With high appreciation expected in the upcoming years on large tracts of land, the 1031 Tax Exchange is a great tool to maximize profit and keep as much of YOUR money as possible.

Savvy investors are moving their money from a hot coastal market inland to take advantage of projected landfall profits in North Florida land parcels.

History of the Tax Deferred Exchange:
Tax-Deferred Exchanges were first introduced in 1921. This permitted investment property owners to defer the payment of capital gains taxes associated with the sale of their property. In order to participate in the program and benefit from the tax advantage, a series of rules and regulations must be met. These are outlined in Internal Revenue Code Section 1031.

Benefits of a 1031 Exchange:
The 1031 exchange process can benefit you in numerous ways. It allows you to diversify your real estate assets and acquire different types of properties. A major advantage is the ability to use money that would otherwise be paid as capital gains taxes to acquire property with a higher value and add to your net worth. Whether you acquire a large property, several properties or an improved property due to that exchange, you are effectively making better use of the money you would be paying in capital gains taxes.

Types of Properties that Qualify:
"Section 1031 of the Internal Revenue Code provides that gain or loss is not recognized when property held for productive use in investment, business or trade, is exchanged for "like-kind" property to be held for the same purpose." Any property retained for such purposes which is not your primary residence, is eligible for tax-deferred exchange. Investment properties purchased as an exchange may be commercial or residential rental property, raw land, apartment buildings, etc. In the event that the property is mixed, with a portion used for primary residence and another portion used for rental purposes, only the portion that would be leased is eligible for the tax deferred exchange. The purchase price or value of the exchanged property must be equal or greater than the proceeds from the property sold. In order for the exchange to be allowed, timing of the sale and purchase of the exchanged properties is critical and must be documented in accordance with strict rules specified in the 1031 tax code.

There are many different types of exchanges available under the 1031 tax exchange code. Professionals versed in 1031 tax exchange rules can help you to determine the best type of exchange that will fit your particular needs.

Different types of exchanges include:

Delayed Exchange (also called Starker Exchange)
This is the most common exchange. From the time of closing of a relinquished property, you, the seller, have up to 45 days to identify three potential properties to purchase for that exchange. Once the 45 days has passed, you have an additional 135 days to complete your purchase for one or more of those identified properties.

Simultaneous Exchange
Two properties may be exchanged simultaneously if you have already identified a property or properties you wish to purchase before you have actually closed on the property you are selling. This situation can involve some risks of having the exchange disallowed. For that reason, investors are encouraged to involve the services of a qualified intermediary for assistance.

Improvement Exchange/Build-To-Suit
In the event that the investor wishes to make improvements to the properties or properties identified for exchange purposes, the cost of the improvements can be added to the exchange value of the property to be acquired. Improvements may include repairs or remodeling of an existing structure, construction of a new building or development of raw land. This exchange requires that all improvements are completed and the exchange estate dispersed within a 180-day time period. Careful planning is essential to avoid time delays that may interfere with the 180 day time requirement and result in the exchange being disallowed.

Reverse Exchange
Under this exchange added in October of 2000, an investor can purchase a desired property for exchange prior to selling an investment property to be used in this exchange. This eliminates the narrow time restrictions of having to buy and sell within a predefined time period.

Frequently Asked Questions about 1030 Tax Exchange:

Q. Can you choose to do a 1031 Exchange after you have closed on a property you sold?
A. Proper documentation must be in place prior to closing on a property that you are selling in order for it to qualify for a 1031 exchange. This is a good reason to work with qualified professionals who understand 1031 tax law and assure that proper documentation is in place to qualify your 1031 tax exchange.

Q. Can anyone qualify for the 1031 Exchange?
A. Owners of investment property can take advantage of this law and realize tremendous benefits in having the capital gains taxes deferred.

Q. How is the exchange property identified?
A. A written form is used to document each property that is being considered for exchange purposes. Besides the 3 properties in the 45 day window, additional properties may be included as part of a "back up" plan.

Q. Where does the 180 day time period come from?
A. Following the initial 45 days for identifying 3 properties for possible exchange, the buyer receives an additional 135 days to close on one or more of those properties. This adds up to 180 days or a six month time frame for the completion of the exchange. Please note that closings after October 15th require a tax extension to be filed in order to take advantage of the full 180 day benefit.

Matt Raitz is your timberland and land development expert who can assist you with your 1031 tax exchange. Call Matt today and tell him what you are looking for. He will search for property by county in North Florida (Leon, Jefferson, Wakulla, Gadsdena) and by acreage.