March/April 2002

Defer gain on investment real estate

BY PAULA ARNETT

Use of the Internal Revenue Code 1031 is one of few remaining ways to build equity in commercial and investment real estate. Through it, gains on real estate are deferred for income tax purposes.

Under International Revenue Code 1031 (a) (1), there are three prerequisites for a tax-deferred real estate exchange:

1. Both the property transferred and that received must be held for productive use in trade or business, or held for investment.
2. The property transferred and that received must be of a “like kind,” the distinction between real property and personal property.
3. The transaction must be solely property for property, an exchange. It may not be a sale and a subsequent purchase. The taxpayer must invest at least as much money in the new property as he/she receives in the sale of the relinquished property. And he/she must borrow at least as much money to purchase the new property as he owned on the old one.

The seller has 45 days (which begins on the date he/she closes on the relinquished property and ends on the 45th day) to identify the new property. He/she has 180 days to complete the exchange or close on the replacement property.

There are many Qualified Intermediaries who can process the transaction. It is best to seek counsel from your own independent tax advisor, tax attorney and/or CPA as to the tax consequences and implications of the Code.