By Bill McIntosh
“The 1031 Exchange has been cited as the most powerful wealth building tool still available to taxpayers,” says a recent Internet article.
Even if this is an exaggeration, those involved or just interested in real estate investments should have a general knowledge of Section 1031 of the U.S. Internal Revenue Code.
When an investor sells a stock or bond that has appreciated in value, tax is due on the gain even if it’s immediately reinvested. Section 1031 rules allow the sale and purchase of certain types of “like kind” property, such as rental property, with a deferral or postponement of the tax.
The investor’s purchasing power is not diminished by the tax obligation. In an environment of rising real estate prices this should increase the investor’s long-term profit.
For example, a condominium suitable as a rental can be obtained in Mesquite for under $50,000. An investor owning such property may, after a period of time, decide to replace this unit with a multifamily building. A 1031 exchange would allow all of the proceeds of the sale of the condominium to be invested into the larger property by deferring the tax on the gain.
The IRS’s 1031 Publication is more than 20 pages long and describes the rules and details on acceptable and unacceptable investments. There is a good deal of confusion about Section 1031 and a second home. While most taxpayers would view a second home as an investment, the IRS has ruled that properties purchased for personal use are not investment properties.
An investor with rental property should assemble a team of professionals to help decipher 1031. These professionals would include a tax professional or CPA, realtor, licensed property manager, escrow officer, and qualified intermediary (a middle person or company also known as an exchange accommodator or facilitator).
The sale of the relinquished property and the acquisition of the replacement property do not have to be simultaneous. A starker tax deferred exchange involves the sale of the relinquished property and a a date for the purchase of replacement property. Forty-five days is allowed after the sale of the old property to “identify” new property. Within 180 days of the sale of the old property the replacement property must be purchased.
Bill McIntosh has been a full-time realtor in Nevada for 20 years. Contact him at Desert Gold Realty, 581 W. Mesquite Blvd., 702-346-1121, cell at 702-277-2638, or email firstname.lastname@example.org.