One of the Last Tax Shelters - A 1031 Tax Deferred Exchange is one of the last tax shelters allowed by the Internal Revenue Service. It is a transaction in which a taxpayer exchanges investment property for like-kind property and defers the payment of capital gain taxes. The IRS defines like-kind property as all real property held for the productive use of trade or business or for investment purposes. This basically means any real estate held for investment except your primary residence and second family home.

The are some important rules which must be followed to effectuate a valid exchange:

............* The exchange must be opened before the close of escrow on the relinquished (sale) property.

........... * The taxpayer must identify the replacement (acquired) property within 45 days after the close of the relinquished (sale) property.

............ * The taxpayer must close the replacement property within 180 days from the close of the relinquished property or the tax return filing of the relinquished property, whichever comes first.

.............* The taxpayer must reinvest all net proceeds into the replacement property. The taxpayer must obtain a debt of equal or greater amount on the replacement property.

By following these rules, the taxpayer may shelter the capital gain taxes into the replacement property. This creates more buying power for the taxpayer than if the capital gain taxes were paid. Also, by deferring the payment of capital gain taxes, the taxpayer gets to invest the taxes interest free from the IRS.

Reverse 1031 Tax-Deferred Exchanges - The newly issued Revenue Procedure
(REV. Proc.2000-37) provides a safe harbor for reverse exchanges entered into on or after September 15, 2000 provided the taxpayer does the following:

,,,,,,,,,,,,,,,,1. The safe harbor allows a taxpayer to treat the Exchange Accommodation Titleholder (E.A.T.) as the beneficial owner of the property for federal income tax purposes. The parked property must be held under a Qualified Exchange Accommodation Agreement.

...............2. The E.A.T. must hold legal title or similar ownership to the property being parked.

...............3. The taxpayer must have the intent to park with E.A.T. either the relinquished or the replacement property as part of a 1031 tax deferred exchange.

...............4. No later than five (5) business days after the transfer of ownership of the property to the E.A.T., the taxpayer and E.A.T. must enter into a written agreement indicating that this is an exchange and that the accommodating party will be treated as the owner of the property for tax purposes.

..............5. Within 45 days after the transfer of ownership of the replacement property to the E.A.T., the taxpayer must identify the property to be relinquished.

..............6. No later than 180 days after the transfer of ownership of the property (replacement or relinquished) to the E.A.T., the replacement property must be transferred to the taxpayer or the relinquished property to the ultimate to buyer. An E.A.T. that satisfies the requirements of a Qualified Intermediary under the regulations, may also enter into an exchange agreement with the taxpayer to serve as the Qualified Intermediary in a simultaneous or deferred exchange. The taxpayer can guarantee some or all of the obligations of the E.A.T., including secured or unsecured debt incurred to acquire the replacement property. The taxpayer can also loan or advance funds to the E.A.T. The parked property can be leases by the E.A.T. to the taxpayer or enter into a property management agreement with the taxpayer.

Creating Better Sales With 1031 Exchanges - Whether an investor owns a property all cash or with leverage, the benefits of tax deferral are significant. The tax dollars saved can be utilized to purchase additional property.

The example below shows the significant advantage of exchanging for an investor who sells a $425,000 property that has been fully depreciated and that was debt-free. This assumes the client is subject to a combined federal and state tax bracket of 35%. The investor who executed a property #1031 Tax Deferred Exchange defers the payment of capital gain taxes.

...........................................................................................Sale ................Exchange
Net Equity (Minus Cost) ............................................... . .$400,000 ...........$400,000
Taxes (35%)................................................................ ... $150,000............ None
Funds to Reinvest............................................................ $250,000............$400,000

If the investor leverages his new property to 70% by putting 30% down, he could purchase properties totaling:

Acquisition Value ......................................................... ..$833,000 ..............$1,300,000

By doing a 1031 Tax Deferred Exchange, the investor increased his portfolio by $467,000 more than if he sold and subsequently reinvested with after-tax dollars, thus creating a better sale.