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REE.com - where the real estate investor market is always hot. With real estate credit virtually non-existent, facilitating a direct 1031 exchange between property owners is a great alternative. REE.com is the oldest, most trusted, and fastest-growing online exchange website for the trading or property swap of commercial real estate properties.


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 Misconceptions Of Real Estate Exchanges

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Russell J. Gullo - CCIM, CEA, of Buffalo, New York. Certified Exchange Advisor, President of R.J. Gullo & Co., a national qualified intermediary company for real estate exchanges, Director of Operations for the American Institute of Real Estate. (716)992-2711.

 Understanding IRS 1031 Exchange Misconceptions
Very often, owners (taxpayers) of business or investment held property go to their advisors with misconceptions about real estate exchanges. To correct misconceptions, advisors must determine what the taxpayer is trying to accomplish (their objectives) and to help the taxpayer develop an understanding of the rules and guidelines within which the exchange transaction must be structured in order to be viewed as an exchange for IRS purposes.

Unlike so many other areas of practice where professionals are dealing with events, which have already occurred, exchanging under Internal Revenue Code Section 1031 usually requires proper planning and advice before a exchange transaction occurs.

 Misconceptions Which Exist Mainly In The Mind
For many, the misconceptions that exist in their minds have deterred them from structuring their transaction as a real estate exchange or, worse, have cost them taxes which need not have been paid. Between state (New York), federal income taxes and recapture of depreciation we are talking as much as approximately thirty percent (30%) of ones Gain today. Once a transaction has taken place (closed) as a sale it is too late to restructure it as an exchange. But, keep in mind, you can amend (change) a sale into an exchange anytime before the closing and for the most part don't even need the cooperation of the buyer to do so.

Too frequently taxpayers who have sold business or investment held properties find out after the fact that they could have avoided state and federal income tax on their transaction had it been structured as a real estate exchange. Increasingly, such taxpayers are looking to real estate agents, tax advisors, and closing attorneys and claiming negligence if they have not been advised about Section 1031 of the Internal Revenue Code.

 
QUALIFIED INTERMEDIARY SAFE-HARBOR TO THE RESCUE !
Today, this need not be the case. With the new Exchange Regulations taxpayers looking to structure the transaction as a real estate exchange can rely on the "Qualified Intermediary" safe-harbor. A professional Qualified Intermediary is one who facilitates real estate exchanges. A professional Qualified Intermediary should have special training in negotiations, contract law, taxation, investment analysis, escrow procedures and real estate practices as well as having a proven success record in the business of facilitating real estate exchanges. Choosing the right Qualified Intermediary could be the most important step toward developing a defensible exchange.

One of the most common sources of confusion is that taxpayers often mistake the requirement for exchanging under Section 1031 with the provisions of Section 121 of the Internal Revenue Code, which governs one's principal residence. This commonly occurs when taxpayers dispose of a double or duplex which is owner occupied. Section 121, allows the taxpayer to dispose of their principal residence and as long as the gain (profit) between husband and wife is $500,000 or less there is no capital gains tax on the unit occupied by the owner. In the case of the owner-occupied double or duplex only the one unit has the protection of Section 121. The other unit which is investment held can be structured as an exchange under Section 1031 by acquiring another business or investment held property to satisfy the investment side of the owner occupied double or duplex. The wake-up item here, is the need for the Qualified Intermediary to be in the transaction before the closing of the relinquished property.

 Another Misconception Of Exchanging
Is that, under Section 1031 is the meaning of like-kind property. Like-kind refers to the nature or character of the property, not to its grade or quality. The fact that real estate is improved or unimproved is immaterial. Some examples of property deemed of a like-kind include: single-family rental for a parcel of land, office building for a multi-family, industrial building for a mini storage building. The point to be made here is that you don't have to exchange a duplex for a duplex or a parcel of land for a parcel of land unless you want to.

 Summary
Today, because of the many misconceptions and myths about real estate exchanges it makes good sense to discuss your transaction with a professional Qualified Intermediary before hand.

Posted: 3/5/2003 3:10:20 PM

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