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The techniques for arranging tax-deferred real estate exchanges that meet the requirements of the owners have become quite sophisticated with increasing usage.
January 01, 2004 -- A working knowledge of property exchange techniques requires an understanding of what constitutes a tax-deferred real estate exchange, how it is used to advantage, and under what circumstances it should be employed. Real estate professionals must understand the techniques for analyzing the tax, financing, and economic consequences to the participants.
THE BROKERS
The skills of brokers who specialize in commercial and income property result in arranging these beneficial tax-deferred exchanges. Our listings can be a valuable source of exchange opportunities, since an investor who lists his property for sale is often open to suggestion for a like-kind exchange, once its advantages and future benefits are explained to him.
Real estate brokers who specialize in this field also are in constant contact with other professionals in societies of real estate exchangors who facilitate exchanges with their professional expertise and with their own inventories of listings of commercial properties.
Even though the term "tax-free exchange" is commonly used to describe these transactions, tax is only deferred until the chain of exchanges is broken by a sale. The only exception occurs when the series of exchanges is unbroken throughout the investor's lifetime, in which case the real estate receives a stepped-up basis on the death of the taxpayer so that no tax is ever payable on the appreciation to that time.
Section 1031, permits the tax deferred exchange of property held for use in a trade or business or for investment.
Section 1033, permitting the owner of property that has been involuntarily converted (i.e., destroyed or condemned) to acquire other property without recognizing any gain realized as a result of conversion.
Real estate exchanges are not limited to those we have arranged between two property owners. Exchanges involving three or more participants are often arranged.
VALUES IN EXCHANGES
When property is sold for cash, the seller holds out for, negotiates for, and finally accepts a sum of cash.
In an exchange, the value of the property to be received can only be determined by the position, requirements and needs of the party receiving it. How will the exchange improve his spendable income? Will it improve his overall wealth? His present or future wealth? A bundle of present and future benefits of ownership evaluated by this person is substituted for cash.
For example, a property owner with a large income might turn down a property with high cash flow in favor of a property with substantial long-term appreciation potential. Another owner might want to exchange a good cash flow property that has high managerial duties for another with lower cash flow and no management problems. |
