Newspaper logo  
 
 
Bookmark and Share
Local News & Opinion

01.26 Local Democrats Invited to Brainstorming Session on Sun., Jan. 31

Ref. : Local Newsbriefs

Travel
Books, Films, Arts & Education

02.04 'The Power of Nightmares': Underwear vs. Reason

Letters

Ref. : Letters to the editor

Open Letters:
Health & Environment

Video National Health Care Systems In Other Countries

02.03 Drugmaker Got Kickbacks for Nursing Home Patients

01.18 Drugmaker Got Kickbacks for Nursing Home Patients

Media Watching

02.04 Err-America

02.03 The Right Gets Itself 'Wired'

Ref. : The Daily Howler

Legal Matters

01.25 Thinking About Fictions

01.24 US Democracy's End of the Road

01.22 Editorial: U.S. Supreme Court Nails Down the Coffin of Democracy

01.22 Security Fools

US Politics, Policy & Culture

02.09 Growing Hunger in America

02.08 The US Government has Lost its Reason for Being

02.08 Thinking About Oracles

02.06 No Direction Home: Pakistan and the Imperial Principle

02.04 Howard Zinn and the State of the Union

02.04 The US Supreme Court: Vanguard of Friendly American Fascism?

02.04 The New War Against Money

02.04 David Brooks Goes After Greedy Geezers

02.02 Obama's Budget Ducks Pentagon Cuts

02.02 Budgets, War and Blind Ambition: The Limited Minds of the American Elite

02.01 Thinking About Definitives

02.01 Remembering Howard Zinn (1922 - 2010)

01.29 American History 101: We Are Devo

01.29 Obama's Outreach to Americans: Empty Rhetoric, Business As Usual

01.28 The Supreme Court's Partisanship

01.27 Freeze Frame: Flopsweat and Farce in the Hollow Halls of Power

01.25 Granny D on Campaign Finance Reform

01.25 S.C. Republican’s Plan: Starve the Poor So They’ll Stop “Breeding”

01.23 It's Time for Kucinich, Conyers, Feingold and Other `Progressives' in Congress to Take a Stand

01.21 Massachusetts' Message of Stupid

01.21 Terrorism Defined: Bill Clinton Lights Our Way to Truth

01.21 How Obama Lost His Way

01.21 Political Earthquake Rocks Massachusetts

01.20 Obama Cuts Deal that Will Reduce Social Security, Medicare and all Entitlements

01.20 Critical Mass: Dem Agenda Opens Right-Wing Doors

01.19 Outsourcing War: The Rise of Private Military Contractors

“High Crimes?”

01.25 The Silence and the Shield: Depraved Indifference to the Atrocities of Power

01.19 Dark as a Dungeon: A Brutal System Stripped Bare

Economics & Business Non/Mis/Malfeasance

02.07 AIG-Gate: The World's Greatest Insurance Heist

02.06 The Free Market Fetish

02.04 The Crisis is Not Over

02.03 States Face Worsening Recession with Health Care Funds on the Chopping Block

02.02 Rule by the Rich

01.29 The Battle of the Titans: JPMorgan vs. Goldman Sachs

01.27 State of the Union: Obama’s “Automatic IRA” Plan Could Make Bush’s Wildest Dreams Come True

01.26 Obama, Read Your Reagan on Capital Gains Taxation

01.24 Funding Public Health Care with a Publicly-Owned Bank: How Canada Did It

01.18 Thinking About Accelerants

International

02.08 Aafia Siddiqui: Victimized by American Injustic

02.07 Annals of Liberation: Obama Surge Driving Thousands From Their Homes

02.05 Human Rights Abuses in Israel and Occupied Palestine

02.03 Child Slavery in Haiti

01.30 Blood is His Argument: Tony Blair's Gentle Cuddling at Iraq "Inquiry"

01.28 Obama Ignores Key Afghan Warning

01.27 Haiti's Earthquake: Natural or Engineered

01.26 Helping Haiti’s Elders

01.26 Focus on Israel: Harvesting Haitian Organs

01.25 Focus on Haiti: Washington's Militarized Takeover

01.22 The Lessons of Boycott, Divestment and Sanctions

01.18 Disaster Capitalism Headed to Haiti

We are a non-profit Internet-only newspaper publication founded in 1973. Your donation is essential to our survival.
Google
This site Web
  Why '1031 Exchanges' Interest Investors
Newspaper logo

CONSUMER INFORMATION:

Why '1031 Exchanges' Interest Investors

by Benjamin Hoffman
Since 2002 IRS clarifications, 1031 exchanges can now be used by tenants-in-common (TIC)
With the recent run-up in real estate prices, investors are looking for ways to defer capital gains taxes. Unlike a primary residence, where a $250,000 exclusion amount may apply if certain criteria are met, the individual investor is left with few alternatives to avoid taxation. However, Section 1031 of the IRS Code may provide just what the individual investor is looking for.

