How To Avoid Taxation and Maximize Profitability
by Randy Lee

I am surprised at how few real estate agents and investors know about the rules that allow for avoiding taxation involved in repeat real estate transactions.

Certainly most investors take advantage of any legal deduction available from expenses and depreciation. However, there is a way to roll from one property to another without incurring taxes. Many wise investors are not taking advantage of the 1031 exchange rule.

What is a 1031 exchange?

A 1031 exchange allows you to sell investment property and defer capital gains and depreciation recapture taxes, assuming reinvestment of 100% of equity into "like kind" property of equal or greater value. Any property held for investment purposes or for productive use in a trade or business generally qualifies as "like kind" property for 1031 exchange purposes.

A 1031 exchange is also referred to as a tax free exchange, tax deferred exchange, tax exchange, or Starker exchange.

1031 exchange rules generally require an investor to identify up to three investment properties within 45 days of the close of escrow of the relinquished property and to successfully complete the acquisition of the replacement investment property, or properties, within 180 days of close.

The Section 1031 exchange is really a sale and a subsequent reinvestment. The deferred exchange is the most popular form of exchange. It involves four parties:

1. You as the owner (seller) of the property being relinquished.
2. The buyer for your property.
3. The seller of the property you want to acquire.
4. A qualified intermediary.

The qualified intermediary is an individual or entity with whom you have not had a business relationship of any sort within the last two years. Therefore, your accountant, lawyer, or real estate sales professional will not qualify as an intermediary.

The intermediary makes the exchange work. Think of exchange money as "radioactive." You may not touch it. Your buddies (like your accountant or lawyer) may not touch it. If you or your buddies touch it, you destroy the exchange and trigger taxes.

The qualified intermediary handles the money and holds the sales proceeds from your property in interest bearing accounts. Then, the intermediary distributes the money as needed to purchase the replacement property.

---------------

Randy Lee is the author of the best selling text book for real estate investors "Short Sales: The Secrets & Strategies of Pre-Foreclosure Investing". Randy is an active investor and a licensed real estate agent in the states of Alabama, Georgia and Tennessee. In TN & GA he is an Affiliate Broker with ERA/Central Real Estate of Chattanooga and in AL, Randy is an Affiliate Broker of Keller Williams in Huntsville.