What is a Tax - Free Exchange?

A tax free exchange is simply the process that allows a taxpayer to exchange an investment or business property for another investment or business property of equal or greater value, and defer all the capital gains tax. In order to successfully complete a tax free exchange, you must obtain a qualified intermediary prior to the sale of the investment property.

In an ordinary sales transaction, the property owner is taxed on any gain realized by the sale of the property.

These exchanges are called "tax-free" exchanges because the exchange transaction itself is not taxed.

What authorizes a Tax-Free exchange?

Tax-free exchanges are authorized by Section 1031 of the Internal Revenue Service Code. The requirements of Section 1031 must be carefully met.

How is Capital Gains Figured?

The capital gains that can be deferred is simply the profit plus all the depreciation taken on the property being sold.

What is the role of the Qualified Intermediary?

Section 1031 of the Internal Revenue Service Code provides for the use of a qualified intermediary when accomplishing a tax free exchange.

The Qualified Intermediary plays an important key role by:

• Providing the required exchange agreement
• Accepting assignment of all exchange contracts
• Providing notification of the assignment to all parties
• Furnishing instructions to the settlement agent
• Establishing a qualified escrow account
• Receiving the 45-day identification notice
• Delivering escrow funds for settlement
• Arranging for direct deeding of properties
• Giving a final accounting of escrow funds and interest earned.

What properties qualify for a tax-deferred exchange?

In an exchange, a property owner simply disposes of one property and acquires another property. Like-kind investment or business property includes townhouses and condominium rentals, land, farm, office, warehouse, vacation rentals, etc.

The replacement property the exchanger desires to purchase must be identified within 45 days of the sale, can be anywhere in the United States and Virgin Islands, and must settle within 180 days of the sale.

What are the reinvestment requirements in an exchange?

To be totally tax free, the acquisition cost of the replacement property(ies) must be equal or greater than the adjusted sale price of the relinquished property. The entire exchanged proceeds (equity less selling costs) from the relinquished property must be held in a qualified escrow account and must be reinvested in the replacement property(ies). The cash not reinvested (known as "cash boot") is subject to capital gains tax.

Tax-free exchange of investment or business real estate enable all investors to profit.

The primary advantage of a tax free exchange is that the taxpayer may dispose of property without incurring any immediate tax liability. This allows the taxpayer to keep the "earning power" of the deferred tax dollars working in another investment which can be increased through subsequent exchanges ...

Contact JOEL A. MOTT, III at Ocean City Tax Free Exchange, LLC to ensure that the exchange is executed properly.

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