20A — March 11 - 24, 2016 — 1031 Exchange — M id A tlantic

Real Estate Journal


1031 E xchange

By Maury B. Reiter, Esq., Kaplin Stewart Like-kind exchanges of real estate


nternal Revenue Code (“IRC”) Section 1031 pro- vides that capital gain is

that gain be taxed on the dis- position of property. Real estate is the most com- mon property used in like-kind exchanges since the combina- tion of depreciation, which reduces a taxpayer’s cost basis in the real estate, and appre- ciation in the value of the real estate, often creates a formi- dable tax bill when the real estate is sold. Utilizing the like-kind ex- change rules allows the tax- payer to defer the Federal taxes by using the proceeds from the sale of the first prop- erty (referred to as the “relin- quished property”) to purchase

a second property (the “re- placement property”). There are certain miscon- ceptions about exchanging. For example, exchanges do not require two parties who want to swap each other’s properties. And exchanges are not required to take place simultaneously. In addition, the types of property which are considered “like-kind” for purposes of IRC § 1031 is extremely broad and permits, for example, the exchange of a parking lot for a multi-story office building. The basic rules for a like- kind exchange are as follows:

1.The total purchase price of the replacement “like kind” property must be equal to, or greater than, the total net sales price of the relinquished property. 2.All the equity received from the sale, of the relin- quished property must be used to acquire the replacement, “like kind”, property. 3 . T h e r e p l a c e m e n t property(ies) must be identi- fied no later than (exactly) 45 days from the day of selling the relinquished property. 4 . T h e r e p l a c e m e n t property(ies) must generally be acquired no later than (ex-

actly) 180 days after the date on which the taxpayer closed on the sale of the relinquished property. 5.The proceeds from the sale of the relinquished property must not be held by the tax- payer pending the purchase of the replacement property but is instead generally deposited into an escrow account with a professional intermediary company. Taxpayers are cautioned to use professionals to guide them through the IRC road map to assure the transaction qualifies for this tax-favored treatment. A failure to follow the road map will result in the IRS challenging the transac- tion after the fact and assess- ing the tax when the taxpayer has already completed the exchange and reinvested all of the money into a replacement property. Finally, with good planning, the like-kind exchange rules can be combined with another favorable provision in the IRC which permits heirs to inherit property at a new cost basis equal to the property’s fair market value on the date of the property owner’s death. Accordingly, it is possible to “defer, defer, and die”, ulti- mately avoiding forever the untaxed cumulative capital gains from all the relinquished properties. Maury B. Reiter is man- aging principal and a foundingmember of Kaplin Stewart. n a section of the MARE Journal P.O. Box 26, Accord, MA 02018 781-871-5298 • 800-584-1062 fax 781-871-5299 www.marejournal.com Section Publishers Barbara Holyoke bholyoke@marejournal.com Steve Kelley skelley@marejournal.com Section Editor Julie King jking@marejournal.com Financial Digest

not imposed o n a t a x - payer when p r o p e r t y held for use in a trade or business or for invest- ment is ex- changed for

Maury Reiter

“like-kind” property which is also intended to be used in a trade or business or for invest- ment. IRC § 1031 is one of the few exceptions under Federal tax law to the requirement

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Contact: MAURY B. REITER • mreiter@kaplaw.com 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-941-2476 • www.kaplaw.com Visit our Real Estate Blog: www.philadelphiarealestatelaw.com Visit our Construction Blog: www.pennsylvaniaconstructionlawyer.com Other Offices: Cherry Hill, NJ 856-675-1550 • Philadelphia, PA 215-567-3120 Kaplin Stewart A t t o r ne y s a t L aw

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