I.R.C. 1031 Tax Deferred Exchange
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Let's assume that your parents own some highly appreciated undeveloped land and they need to convert it into a source of income. Most likely they will first think about selling the land and then investing the after tax proceeds. This will subject them to a federal capital gains tax of up to 15% on the sale of the land, plus any state income taxes that might be applicable.
But, with your help, they might be able to convert their land into an income producing real estate property that could be managed by a real estate professional. This can often be done with what is known as a tax free exchange -- although it's really a tax deferred exchange.
Tax code section 1031 permits taxpayers to make an exchange of like kind property on a tax deferred basis. Except for real property, the like kind rule is interpreted very strictly by the IRS and the courts. But for real property, the concept of like-kind is very liberal.
The variety of exchange properties can range from raw land for factory buildings, office buildings for golf courses, an amusement park for an apartment building and just about any other property that is primarily land and improvements -- other than a residence.
The key to a tax deferred exchange is to get the help of a specialist. You can usually find them in the phone book of any major city under real estate consultants or brokers. Call a few and ask if they can refer you to someone who is a specialist in Section 1031 exchanges. Although a basic explanation of the tax deferred exchange is fairly simple, the details are not and you will need the help of someone who is on intimate terms with these rules. If you do a search on the Internet using "IRC 1031" and/or "tax deferred exchange" pr "tax free exchange" you will find an abundance of web sites with further details about this arrangement.
Copyright, 2003, Vernon K. Jacobs
Vernon Jacobs is the Editor/Publisher of The International Wealth Protection Reports, which are a collection of research reports on legal methods of asset protection and tax avoidance. Further information on this subject is available at http://www.offshorepress.com/ Jacobs is a CPA who has worked as a free lance tax and financial author/editor since 1977. Details about his credentials and experience are online at http://www.offshorepress.com/vkjcpa/
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