advertisement

A 1031 exchange delays, not eliminates, capital gains taxes

Q. I have a question about a 1031 exchange. Am I required to use the entire proceeds from my sale on my purchase of the new property or can I take some of the proceeds from my sale and use the balance for my purchase? What would be the tax ramifications if I took some of the proceeds from the sale?

A. First, for readers not familiar with a 1031 exchange (also known as a Starker exchange), Section 1031 of the Internal Revenue Code provides an opportunity for the seller of investment real estate to defer capital gains taxes upon the sale of their property.

There are numerous rules and provisions to successfully qualify for the exchange. However, presuming the provisions of Section 1031 are met, a seller of investment real estate can use the proceeds from the sale of their property to purchase "like kind" property and avoid, at least for the time being, paying capital gains tax on the sale. Like kind property is viewed liberally by the IRS. An apartment building can generally be exchanged for vacant land; however, it cannot be exchanged for a fork lift.

The question posed here is whether all the proceeds from the sale must be used on the "replacement property" to qualify for deferred capital gains tax treatment under Section 1031. The simple answer is yes. For example, if a seller has a $50,000 capital gain on the sale of investment property, and then spent $25,000 to purchase a replacement property while keeping the remaining $25,000, as a general rule, he or she would then pay capital gains tax on the pocketed $25,000.

There are numerous rules and provisions that govern these transactions and the scenario above is very basic. Anyone considering a 1031 exchange should speak to a professional experienced with these types of transactions.

Q. I would like to have my ownership of an apartment building concealed from the public. I bought the building about 15 years ago. However, at this time, it would be best if my ownership of this building was not available to the public. How can I accomplish this?

A. If you purchased the building in your name 15 years ago, there is no way I'm aware to remove yourself from the public record as owning this building. You could convey ownership of the property into a land trust of a different name, making yourself the trustee. Unfortunately, the county records would disclose you personally purchased the property 15 years ago and that you recently conveyed the property into the land trust. The only way to truly keep your name out of the county records would have been to have the property conveyed directly into the land trust from the original seller 15 years ago. This way, the only place your name is found is on the land trust agreement, which is not of public record.

• Send your questions to attorney Tom Resnick, 345 N. Quentin Road, Palatine, IL 60067, by email to tdr100@hotmail.com or call (847) 359-8983.

Article Comments
Guidelines: Keep it civil and on topic; no profanity, vulgarity, slurs or personal attacks. People who harass others or joke about tragedies will be blocked. If a comment violates these standards or our terms of service, click the "flag" link in the lower-right corner of the comment box. To find our more, read our FAQ.