A Better Way to Build Your Wealth
By Bob Hartwick

Real estate ownership has probably created more millionaires than any other form of investment. However, “The Best Kept Secret in Real Estate” has eluded many. Instead of benefiting from this “secret”, many investors list and sell investment property creating a taxable event, paying as much as 30% or more of their proceeds in taxes when they did not have to pay any taxes. Is this procedure a tax break for the rich? No, it is an investment tool that every owner of income property should know and use. The procedure is known as the Tax Deferred Exchange. So how does it work? This investment technique closely resembles the popular IRA account. With an IRA, investment funds compound tax-free as long as you don’t touch the money and they remain under the “IRA umbrella”. IRC 1031 treats investment real estate the same way.

1031 exchanges are not much different than a sale. A sale is an exchange of property for cash. A 1031 exchange is the exchange of property for property. This is done through the use of a substitute seller. Once the investor has negotiated the sale of their property, an Intermediary is substituted into the transaction so that the sale can be recorded on their tax number instead of the exchangers. This does one thing in the eyes of the IRS, keeps the investor from touching the cash (remember the IRA umbrella). The Intermediary (substitute seller) cannot alter the contract in any way. They simply fulfill the contract to your buyer. The cash from the sale is then held by the Intermediary in a special insured account until you, the investor, finds the new property. The cash is then used to purchase the replacement property and the exchange is done (similar to a rollover with your IRA). The whole thing means tax deferment, or saving you as much as one third of your equity.

There are some restrictions you need to keep in mind:

1) After the sale of the old property, you have 45 days to identify your possible replacement property or properties and you must purchase the new property no later than 180 days after closing.

2) The Intermediary must be “Qualified” under the safe harbor rules of the tax code and cannot be an agent of yours such as your escrow company, your real estate agent, your attorney or accountant or a friend or relative.

3) There are certain procedures that must be followed by the Intermediary to give you the paper trail you need for the IRS.

This is the first in a series of four articles to be published on Tax Deferred Exchanges. Bob Hartwick is an associate Broker with RE/MAX of Petoskey and has been involved with resort property sales for over twelve years. This material is provided for informational purposes only and is not to be construed as tax advice. The reader is strongly advised to speak with a tax consultant before attempting to employ any of the concepts stated herein.

More Articles by Bob Hartwick
A Better Way to Build Your Wealth
Room for Improvement
Second Home Secrets
Financial Options

Free Tax-Deferred Exchange Information
Did you know that there is a reverse 1031 Exchange, where an investor acquires the replacement property before closing on the relinquished property? Did you know that an investor could trade out of one property into several, or consolidate from smaller properties into one larger property?

Most people don't take advantage of a Tax-Deferred Exchange because they believe it is too difficult or they obtained incorrect information.