Because of 2002 IRS clarifications, the 1031 exchange has become a very popular option for many real estate investors. A 1031 exchange (named after Section 1031 of the IRS code) is not a new idea. It was created in 1921 in order to allow for a reciprocal transfer of certain types of property. In the past, abiding by the very strict requirements of the 1031 caused investors to choose other options when selling their real estate. Now, with Tenants-in-Common (TIC) ownership, the popularity of the 1031 has been increasing significantly. Since 2001, the amount of money invested in TICs has roughly doubled each year. It is believed that TICs will reach more than $5 billion in 2006.

Tenant-in Common is a form of ownership whereby two or more individuals own a partial share of a whole piece of property. Each co-owner receives his or her portion of net income, tax benefits and appreciation. TIC investments are created by various sponsors who acquire the property and package it for sale to multiple investors who will each own a fractional interest. The typical TIC offering is a large institutional property such as an office building or luxury apartment complex.

A 1031 exchange is usually a three-way delayed exchange in which an intermediary is used to facilitate the transaction. There are four basic steps:
  1. The seller arranges for the sale of property and includes exchange language in the contract.

  2. At closing, sales proceeds go to a Qualified Intermediary for a 1031 exchange.

  3. The seller must identify potential exchange properties within 45 days of the closing.

  4. The seller must complete the 1031 exchange within 180 days of closing.
A successful exchange can result in the taxpayer being able to utilize 100% of the proceeds from the sale of property to purchase a new property, thus deferring capital gains. By doing this, real estate owners can accomplish a number of objectives: diversification, improved cash flow, greater leverage, geographic relocation, or property consolidation.

The power behind the TIC

Heirs receive a stepped-up basis on the TIC investment, potentially eliminating capital gains taxes altogether.
One driving force behind the increase in TICs is the ability to defer taxes on the gains from the sale of certain types of property, while taking advantage of the recent real estate boom in highly desirable areas. Another driving force is TIC investors typically become owners of high quality commercial or industrial property. Thus, the owner becomes a passive owner, which means no 2:00 am phone calls that the toilet is clogged or the heater broke. A third benefit is TIC investors can receive monthly income from their investment while still having the potential for appreciation of the property. Lastly, heirs receive a stepped-up basis on the TIC investment, potentially eliminating capital gains taxes altogether.

There are risks involved

While a TIC investment provides many benefits, you should also be aware of the risks and limitations of such an investment. TIC interests are not freely transferable, and there is no secondary market for these interests. Cash distributions and potential property appreciation are not guaranteed. Also, investors in a TIC are subject to the typical risks of real estate ownership such as economic influences, occupancy rates, and tenant risk.

Some Dos and Don’ts
  • Do advanced planning for the exchange and talk to your accountant, attorney, and financial advisor prior to selling a property.

  • Do not miss your 45-day identification deadline as this will disqualify the entire exchange, and expose you to possible tax liabilities from the sale.

  • Do keep in mind that you must receive only “like-kind” replacement property in the U.S. (i.e., you can exchange any real estate investment for any other type of real estate investment; for example, vacant land can be exchanged for an office property; an apartment can be exchanged for a retail property), must use all proceeds from the sold property for purchasing the replacement, and make sure the debt on the replacement property is equal to or greater than that on the relinquished property.

  • Do not try doing a 1031 exchange yourself using your CPA or attorney to hold title or funds. IRS regulations require a Qualified Intermediary to properly complete an exchange.
As you can see, there are some wonderful benefits to the 1031 exchange but qualifying and following every rule can be tough. You should consult with legal experts knowledgeable on these transactions before deciding if a 1031 is right for you.
Benjamin Hoffman is Vice President of Investments for H&R Block Financial Advisors located in the firm’s Timonium, Maryland office. He may be reached at 410-308-6108 and bhoffman@hrblock.com.

Copyright © 2006 The Baltimore Chronicle. All rights reserved.

Republication or redistribution of Baltimore Chronicle content is expressly prohibited without their prior written consent.

This story was published on June 21, 2006.
  

Public Service Ads:
Verifiable Voting in Maryland