IRS Code 1031 Tax Deferred Exchange

Tax deferred exchanges of like–kind property are useful to defer capital gains tax and thereby leverage the sale proceeds to purchase a more productive replacement property. The U.S. Treasury Regulations allow taxpayers to buy replacement properties before selling the relinquished property. Exchanges can also be simultaneous with the sale of property or deferred through use of a qualified intermediary.

There are guidelines that have to be strictly followed for the exchange to be completed. Once you decide you want to do the exchange, this should be acknowledged in the sales contract. A good land broker would be able to assist in this. A Qualified Intermediary (QI) would handle the funds for the transaction. The QI would be the exchange agent. The QI holds the funds as your agent and uses the funds to acquire the replacement property that you designate. Your QI will have the forms, documents and contracts necessary for the exchange.

From the day after the sale of the relinquished property, the seller has 45 days to identify the replacement property and 180 days to close the transaction. There are other calculations considering “Boot” (cash received) and debt to equity ratios that you need to consult your CPA or QI about. There are also rules about how many properties you can designate and what you can close on. One important precedent that has been set for timberland owners is that income from harvested timber can be exchanged for timberland. These rules would take much more time to explain than this introduction to 1031 Exchanging has time for. There are many experts and courses that can define your personal situation and how the exchange can benefit your financial goals.

Example of a 1031 Exchange:
If you own 100 acres in Florida that you have been grazing cattle on for 25 years with a basis of $250 per acre and sold it for $30,000 per acre to a developer.

Basis $25,000
Sale $3,000,000
Gain $2,975,000
15% Tax $446,250

Obviously, this is very basic and certainly there are other factors involved. The point is that you could defer the tax payment of $446,250 on this example at no cost of capital to purchase another property. There are State Tax, QI Fees, Real Estate Transaction Cost, … also associated with the exchange. A Tax Deferred Exchange is a very important tool in growing your wealth and income.

The political climate under this administration is very positive toward keeping the long term capital gains rate at 15%. There is a good chance that the next administration may view this differently. If this should come to be, there is a very likely chance that the long term capital gains rate could be raised or even done away with. One report predicted all long term capital gain could be taxed at the ordinary income rate. The capital gains rate currently is probably as good or as low as it will ever be. We suggest you think long and hard about your investment goals, get some good advice and take advantage of some good planning. Green Hill Land & Timber, LLC is here to assist you in selling and finding property that will fit your needs and management objectives in Georgia and South Carolina.

I would like to thank my good friend Bill Trotter for his help with many of our clients and his input in this bulletin. Bill is an attorney and exchange specialist located in Augusta, Georgia. You can email Bill at this address: bill@trotterjones-exchange.ihostexchange.net