WHAT IS AN EXCHANGE?

• When property is sold, the seller pays tax on any gain or deducts a loss. Section 1031 of the tax code gives taxpayers an opportunity to defer any gain on the sale of qualified property.
• Most exchanges are completed through an intermediary (such as Salem Street Exchange). The IRS has published rules (safe harbor rules) for an intermediary assisted exchange. If these rules are followed, the IRS will not challenge the exchange. This safe harbor is a primary reason for using an intermediary to assist in the exchange. An intermediary can also provide expertise and guidance to insure that the exchange complies with IRS requirements.
• There is a 180 day period to complete an exchange. When an intermediary is used, an exchanger may convey property (the relinquished property) directly to a purchaser with the proceeds of the sale paid directly to the intermediary. When the exchanger purchases replacement property, the intermediary pays the exchange funds to the seller of the replacement property.
• Under Section 1031 tax on a gain is deferred, not completely forgiven. Eventually when the replacement property is sold, tax on the deferred gain must be paid unless other provisions of the tax code are used to completely eliminate the taxable gain.

WHAT IS QUALIFIED FOR EXCHANGE

• Virtually any property held for investment or for use in a trade or business.
• Real estate is by far the most exchanged property but other business property qualifies as well.

QUALIFICATIONS

• To defer taxation, an exchanger must exchange into "like kind" property.
• Like Kind Property is broadly interpreted and now means virtually any kind of qualified real estate can be exchanged for any other real estate -- a ranch for a condo; a shopping center for an office building; a duplex for an interest in an oil well.
• With personal property exchanges, there are limitations on the property which qualifies as replacement property.

BENEFITS OF EXCHANGING

• SAVE TAXES
  Section 1031 arguably provides the best tax shelter left in the tax code. Taxable gain can quite easily be deferred. When Section 1031 is combined with other sections of the Tax Code, it is possible to completely eliminate the deferred tax. When the tax is deferred, a taxpayer has more funds available for re-investment. The government in effect makes an interest free loan to the taxpayer in the amount of the deferred tax.
• INCREASE OR REALLOCATE BASIS
  If a taxpayer has fully or substantially depreciated property, Section 1031 can allow the taxpayer to increase basis by using the equity in a depreciated property to leverage the purchase of a more expensive property, thereby providing depreciable basis.
• DIVERSIFY INVESTMENTS
  An exchange can help diversify assets. Property can be exchanged for any like kind property. For real property, like kind property includes any kind of real estate from a farm or ranch to a shopping center, to an office building. It also includes certain types of mineral interests. The possibilities are virtually endless.
• INTEGRATE INTO ESTATE PLAN
  There may be instances when a family desires to gift property to a younger generation. If there are large assets an exchange can be used to diversify into multiple smaller assets to facilitate gifts to children and grandchildren.
  Low basis property can be retained until death to benefit from a step up in basis which can eliminate taxable gain on low basis property acquired through prior exchanges.

Salem Street Exchange - 30 Nevada Ave - Malden MA 02148 - Phone: 781 322-2399