^{WHY 1031 EXCHANGES?}

Tax deferred exchanges have actually been around for many years. Throughout our nation's history, farmers have traded land for land, tractor for tractor, livestock for livestock, etc. There was no tax consequence on these types of transactions until 1918, when the first federal income tax was imposed.

The process for conducting 1031 exchanges today is actually the result of a 1979 court case involving a man named Starker. Starker won his case (for the most part) against the government, establishing the case law that has provided the foundation for modern-day exchanges. That is why many refer to a 1031 as a "Starker Exchange".

Although the Starker Decision validated the tax payer's right to conduct tax deferred exchanges, 1031's did not really gain widespread popularity until the "Final Treasury Regulations" were issued in 1991. Since that time, 1031's have become increasingly popular. So popular in fact, that 1031s are fast becoming the rule rather than the exception in real estate transactions!

Most buyers and sellers today can benefit from 1031 exchanges. To follow is our personal "1031 Top 10 List", the ten most important things to know about 1031 exchanges:

1. A 1031 exchange does not allow you to sell real property "tax free". There are tax ramifications on most sales, although the 1031 process does allow you to sell "tax deferred".

2. The sale of your "relinquished property" does not have to occur at the same time that you purchase a "replacement property". It can, but this would actually be a "simultaneous exchange" which has become somewhat less popular since the Starker Case.

3. Within 45 days of the sale of your relinquished property, you must positively identify up to 3 potential replacement properties. Or, you may identify an unlimited number of potential replacements, so long as the aggregate fair market value does not exceed 200% of the value of all relinquished properties.

4. You must acquire (close on) the replacement property by the end of the 180th day from the transfer date of your relinquished property. That is why we often recommend against pre-construction product for replacement properties.

5. Actual or constructive receipt of proceeds (if you touch the money) from the sale of your relinquished property, prior to acquisition of your replacement property, will disqualify the exchange.

6. The use of a qualified intermediary is required. The intermediary holds the money, accepts the property on your behalf, then transfers the acquired property to you. Many local attorneys and title companies offer this service. Someone who has represented you (attorney, REALTORŪ, employee, etc.) within the past 2 years prior to the transaction may not act as your intermediary.

7. If your relinquished property is a condo, you don't necessarily have to acquire another condo to qualify the exchange. Just about any properties held for investment are considered "like kind".

8. The ability to sell a property (paying no capital gains tax), investing the proceeds into a new property, all the while deducting the expenses of maintaining the property on your tax return is a FANTASTIC way to build wealth!

9. Exchanges involving family members have special restrictions. You may have to hold a property for at least two years after acquisition.

10. Feel free to contact Dean for additional information. Consult your CPA, attorney, or tax consultant to see how 1031 exchanges may benefit your particular situation!