Building, Rental Property (house, condo, duplex, triplex etc), Apartment Building, Warehouse, and so on.

Don’t forget on the sale of your Primary Residence you have a capital gains exemption if you have lived in the home for 2 of the last 5 years.  This is totally separate from the Deferred or Like Kind exchange we are talking about.

Are 1031 or Like Kind exchanges limited to just real property?
No they are not; this type of exchange is referred to as a “multi-asset exchange”.  These types of exchanges take careful planning and it is highly recommended to consult with your tax accountant before you even start this process.

Why are the proceeds of the Relinquished property just tax deferred and not tax free, and is there a way to make it tax free?
OUTSTADNING question – First things first – The 1031 exchange is tax-deferred, not tax-free. When the replacement property is ultimately sold not exchanged, the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

However, there are ways to eventually eliminate the Taxable Gain of the Relinquished property.  Prime example – I had a couple that I was working with that sold an office building in Michigan. They then bought a home from a local builder that was offering the home as a Model Lease Back.  They successfully preformed a 1031 exchange! The builder then leased the home back for 3 years using it to meet with potential customers and show his work.  Once the three years were done on the lease back my couple from Michigan moved into the home.  Now once they live in the home for 2 years they can sell the home and take all of the gains up to $500,000 (gains not sale price) tax free.

The laws on the 1031 exchange are ever changing that is why it is important to have qualified and trustworthy people working for you.  Proof of this, recent legislation has now placed a 5 year holding period on the transaction I was able to complete for the Michigan couple.

Please note this is just a blog post — Please call for more information on 1031 Tax Deferred Exchanges.