Idaho Falls Real Estate Blog

I recently heard of an investor who sold an Idaho Falls real estate property and immediately used the profits to purchase another investment. It wasn’t until tax season that he was made aware that he could have saved thousands of dollars in taxes if his Idaho Falls Realtor would have told him about 1031 exchanges.  Believe me, you don’t want to learn about this mistake in your CPA’s office come April.  My advice to you is to know what a 1031 exchange is and whether you qualify.  You should also find and use an Idaho Falls real estate agent who has a complete understanding as well.

So, what is a 1031 exchange?

A 1031 Exchange allows you to sell and buy property of like-kind while deferring tax consequences.  This exchange offers investors a reliable strategy for reinvesting up to 100% of the equity from the sale of property into purchasing a like-kind replacement property – without recognizing any gain.  It cannot be used for the sale of your personal residence.

Regarding real estate properties, the term “like-kind” refers to the nature or character of property and not to its grade, quality, or use.  Therefore, no distinction is made between parcels of real estate, however dissimilar they may be in location or quality.  In fact, the term “like-kind” as it pertains to real estate has been very broadly interpreted by the courts.

The following would be considered like-kind exchanges:

1. Commercial real estate for residential real estate
2. Metropolitan high rise for a ranch or farm
3. Improved real estate for unimproved real estate
4. An office building for a hotel, or in exchange for either developed or undeveloped land

The exchange process allows taxpayers a range of opportunities to improve their real estate portfolios:

1. Upgrade size and/or quality of investment
2. Change investment location
3. Create or improve cash-flow
4. Facilitate the formation or dissolution of an investment group
5. Facilitate estate planning

The identification period under IRC Secton 1031(a)(3) applies when property is conveyed in a deferred like-kind exchange.  It is extremely important that this process be done correctly; so contact your Idaho Falls real estate agent or your personal accountant for direction.

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