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By BONNIE HUGHES, for i-1031exchange.com 8/25/2007

For gains greater than the exemption amounts, a 15 percent capital gains tax usually will apply. In today's market, finding real estate values can be a challenge and individual investors have been somewhat limited to residential properties and small commercial structures.A deadline that falls on Thanksgiving, Christmas or New Year's Day, does not permit extension. If your property has declined in value or you have losses from other sources that can offset the capital gain on the sale of your property, then a tax-deferred exchange would not be a good idea. Reverse 1031 exchanges may be structured in one of two ways to serve different purposes.

1031 Exchange a brief history

Exchange Period: The replacement property must be received by the taxpayer within the "exchange period," which ends within the earlier of 180 days after the date on which the taxpayer transfers the property relinquished, or the due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurs. This is particularly true if you already hold a full-time job. As originally enacted, only simultaneous exchanges were contemplated. If there is an issue that needs addressing within the building, the tenants will expect you to tend to it as soon as possible. It is critical that the Exchanger receive improvements/replacement property that are/is substantially the same as the improvements/replacement property identified. Similarly, higher levels of outside blockholdings have a negative impact on both equity and hybrid and mortgage market-to-book ratios. In both cases, you must have a reliable source of rental income. Specializing in like-kind exchanges, starker exchanges, triple-net leases and 1031 exchange services.

Real estate investment

Such treatment by other authoritative bodies will not taint the property for purposes of the safe harbor.Typically, day-to-day management of the property is handled by a professional management company and owners receive a monthly distribution check. As long as the property being sold is not a primary residence, and there is a tax liability to selling, an Exchange should be considered. To be eligible for tax deferral, the property that you sell must be either held for investment or used in a trade or business. Granger causality tests are also performed to determine if an asset's returns Granger cause the returns on the other asset. A final accounting is sent by the Qualified Intermediary to the taxpayer, showing the funds coming in from one escrow, and going out to the other, all without constructive receipt by the taxpayer.

1031 Exchange facts

Enter into an 1031 exchange agreement with your Qualified Intermediary, in which the Qualified Intermediary is named as principal in the sale of your relinquished property and the subsequent purchase of your replacement property. It is possible to sell hard real estate, such as an office building or an apartment complex and buy mineral interests as your replacement property. For real property exchanges under Section 1031, any property that is considered real property under the law of the state where the property is located will be considered like-kind so long as both the old and the new property are held by the owner for investment, or for active use in a trade or business, or for the production of income. Thus, many properties involving co-owners are purchased as tenants-in-common with each co-owner on the deed. Although reverse like-kind exchanges are not a new technique, in the past the tax implications were sometimes uncertain. Once you sell your existing property, you must close on your new property within the earlier of 180 days or the due date of your tax return (including extensions).

1031 Exchange tips

Unless the Investor has taken specific steps to remediate the risk on closing to each particular transaction, it is quite possible that the Investor may find himself in a position where the property identified is not able to close, but the deadline to identify additional Replacement Properties has passed, so that their tax-deferred exchange transaction is doomed to failure. However, the transfer of the property or properties identified must still close within 180 days of the transfer of the relinquished property.The IDENTIFICATION PERIOD is the first 45 days of the exchange period. The Regulations provided that rights conferred upon a Taxpayer under state agency law to dismiss a Qualified Intermediary, and thus obtain the benefits of money or other property held by the Intermediary, will be disregarded in determining whether the transaction satisfied the exchange requirement of section 1031. If proceeds from the sale are used to service non-transaction costs at closing, the result is the same as if the taxpayer had received cash from the exchange, and then used the cash to pay these costs. Sale proceeds being used to pay non-qualified expenses.In cases where the transactions are not simultaneous, the taxpayer cannot actually receive the funds that result from the initial sale. In order to successfully defer taxes with a reverse exchange, certain safe-harbor requirements must be met.But this doesn't mean that there should necessarily be a property for sale. You must not have any access to the money from the sale of your property.

1031 Exchange case studies

Third parties are usually involved. Then when this is complete, escrow closes. Intertemporally, REIT returns are much more strongly related to unsecuritized real estate than stocks or closed-end funds. Now is the time to hunt for properties that fit the investing criteria you've established for yourself. Thus, many properties involving co-owners are purchased as tenants-in-common with each co-owner on the deed. The corporation and the ex-spouse exchanged their respective co-tenancy interests so that she and the corporation each owned 100% of one-half of the timberland acreage.