How can you save Thousands of dollars?

By: Neil Dailey

If you are involved with selling or buying real estate and you haven’t heard of a 1031 Exchange…you'll love hearing about a 1031 Exchange. A 1031 Exchange, named after the IRS code, is a way to defer capital gains tax on the proceeds from the sale of real estate or personal property.

In order to qualify for this exchange, certain rules must be followed:

1)Both the relinquished property and the replacement property must be held either for investment or for productive use in a trade or business. A personal residence cannot be exchanged.

2)The asset must be of like kind. Real property must be exchanged for real property, although a broad definition of real estate applies and includes land, commercial property and residential property. Personal property must be exchanged for personal property. (There are some complicated rules surrounding this -- for example, livestock of opposite sex are not considered like kind property for the purpose of a 1031 exchange.)

3)The proceeds of the sale must be invested in a like kind asset within 180 days of the sale. However, the property must be identified within 45 days, but up to three properties may be identified.

This process can be incredibly handy if you are a property owner or business owner selling your building and buying another or if you are an investor selling off a portfolio of properties. The capital gains tax being deferred can easily reach hundreds of thousands of dollars, so you can see how important it would be to defer the tax and reinvest the money in the new property.The popularity of this capability has caused the emergence of hundreds of companies specializing in every aspect of this process.

There are companies that just handle the replacement properties by selling “triple net” properties. Triple net properties, or NNN Properties, are buildings occupied by tenants that bear the full responsibility for the taxes, maintenance and insurance on the building. For example, if you bought a building occupied by a national drugstore, you would just have to collect the rent every month. If the roof leaks, the tenant would take care of it without calling you. It’s essentially “mailbox money.”

For more information on 1031 exchanges, visit http://www.irs.gov/ or for a list of properties in your area, you can reach me at 918-853-7337.