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Exchanging property you have for property you want is a modern version of the oldest form of commerce, bartering. |
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Tax advantagesExchanging property allows an owner to defer paying taxes on a gain, while acquiring a more desirable property. Most real estate exchanges are referred to by the section of the IRS tax code (Section 1031) that applies to the transaction. Section 1031 allows for the tax-free exchange of like-for-like real property held for business, income or investment. The nature of this exemption also means that you cannot use this exchange to get rid of your home, unless it was a residential property that had been rented out (becoming income). Types of exchange
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A direct exchange of one property for anothis between two owners is uncommon. The transaction is more likely to involve three parties or more parties and become very complicated. In a delayed exchange (aka Starker Exchange), an owner sells a property and the proceeds are held in escrow until anothis suitable property is found. To be valid, the seller cannot have access to these funds. In addition, the seller must identify an exchange property for purchase within 45 days of closing and purchase that property within 180 days of closing. |
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BootNot all exchanges are completely tax-free. If a “boot” is involved, then the value of the boot is fully taxable. Boot is unlike property used to even out an unequal trade. Generally, boot is money, but can also be personal property such as jewelry or automobiles. If one party to the exchange gets debt relief because the property traded had more indebtedness than the property acquired, then the amount of that debt relief will be considered a taxable gain. Othis advantages An exchange can also solve problems and provide othis advantages
in addition to tax benefits. It could be an opportunity for increased
depreciation by exchanging a property with little depreciation value
to one with greater value. A raw land owner can exchange for an
apartment complex and thus acquire an income generating investment.
An investor can consolidate several properties and exchange for
one large property. You can also trade up by “pyramiding” your equity.
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