Erec 2006 Blog

Investing in Colorado Real Esxtate while using the 1031

January 21st, 2008

In 1990 the Section 1.1031 of the Internal Revenue Code passed. This is the code we often hear as a 1031 exchange. When we sell real estate property or personal property, we must pay taxes on the profit we have made on the investment. For decades if you sold your property for more than you bought it for,. You had to pay taxes on that gain. However, after the passing of a 1031 Exchange that is no longer the case.

A 1031 Exchange allows sellers of some Colorado real estate and personal property the opportunity to avoid paying capital gains taxes (which are 15% plus state taxes) by “exchanging” their sold property for newly purchased property. However, certain restrictions apply. The most important restriction is that only business property and investment property applies

But simply selling your office isn’t enough to qualify you for a 1031 exchange. The code also requires that that you buy a property of “like-kind.” This does not mean that if you are selling a 2000 sq. ft. office you must buy a 2000 sq. ft office. So, if you sell and unimproved lot of land and purchase an improved one or visa versa, this still qualifies, just as selling industrial property and buying rental resort property does. The point here is that while “like-kind” is an important restriction, it has been interpreted so broadly as to give individuals a lot of free reign.

A tax-deferred 1031 exchange allows up to 180 calendar days between the sale of the first property and the purchase of the second. But no matter the time between sale and purchase, a 1031 exchange is required by the Internal Revenue code to have a “qualified intermediary” to manage the exchange.

The requirement of a qualified intermediary is intended primarily to prevent individuals engaged in the exchange from using the time in between the sale and purchase of property to their financial gain. Although the seller has up to 45 days to set up the intermediary, the exchange is designed so that the seller should not profit from the use of the money before the purchase of the new property is made. An intermediary serves the judicial purpose of ensuring this. But it is important to remember that the qualified intermediary charges fee for this. While these services can vary in cost depending on the additional advisory services provided by the Intermediary, individuals interested in a 1031 exchange should expect to pay somewhere in the vicinity of $500 to $700 for the first exchange and $200 to $400 for each additional property.

Entry Filed under: Business