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Multi-State Exchange

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Posted On: 03/07/2012

Question:

We are hoping to do a 1031 exchange sale on an Idaho rental condo for a rental property in Virginia. We live in California. Can this be done?

Answer:

If you follow the rules, yes.

Typically when an investment property is sold there’s a tax on the sale. With a 1031 exchange – commonly called a “Starker” exchange – the tax can be deferred. The catch is that a 1031 exchange must follow IRS rules exactly otherwise it won’t work.

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• The exchange must involve “like-kind” business or investment property that is traded for replacement business or investment property. For instance, you can trade an investment condo for a single-family home to be used as a rental, or an investment duplex for a triplex. The IRS says properties are of like-kind “if they are of the same nature or character, even if they differ in grade or quality.”

• The proceeds from the sale must be held by an outside party in an escrow fund.

• Generally you can “identify” up to three replacement properties within 45 days of closing on the first property, or any number of properties, provided they do not have in total twice the value of the original property. You must close on the replacement property within 180 days.

• A 1031 exchange may not defer all taxes. There can be situations where one property is exchanged for a replacement property of lesser value, leaving a taxable “boot.”

You want to carefully document all aspects of the exchange. You also want to hold onto the paperwork – it may be needed years or decades later to establish the taxable basis for the replacement property if it’s ultimately re-sold or exchanged.

For specifics speak with a tax professional and an attorney who specializes in real estate. Also, see IRS Form 884 and IRS Publication 544. Local real estate brokers who concentrate on exchanges can provide further advice.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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