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Why a 1031 Exchange of Texas Real Estate

Posted in: 1031 Exchanges
By SAGE - Premium Texas Real Estate
Apr 2, 2013 - 5:46:01 PM

Anyone thinking about a 1031 exchange of Texas land--from Austin TX real estate to San Antonio, to Fredericksburg or other Texas Hill Country land--may be interested in this information.  A 1031 exchange can be extremely financially beneficial for those who follow the rules and know what they are doing.

Designed to work to the benefit of the Texas property owner over time, the 1031 exchange helps minimize capital gains taxes and offers advantage to property owners.  It generally remains hidden from view inside the Internal Revenue Code, just waiting for those of you who could benefit to find it.

Under Section 1031 of the Internal Revenue Code, a real-property owner can defer capital gains taxes if he sells a property and reinvests the proceeds in a like-kind property.  This is especially beneficial for property owners who will net a gain upon sale, most likely because the property substantially depreciated for tax purposes and/or appreciated in fair-market value.

Examples of qualified like-kind exchanges include apartments, commercial, condominiums, duplexes, raw land, and rental homes.  Of the five classes of properties, the 1031 primarily applies to Nos. 1 and 4 below and sometimes to No. 5.
  1. Property used in taxpayers trade or business
  2. Property held primarily for sale to customers
  3. Property used as principal residence
  4. Property held for investment
  5. Property used as vacation home.

There are many rules for the 1031 exchange.  If either party overlooks the rules, all proceeds become taxable.  For example, the transaction must follow strict timelines including that for the identification period and exchange period.  There are rules about the replacement property.  The real property being sold and the real property being bought must be used productively for a trade or business or investment and be of like kind.  Cash proceeds from the original sale must be reinvested in the replacement property.

Even the 1031 exchange formats could throw the layperson for a loop.  They include a Delayed exchange (the most common), Simultaneous, Two-party swap, Alderson exchange, Safe harbor, Multiple sales/acquisitions, Reverse exchange, and Improvement exchange.

For these and many more reasons, we advise that you seek professional help on using the 1031 exchange to accomplish investment goals.  A Qualified Intermediary (UI) is a person or entity that legally holds funds to facilitate a 1031 exchange.  In addition, the QI creates the exchange of properties, prepares the legal documents, and performs other important functions.  This cannot be a relative or agent of the exchanging party.

For information about real estate, investments, land, and custom homes in the Hill Country, click here to contact Dale Cook or call 830-997-1035.


Dale E. Cook, MBA, Broker/Owner

Sage - Premium Texas Real Estate
405 N. Llano St.
Fredericksburg, TX 78624

830-997-1035 office
830-992-0056 cell

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