1031 Tax Free Exchange - Does a Condominium Qualify?

A condo will qualify as a property to exchange as long as it is considered to be investment property and not your residence.

If you invest in real estate, you will want to learn about a 1031 tax free exchange. It is a tax shelter for investors to defer paying taxes on real estate that they sell. When you sell an investment property you will either have a loss or a gain.

Section 1031 of the Internal Revenue Code allows the investor to NOT recognize the gain or loss on the sale of their investment property and to exchange it for "like property".

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Like kind property refers to the nature of the property, meaning that it is an exchange - investment real estate for investment real estate. It does not matter where it located or if it is improved or unimproved.

• A 1031 Tax Free Exchange can NOT involve the exchangor's personal residence.

• You will not get the cash from a sale, but you will purchase more investment property.

• The rules of this exchange are strict. You will NOT be able to let any money into your hands.

The capital gains tax is 15%, so with a sale of $500,000, you could be writing a check for around $75,000.00. If you do a 1031 tax free exchange, you use that 75k to pay on the new property that you will purchase.

See the signifigant advantage!

• The exhangor signs a contract to sell a relinquished property to the buyer.

• The exchangor assigns the exchangor's rights in the contract to the Qualified Intermediary.

• At the closing of the relinquished property the exchange funds are deposited withthe Qualifed Intermediary who instructs the settlement agent to transfer the deed directly from the exhangor to the buyer.

• The exchangor has a maximum of 180 days in the exchange period - or until the tax filing deadline, including extensions, for the year of sale of the relinquished property - to acquire all replacement properties.

• Unless the exchangor can acquire all replacement property within the first 45 days from the close of relinquished property, the exchangor must identify possible replacement prroperties in writing to the Qualified Intermediary with the 45 day identification period.

• The exchangor signs a contract to purchase the replacement property with the seller and assigns the contract to the Qualified Intermediary.

• At the closing of the replacement property the Qualified Intermediary forwards the exchange proceeds to the settlement officer together with instructions to transfer the deed directly form the seller to the exchangor.

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If you exchange land for income producing property, you will gain income and tax deductions from that rental property.

Often times if you have a property that has peeked in value, it is wise to sell it and invest in one or more other properties to begin gaining equity in it or them.

You may want to leave one neigborhood that may be deteriorating or is not showing improvement to invest in a better neighborhood.

There is no limit to the number of exchanges you can make in your lifetime. You can mix and match properties. For example, you can sell one and buy three.

Rarely do two property owners want to or end up trading properties with one another.

Typically there are three parties involved in an exchange.

• The exchangor is the investor who chooses to sell his property and delay taxation.

• The seller is the one who is selling to the exchangor, the new replacement property.

• The Buyer of the relinquished property, the exchangor's property.

There are strick rules when it comes to the way an exchange is handled. It is recommended that you hire a qualified intermediary to handle the transaction. They will become a fourth party in the transaction. They will need to be involved from the planning stages through the end of your exchange.

This will ensure you that your transaction will be a valid exchange with regard to Uncle Sam!

I have provided you with a brief summary of a 1031 tax free exchange, otherwise known as a tax deferred exchange.

An experienced intermediary will be very helpful in guiding you through the entire process. The cost may run you $500 - $2000 depending on the number of properties involved and the complexity of your situation.

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• The Qualified Intermediary does not provide legal or specific tax advice to the exchangor, but will usually perform the following services:

• Coordinates with the exchangers and their advisors, to structure a successful exchange.

• Prepares the documentation for the Relinquished Property and the Replacement Property.

• Furnishes escrow with instructions and documents to effect the exchange.

• Secures the funds in an insured bank account until the exchange is completed.

• Provides documents to transfer Replacement Property to the exchanger, and disburse exchange proceeds to escrow.

• Holds the document of Identification of Replacement Properties sent by the Taxpayer.

• Submits a full accounting of the Exchange Funds for the Taxpayers Records.

• Submits a 1099 to the Taxpayer and the IRS for any growth proceeds paid.

If an exchange is done properly, a Section 1031 exchange can be a great way to defer taxes and take advantage of the many investment opportunities in Panama City and surrounding areas.

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