Real Estate Watch: ‘Safe Harbors’ for property investors

Philip A Raices

Do you own non primary residence/commercial property?  

Well, I have a great proposition for those type of investment properties!  

When you are selling an investment (not your primary residence), the I.R.S. will allow you to sell it, (IRCS1031) no matter how much profit you have earned over the years and exchange it for another property within the continental U.S. and some other areas located within the U.S. Virgin Islands, Guam and Mariana Islands.  

There are situations with products, tangible personal property and intangible, such as patents and whether or not they were in use two years before and two years after the exchange, to determine if they qualify.  

This IRCS1031 Exchange has remained substantially unchanged for the past 50+ years except in 1991, when the U.S. *Treasury clarified and redefined the “Starker” or delayed exchange, including the 45 day identification requirements for replacement property.  

It also defined and encourages the use of a Qualified Intermediary, deeming it a “safe harbor.”  

A “safe harbor” is a term which defines acceptable guidelines so a transaction will be regarded defensible*. (* Quoted from the Starker Services Booklet 2006-2007).  Canada and other foreign entities have some similar exchanges but that will be in another future article, stay tuned to read about it.  

This article will not have enough space to explain every minute detail, but will provide a synapsis of the concepts of the like kind exchange.

When you sell a commercial or investment rental property (non-owner occupied), you can purchase another one anywhere in the U.S. or other areas, as explained in the previous paragraph and roll all or part of the monies over to that property, to defer all or part of the income taxes (you will pay either long term capital gains of between 5-15 percent + recapturing Depreciation-will be taxed at 25 percent (Taxpayer Relief Act of 1997/or short-term capital gains less than 12 months, taxed as ordinary income (which would generally not be to your advantage); depending on the length of time you have held the property that you would have owed, if you took the profit.  

However, you are allowed 45 days to locate any type of property (again non-primary residence), once in contract of the sale of your first property and then six months to close and take title to the second investment property.  

Logically, you should take plenty of time in advance of considering selling your investment property, to find another one and then, get yours in contract; then again, you will have six months to close on the next property, where you will use the money for you sale and the intermediary, holding the money, will forward it over to the attorney for the seller of the second property.    

Corporate owned properties will pay anywhere from15-35 percent capital gains taxes.  

This vehicle is an excellent way to defer taxes, for a very long time, similar to an IRA, Roth IRA or any other type of retirement plan.  

But you must be smart about approaching this form of, deferred tax exchanges, for this article is intended to be just a mere taste of what it is all about; for there are many ways to handle your exchanges and I suggest that you find the property entity, whether it be an attorney, real estate broker or financial planner, who is very well versed in this type of transaction.  

Do not try to do this on your own, seek out the most qualified professional to assist you, so costly, taxable mistakes, will not occur.

If you would like a Free Booklet on this information, email the publisher, sblank@theislandnow.com

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