WHAT IS A §1031 EXCHANGE?

Thanks to IRC §1031, a properly structured exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC §1031 (a)(1) 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."

To understand the powerful protection an exchange offers, consider the following example:

• An investor has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $130,000 remains to reinvest in another property.
• Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $520,000 new property.
• If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.

As the above example demonstrates, exchanges protect investors from capital gain taxes as well as facilitating significant portfolio growth and increased return on investment. In order to access the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process and the IRC. For instance, an accurate understanding of the key term like-kind - often mistakenly thought to mean the same exact types of property - can reveal possibilities that might have been dismissed or overlooked. API is your resource to obtain accurate and thorough information about the entire exchange process.

WHAT'S THE FIRST STEP?

1. Always discuss a §1031 tax deferred exchange with your tax and/or legal advisors.
2. Call Asset Preservation for a free consultation at any time and definitely before closing on the relinquished property. The following information is needed to begin preparing the exchange documents:  A)  The name, address and telephone number of the Exchanger; and B) The closer/escrow holder's name, address, telephone number and file number. We will prepare all necessary exchange documentation and will coordinate with the closer/escrow holder, the Exchanger's real estate agent/broker and his or her tax and/or legal advisors.
3. Include language establishing the intent to affect a §1031 tax deferred exchange in the Purchase and Sale Agreement. The following are examples:

SALE OF RELINQUISHED PROPERTY

"Buyer is aware that Seller intends to perform an IRC §1031 tax deferred exchange. Seller requests Buyer's cooperation in such an exchange and agrees to hold Buyer harmless from any and all claims, liabilities, costs, or delays in time resulting from such an exchange. Buyer agrees to an assignment of this contract to Asset Preservation, Inc. by the Seller."

PURCHASE OF REPLACEMENT PROPERTY

"Seller is aware that Buyer intends to perform an IRC §1031 tax deferred exchange. Buyer requests Seller's cooperation in such an exchange, and agrees to hold Seller harmless from any and all claims, liabilities, costs, or delays in time resulting from such an exchange. Seller agrees to an assignment of this contract to Asset Preservation, Inc. by the Buyer."