Lake of the Ozarks Real Estate

A 1031 tax deferred property exchange is an exchange in which capital gains tax deferral is available to real estate owners who sell their investment, rental, business or vacation real estate, and reinvest the net proceeds in other real estate. Real Estate held for these purposes are called like-kind or 1031 properties.

Some quick bullet items on 1031 exchanges.

• First rule is that any exchange will work, as long as you are not audited. I say this because the misinformation out there from CPAs, attorneys, and well intentioned friends can be very dangerous, and examples of how their exchanges 'worked perfectly' sound convincing. Use someone you know is handling your situation correctly.
• You are taxed on your gain, not on equity, not on the size of the proceed check. The IRS looks at your basis, then determines the amount of tax due. You can't refinance the property and expect to not pay any gain. You can refinance the property, take the proceeds, but you will pay tax on it if you do not do a 1031 exchnage.
• You CANNOT TAKE ANY MONEY from the sale your property. The proceeds must go into an escrow account with a 'Qualified Intermediary' and never be in your possession. Any money you receive is called 'boot', and will be taxed.
• You have 45 days to ID at least one replacement property. It must be clearly identified, not 'A condo at Lake of the Ozarks, or a condo at Regatta Bay condos.' It must read 'All of Unit 1342 Regatta Bay Condominiums, Camden County Missouri, Parcel ID # 1324345567-98653544' to be sure it is allowed.
• You have 180 days to close and take possession of the property. There are no exceptions, and 180 days is 180 days, not business days, not holidays, 180 calendar days.
• Many people think the rule is that the replacement property simply must cost more than the relinquished property and while this is true, it is only part of the equation. The amount of debt on the property you are buying must be an equal or greater amount on the property you are selling, otherwise, this is called mortgage 'boot' and will cause taxes to be paid. This coupled with the fact you can not take receipt of the proceeds ensures the replacement property will be more than the relinquished property.
• 'Like-kind' means investment property for investment property. Vacation properties bought for investment purposes can be exchanged for income properties, or for raw land held for investment. They can even be exchanged for Tenants-in-Common interests and even Oil and Gas Royalties, if the agent is properly licensed to sell these SEC regulated investments.

Property owners may sell like-kind properties and defer taxes on the sale's profits by meeting the requirements of Internal Revenue Code (IRC) 1031 exchange. The purpose of the 1031 Exchange is to allow sellers of like-kind property to buy replacement property of like kind within a specific time period and to defer taxes.

As far as a second or vacation home being considered 'like-kind' nn a 1981 Private Letter Ruling**, the IRS allowed Section 1031 treatment of a vacation home where the taxpayer intended to acquire property for personal enjoyment and as an investment. The IRS stated, 'The house and lot you acquire in this trade will be held for the same purposes as the properties exchanged therefore: to provide for personal enjoyment of the community and to make a sound real estate investment.' This Private Letter Ruling would seem to support the argument that 'personal enjoyment' of a property does not prevent it from qualifying for a 1031 exchange.

*IRS Reg. 1.1031(a)1(b) **Private Letter Ruling 8103117

The important thing is having an agent that is familiar with 1031 exchanges, and one that understands how it will affect your taxation.