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The tax
deferred exchange, as defined in Section 1031 of the
Internal Revenue Code (IRC) of 1986, as amended, offers
investors one of the last great opportunities to build
wealth and save taxes. By completing an exchange, the
investor (Exchanger) can dispose of their investment
property, use all of the equity to acquire replacement
investment property, defer the capital gain tax that would
ordinarily be paid, and leverage all of their equity into
the replacement property. Two requirements must be met to
defer the capital gain tax:
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The
Exchanger must acquire like kind **
replacement property; and
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The
exchanger cannot receive cash or other benefits (unless
the Exchanger pays capital gain taxes on this money).
In
any exchange, the Exchanger must enter into the exchange
transaction prior to the close of the relinquished
property. The Exchanger and the Qualified Intermediary
enter into an Exchange Agreement, which essentially
requires that:
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The
Qualified Intermediary acquires the relinquished
property from the Exchanger and transfers it to the
buyer by direct deed from the Exchanger; and
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The
Qualified Intermediary acquires the replacement property
from the seller and transfers it to the Qualified
Intermediary and are held by the qualified Intermediary
in a separate, secure account.
The
exchange funds are used by the Qualified Intermediary to
purchase the replacement property for the Exchanger.
**LIKE-KIND
PROPERTY…Pursuant
to IRC 1031, capital gain tax deferment requires the
exchange of "like-kind" relinquished property for other
"like-kind" replacement property. Contrary to the commonly
held misconception that exchanged properties must be of
the exact same type - for example, that bare land be
exchanged for bare land or an income property be exchanged
for another income property - the actual definition of
"like-kind" is far more empowering in its flexibility.
What is important is the nature or character of property -
not the grade, quality or use. Any real property held for
investment, or real property used in a trade or business,
can be exchanged for any other real property held for
investment, or real property used in a trade or business.
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