Now good time for 1031 exchange

Real Estate Weekly, Oct 31, 2001 by Guy Smilovich

Exchanging properties is neither special nor new. But people are currently asking tax professionals if now is the right time to invest money in a 1031 exchange. The "your property" for "my property" type of direct exchange has been in practice for a long time, but it is difficult to arrange. Several years ago, in June 1990, it became for real estate investors because the IRS issued new rules governing delayed exchanges. Section 1031 of the Internal Revenue Code laid out the procedure for turning a sale and purchase type transaction into an exchange. The new rules allow owners of certain real property to sell their property and buy other "like-kind" property by deferring the Capital Gains Tax. The rules give everyone an opportunity to use purchase and sale techniques to structure tax deferred exchanges. If an investor wishes to keep his investment money in real estate, he should consider the tax advantages of a deferred exchange.

The like kind provision for real property is quite broad, and includes land, rental, investment, and business property. Any of these can be exchanged for the other. The rule also requires that the exchanger use a safe harbor to hold the proceeds while the exchange is in progress, spelling out what those safe harbors are. The only practical safe harbor for most exchanger is a qualified intermediary. He/she acts to facilitate the deferred exchange by entering into an agreement to exchange the properties, for a fee. The 1031 exchange rules also have two time limitations. The first is the period of time available for identifying the replacement property. It begins on the date of the closing of the exchange property and ends 45 days later. The second time requirement is the period in which the replacement property must be received by the exchanger. It starts on the date of closing of the exchange property and ends on the date that the tax return of the taxpayer is due, including extensions, or in 180 days, whiche ver is earlier. With interest rates at such attractive levels now is a good time to do this type of exchange.