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  • Writer's pictureJerad Cotten

Are you looking buy or sell a Colorado Ranch as part of a 1031 Exchange?


1031 Exchange Defined


Section 1031 of the IRS tax code allows investors

to sell investment ranch property and use all the proceeds to purchase new investment ranch property while defering taxes associated with the sale. To qualify as an exchange, the relinquished and replacement properties must be qualified "like-kind" properties and the transaction must be properly structured as an exchange. "Like-kind" relinquished property and replacement properties must be real property that has been and will be held for productive use in the investor's trade or business or for investment.



Reasons to Exchange

There are many advantages to structuring your transaction as a 1031 Exchange.

  • Defer taxes (up to 35-40% of the gain)

  • Diversify or consolidate a real estate portfolio

  • Switch property types

  • Greater purchasing power

  • Build & preserve wealth

  • Expand into other real estate markets nationally

  • Improve cash flow

  • Greater appreciation potential

  • Estate planning for heirs

The Exchange Process

  • The exchanger signs a contract to sell a relinquished property to the buyer.

  • Qualified Intermediary and the exchanger enter into the exchange agreement to retain Qualified Intermediary as the Intermediary and the exchanger assigns the exchangers's rights in the sale contract to the Qualified Intermediary.

  • At the closing of the relinquished property, the exchange funds are wired to the qualified intermediary and they instruct the settlement officer to transfer the deed directly from the exchanger to the buyer.

  • The exchanger has a maximum of 180 days in the exchange period (or until the tax filing deadline, including extensions, for the year of the sale of the relinquished property) to acquire all replacement property.

  • The exchanger must identify possible replacement properties in writing within the 45-day identification period.

  • The exchanger signs a contract to purchase the replacement properties with the seller and the exchanger assigns the exchanger's rights in the purchase contract to the Qualified Intermediary.

  • At the closing of the replacement property, the Intermediary wires the exchange funds to complete the exchange and the Intermediary instructs the settlement officer to transfer the dee directly from the seller to the exchanger.


Tax Benefits of Exchanges


Whether the investor's property is owned free and clear or encumbered, the benefits of a tax deferred exchange are significant. The tax dollars saved by an exchange can be utilized to purchase additional investment property.

Compare a sale vs. an exchange with the following assumptions:

  • Investor sells property with no debt for $1,000,000

  • The property has been fully depreciated and has a basis of $100,000

  • The property has been owned for more than 12 months

  • Assume a combined tax rate of at least 25%(federal capital gain, depreciation recapture, net investment income tax and state)


Exchange

Sale

Equity

$1,000,000

$1,000,000

Basis

$100,000

$100,000

Gain

$900,000

$900,000

Estimated Tax

NONE

$225,000





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