In recent years, particularly in rising markets, many real estate investors have found it convenient or necessary when liquidating an investment interest to use Internal Revenue Code Section 1031 like-kind exchanges to shelter capital gains and avoid or defer depreciation recapture.
Our experienced tax deferred exchange attorneys are available for advice about how this reinvestment strategy can work for you. Because the 1031 exchange deadlines can be tight, contact us as soon as you plan to sell your property to discuss your like-kind exchange questions and tax deferred benefits.
Alperin Law also provides Qualified Intermediary services for property exchanges pursuant to Internal Revenue Code Section 1031. In this capacity, we prepare and distribute the documents necessary to complete the exchange transaction, including closing instructions to the closing attorneys handling the sale and purchase.
Because receipt of any of the proceeds by the exchange or from the sale of the property would result in those proceeds being taxable, our firm holds the proceeds from the sale in a separate exchange account until they are needed for the purchase of replacement property.
A Closer Look At 1031s
Internal Revenue Code Section 1031 allows individuals and entities to “exchange” investment property or other property that is held for productive use in a business or trade but not primarily for sale. The exchange is ordinarily accomplished by the sale of the investment or other property to one third party and the purchase of replacement property from another third party within a designated time period. To qualify for Section 1031 treatment of the gain from the sale of your investment real estate, the proceeds of the sale of investment property must be reinvested in a qualifying replacement property within a limited period of time.
Under IRC Section 1031, capital gains from the sale of investment or income bearing property are deferred so long as the Exchangor does not receive cash or other benefits from the sale.
To satisfy the no cash or benefits requirement, the IRC Section 1031 allows a Qualified Intermediary to receive the Exchangor’s interest as the seller of the property (the proceeds) and the Exchangor’s interest as the buyer of replacement property, thus becoming an actual participant in the transaction.
An exchanger’s failure to fully satisfy the 1031 like-kind exchange requirements can ruin any intention to shelter the proceeds of a prior sale from immediate tax liability.
As of March 10, 2008, investors and second-home owners now benefit from a 1031 Exchange rules update by the IRS that provides a safe harbor for like-kind exchange of dwelling unit. This new procedure provides a safe harbor under which the IRS will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of Section 1031 of the Internal Revenue Code.
The rule demonstrates a relaxation of the long-standing notion that any real estate used for personal purposes could not also qualify as property held for ‘investment’ purposes under the tax deferred exchange guidelines. The procedure also provides a specific ‘bright line’ test for compliance with the safe harbor requirements.
Tax-Deferred 1031 Exchanges Benefits
Anyone who is thinking about selling a business or investment property should consider a 1031 exchange, which allows you to avoid the capital gains tax that would otherwise be levied in an outright sale.
Section 1031 tax deferred exchanges are becoming increasingly popular among Virginia property owners. There are many reasons to consider a 1031 Exchange, such as:
A properly structured exchange can give real estate owners a 100% deferral of both federal and state capital gain taxes. This essentially equals an interest-free, no-term loan on taxes due until the property is sold for cash.
Often the capital gain taxes are deferred indefinitely because many property owners continue to exchange from one property to the next, increasing the value of their real estate investments with each exchange.
Many property owners exchange from a property where they have a high equity position, into more valuable property. The larger property can generate more cash flow and provide greater depreciation benefits, and a better overall return.
Section 1031 Exchanges offer a great opportunity to diversify assets, whether by diversifying into another geographic region or simply from one property type to another.
Some types of property require hands-on management, and that type of responsibility can become burdensome. Exchanging into a property with less maintenance or ongoing management can make good economic sense, especially in the context of a tax-free exchange.
Sometimes a number of family members inherit one large property and disagree about what to do with it. Some may want to continue to hold the property, while others want to sell for quick cash.
By exchanging from one large property into several smaller properties, clients can designate that, after their death, their heirs will each receive a different property, which they can choose to either hold or sell.
Why Choose Alperin Law PLLC For Your Tax-Deferred 1031 Exchange?
Personal service is what sets us apart from other law firms. We are always available to assist our clients with any questions about the exchange process.
In addition to the necessary exchange documentation, we provide written notification of designation and exchange deadlines and oral reminders to make sure time requirements are met.
We enjoy working with people who are new to investing or transferring in or out of the area and would like a better understanding of how to benefit from a Tax Deferred Exchange.
Our services include:
- Sole Owner Exchanges
- Tenants in Common Exchanges
- Reverse Exchanges
- Replacement Properties
- Qualified Intermediaries
- LLC Formation for Tenants in Common
- Due Diligence
- Exchange Closing
The Right Advice
Alperin Law can advise you on all aspects of like-kind exchanges so that you can avoid a taxable event by means of a timely and fully qualifying exchange with sound investment values.
For a no-cost phone consultation, feel free to call us at (757) 490-3500.