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As a Qualified
Intermediary specializing in tax-deferred property exchanges,
Gulf
Title Company is perfectly positioned to help
investors and real estate professionals maximize savings in tax-deferred real estate
exchanges.
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What
is a 1031 Exchange? |
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When a taxpayer
sells investment real estate he usually has to pay income tax on any
profit (capital gains) realized on the sale. This is generally the
difference between the property's adjusted basis and the sale price.
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Section 1031 of the Internal Revenue Code allows a taxpayer to defer
or postpone the income tax on the gain when property held for investment
or productive use in a trade or business is exchanged for property of
like kind which is likewise held by the taxpayer for investment or
productive use in a trade or business. Real estate is often used
in Section 1031 exchanges because any given parcel of real estate is
almost always considered to be of like kind to any other parcel of real
estate, regardless of whether such parcels are improved, unimproved,
productive or unproductive. |
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Although section 1031 refers to exchanges, it is not necessary for a
taxpayer to find another person willing to directly exchange
property in order to obtain the benefits of Section 1031.
Treasure Regulation Section 1.1031-3(k) provides methods and safe
harbors for taxpayers to transfer their property (relinquished
property) to one party and acquire replacement property with the
proceeds from a different third party. In order to preserve
the exchange element and prevent taxpayers from merely reselling
relinquished property and buying replacement property, each safe
harbor restricts a taxpayer's access to the sales proceeds of the
relinquished property during the exchange period by requiring a
third party, e.g., a qualified intermediary, trustee or escrow
agent, to hold the proceeds and disperse the same for the
replacement property. Indeed, if a taxpayer has access to
sales proceeds prematurely, a like-kind exchange will be
thwarted. Thus, it is important that the documentation to
effect a like-kind exchange be in place prior to the closing on the
relinquished property. Note, however, that the documentation
can be accomplished as late as the day of the closing and still
qualify under Section 1031.
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The period of time allowed to complete a like-kind
exchange is divided into two segments: the first segment requires
the taxpayer to identify qualified replacement property with forty-five
(45) days after the transfer of the relinquished property
(identification period), and the second segment requires the taxpayer to
actually acquire the replacement property within one hundred eighty
(180) days after the transfer of the relinquished property, subject to
the following limitations: (1) a taxpayer may identify up to three
replacement properties regardless of their aggregate fair market value,
or (2) more than three replacement properties, but only if their
aggregate fair market value does not exceed 200% of the value of the
relinquished property. |
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