Tax Issues

Tax-Deferred Exchanges

A tax deferred exchange allows the exchanger to use money that would have been paid as tax to invest in other real estate. Internal Revenue Code Section 1031 states that when property is exchanged for other property, all of the gain received may not need to be currently taxed. This cannot be applied to property that is used a principal residence, however.

It's important to consider that the code defers tax until a future point, but generally doesn't avoid it. For some individuals, it may be advantageous to sell the property, pay the tax, then reinvest rather than to initiate a deferred exchange.

A Tax-Deferred exchange is also called a 1031 Exchange, a Like-Kind Exchange, or a Starker Exchange, after the 1979 Starker decision in which the Treasury finally issued rules governing these exchanges. For example, the exchanger contracts with an intermediary to transact the exchange for replacement property, which must be designated within 45 days of sale of the exchange property and close the purchase of replacement property within 180 days.

An exchange agreement is required, as well as an Assignment of the exchanger's interest and a letter designating replacement property, which must be received within 45 days of the original sale.

For further Exchange Escrow information contact Sharon Robinson-Kramlich at skramlich@pacunion.com