Real estate investors are getting more and more savvy. The best investors know they can sell a property and avoid taxes simply by trading for other like-kind property through Section 1031 of the IRS Code. Furthermore, our IRS explains “Like-Kind” Exchanges, in words only a tax accountant could love.
Like-Kind Exchanges - Real Estate Tax Tips
Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
Like-Kind Property
Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the
Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the
I was actually following along well until the word “livestock” was used and I burst out laughing with a vision of two farmers walking toward and eventually meeting each other on a dusty road, one with a horse and one with a goat. Eventually the farmers are heatedly arguing over IRS Section 1031. The horse and goat become spooked, trying to run in opposite directions, slowly pulling the farmers farther and farther apart out of ear shot. Anyway, is it just me or who talks “Like Kind” anyway? Where I am from it is “Kinda Like.” Perhaps tax accountants, in a fine restaurant, ordering dessert, do say to the server:
“Pardon me, is the blueberry Sorbet of like-kind to the blueberry Gelato?”
Another caveat with the 1031 is you have to go through an Accommodator, or Qualified Intermediary (QI). No, “The Accomodator” cannot be your mother-in-law despite her expert insistence, but a QI has to be a corporation in the full time business of facilitating 1031 exchanges.
One such QI is Bayview Financial Exchange Services and an expert on the 1031 Tax Deferral Strategies is, Business Development Consultant, Christopher J. Princis. Here is what Chris had to tell us at LakeshoreDreams.com:
The Basics on a 1031 From the Expert
“Tax deferral through 1031 Exchanges offers a means to preserve the wealth that you have worked so hard to accumulate and to grow your assets by reinvesting the tax savings.
In a typical Forward Delayed Exchange, the most common type of exchange, the taxpayer sells business or investment property and acquires Replacement Property of equal or greater value within 180 days. The use of a Qualified Intermediary, such as Bayview Financial Exchange Services (Bayview 1031), is a safe harbor requirement to facilitate a valid tax deferred exchange.
This Qualified Intermediary must possess intimate knowledge and a thorough understanding of 1031 regulations. At Bayview 1031 we focus solely on facilitating exchanges of real property, with unparalleled quality, expertise, and pricing. “
Skilled Guidance Through 1031 as told to LakeshoreDreams by Bayview 1031:
Step One:
Before the sale of the first property the Exchanger must complete the documentation prepared by Bayview 1031. At closing, the proceeds are delivered directly to Bayview 1031, as the Qualified Intermediary.
Step Two: Identification of the Replacement Property
The Exchanger must identify the property to be purchased (generally called the "Replacement Property") within 45 days following the sale of the Relinquished Property. The taxpayer may generally identify three properties as a potential Replacement Property, or more under alternate rules of identification.
Step Three: Purchase of the Replacement Property
The Exchanger must obtain the Replacement Property within 180 days following the sale of the Relinquished Property, which must be identified property, subject to the rules listed above. At closing, the proceeds are paid directly by Bayview 1031, as the Qualified Intermediary, and the Exchanger receives the Deed to the Replacement Property.
There are other types of exchanges, such as reverse exchanges, improvement exchanges, and personal property exchanges. Bayview 1031 provides unparalleled expertise for such exchanges and your Exchange Coordinator can discuss the specifics of your situation with you.
“Like Kind”/Thoughts on what is a “QI” from our friends at Bayview 1031:
- "Like Kind" in its simplest explanation is pretty much any real estate (real property AND real land) that is not your primary residence. Vacation homes and Second Homes can fall into some grey areas.
- The QI Has to be a third party from the seller - meaning any sort of relationship, either personal or professional, with the seller cannot be a QI. Most people believe their attorney can act as the QI, this is a no-no.
- The QI is a must in the 1031 Exchange transaction, since the exchanger cannot touch their funds at closing. They must be held by a QI
- ALWAYS make sure the QI offers bonding and insurance for the proceeds they hold for you. NEVER do business with a QI that cannot insure and bond your ENTIRE amount of proceeds.
Finally, if the first thing you think of when you hear the word taxes is this old quote:
“Did you know that the
…perhaps now you will keep in mind the 1031 tax deferral strategy?
Well at least you may be a little clearer on “like-kind”?
By the way ladies, you can’t trade your husband for “like-kind” (Brad Pitt, Tom Cruise, etc.) Besides you don’t want to trade your Stallion for a goat anyway, just ask those two farmers, or better yet BEFORE you begin the exchange process, be sure to consult with your tax or financial advisor to ensure that a 1031 exchange is right for you. Then simply contact a Bayview 1031 Exchange Coordinator at 866.903.1031 or another of like kind. Your Exchange Coordinator will then lead you through the process, answering your questions and providing guidance along the way. LakeshoreDreams knows Chris Princis will accommodate you and treat you….well… like, kind.
Disclaimer: This is not tax advice from Lakeshoredreams.com, please consult a qualified tax professional for help with a 1031 transaction.
