Housing Counsel, by Benny L. Kass

The Washington Post, Saturday, February 16, 2013

Postsez… The IRS Revenue Code, Section 1031 is a rule covering investment property you currently own and would like to swap and defer taxes that would have to typically be paid upon sale of an investment property. This rule is also known as a Starker Exchange.

Ø  Richardsez…This long-time contributor to the Post and local attorney, provides a good history and basis for Section 1031. As with many names on IRS rulings, this one comes from a private citizen, T.J. Starker who did an exchange and cited Section 1031 as his reason for not paying capital gains taxes. IRS said he waited too long to use that rule, however, the Appeals Court over turned the IRS and agreed with Starker. So the IRS implemented some rules and this article does a good job explaining the details.

Postsez…The IRS just issued proposed regulations on the new Medicare surtax, which one sentence says…”To the extent that gain from a like-kind exchange is not recognized for income tax purposes under Section 1031, it is not recognized for purpose of determining net investment income under Section 1211.”

Ø  Richardsez…What??

Postsez…In other words, if you do a 1031 exchange, you will NOT have to pay the 3.8 percent Medicare surtax. And while the regulations aren’t final, you have the right to rely on that language.

Ø  Richardsez…The language of Section 1031 talks about like-kind exchanges. Just because you have a townhouse, doesn’t mean you couldn’t exchange if for a commercial building or some other investment property. What you can’t do is sell your Parkfairfax condo you have owned since you got married and have rented it for nearly 20 years and exchange if for a place in Rehoboth Beach, that you would intend to use as a rental and second home.

Postsez…There are time restrictions on this exchange. You have to note in your listing to buyers that this is part of an 1031 exchange and once you sell, you have 45 days from the date you sell the relinquished property to identify the replacement property or properties. Then, within 180 days from the date of sale, you must take title to the replacement property.

Ø  Richardsez…The other qualifier to make all of this work is that you must not ever hold the proceeds from you investment property that you sold with the intention of exchanging. In order to that I have some advice.

·         Get with an agent who understands the process. You’ll want to ensure that your listing to buyers is correctly disclosed and an agent can assist you in quickly finding another property—45 days isn’t a lot of time.

·         Next, there are specialists who handle these transactions. I can provide a good experienced real estate attorney for this and there is a company in Virginia that only handles 1031 exchanges. Having these professionals in the loop prior to making this exchange will help in this complicated transaction.

If you decide to do an exchange and you need more information, just contact me at rmcguire@mcenearney.com.