12A — March 10 - 23, 2017 — Financial Digest — 1031 Exchange — M id A tlantic
Real Estate Journal
www.marejournal.com
1031 E xchange
By Alex Snyder, Barley Snyder Did you also know the four lesser- known facts about 1031 exchanges?
Y ou have probably heard of “like kind” or “tax f ree” exchanges in
Internal Revenue Code permits a taxpayer to defer paying tax on this amount if the proceeds are instead applied towards the purchase of property of “like kind.” The potentially huge tax ben- efits have given the practice its own nickname – “1031 exchang- es.” It is important to plan these 1031 exchange transactions in advance to meet strict require- ments. Typically, a qualified intermediary is used to hold the sale proceeds until the replace- ment property is purchased. Replacement assets must be identified within 45 days, and
closing on the purchase must occur within 180 days. The re- placement property must be of value that is equal to or greater than the relinquished property, or a portion of the transaction may be taxable. Did you also know these lesser-known facts about 1031 exchanges? • Something like an air- plane could qualify for a 1031 exchange. When you do a 1031 deal, the replacement property must be of like kind, meaning the same broad category of as- set. Investment real estate for investment real estate is the
most common. But taxpayers can defer the taxable gain on the sale of most types of capital assets with a few notable ex- ceptions such as stocks, bonds, partnership interests, or notes. In other words, the exchange of a valuable non-real estate asset –such as an airplane – is eligible. • A taxpayer often has dif- ficulty identifying a property of roughly equivalent value within the time frame specified. One potential solution is to have the taxpayer purchase a fractional interest in the replacement property. This also benefits buy-
ers by allowing them to move from less valuable to more valu- able properties. From a seller’s standpoint, it may increase the marketability of a more valu- able property by opening up a larger class of buyers. • “Reverse” 1031 exchanges, though more complicated, are possible. In the standard 1031 exchange, a person sells a property first and invests the proceeds in a replacement property identified later with- out incurring tax. In a reverse exchange, a buyer acquires the replacement property first and sells the relinquished property later through the use of inter- mediaries. This structure may be useful, for example, where an investment property comes on the market before the in- vestor is ready to sell the first property. • Section 1031 exchanges can be done between related parties, with certain important limitations. The rules for de- termining whether parties are related are fairly complex, but if an exchange is made between related parties, the replace- ment property must be held for two years before it can be sold or the tax deferred by the 1031 exchange is due. A seller can purchase the replacement property from a related party only if the related party is also initiating a 1031 exchange. If you are planning to sell a capital asset with a low tax basis in the near future, contact your attorney or accountant to discuss the possibility of a 1031 exchange. Alex Snyder is a partner in Pennsylvania-based Barley Snyder’s Tax, Business, and Personal Planning groups. Contact him at 717-852-4975 or asnyder@barley.com. n Summary: The 1031 ex- change is a fantastic tool that many real estate investors have employed for years. It is used for $100,000 transactions; it is used for $100,000,000 transactions—and everything in between. The process can be quite straightforward with the guidance of a professional that has expertise in the space. This topic will be expanded upon in future articles with the hope that you will gain insight on how to make the most of your continued from page 10A continued on page 15A Why you should consider deferring . . .
reference to rea l es tat e transactions. N o r m a l l y , when an as- set is sold, tax must be paid on the differ- ence between the amount
Alex Snyder
received on the sale less the taxpayer’s “basis” in the prop- erty (the investment in the property, with some adjust- ments). Section 1031 of the
We know Real Estate
Our dedicated real estate attorneys provide comprehensive legal
• Negotiation • Due diligence • Permits & Approvals • Title insurance • Entity formation • Settlement • Tax assessment appeals
services to assist clients in every stage of the real estate transaction. We regularly represent developers, businesses, public entities and individuals.
Lancaster York Reading Hanover Malvern Hunt Valley www.barley.com @barleysnyder
Listed by U.S. News - Best Lawyers® as a 2017 Harrisburg Tier 1 “Best Law Firm” in six practice areas, and Tier 2 firm in one practice area.
Made with FlippingBook - Online catalogs