Miami Real Estate - 1031 Exchange -
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Thanks to IRC 1031, a properly structured exchange allows an investor to sell a property,to reinvest the proceeds
in a new property and to defer all capital gain taxes. IRC 1031 (a)(1) states:

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade
or business or for investment, if such property is exchanged solely for property of like-kind which is to be
held either for productive use in a trade or business or for investment."

To understand the powerful protection an exchange offers, consider the following example:

• An investor has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $130,000 remains to reinvest in another property.
• Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $520,000 new property.
• If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.

As the above example demonstrates, exchanges protect investors from capital gain taxes as well as facilitating significant portfolio growth and increased return on investment. In order to access the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process and the IRC. For instance, an accurate understanding of the key term like-kind - often mistakenly thought to mean the same exact types of property - can reveal possibilities that might have been dismissed or overlooked. API is your resource to obtain accurate and thorough information about the entire exchange process.

Taxpayers nationwide are able to acquire better performing properties or meet other investment objectives by under-standing the great variety of properties that can be exchanged under Internal Revenue Code Section 1031.
There are, however, some types of assets that do not qualify for non-recognition treatment, such as:

1. 
   Stock in trade or other property held primarily for sale: The exclusion encompasses two aspects - A)
   "Stock in trade," which is property held for sale to customers in the ordinary course of the taxpayers'
   trade or business resulting in gain taxed as ordinary income and; B)
   "Property held primarily for sale," which is a much more expansive category of ex-cluded property.
   The word primarily is viewed as being held "principally" or "of first importance.
   [Malat v. Riddell, 383 US 569, 5 L. Ed. 2d 154, 86 S. Ct. 244 (1966)].
   
   Generally the IRS considers property held primarily for any disposition as falling
   into the category of property held primarily for sale.
   [Rev Rul 75-292, 1975-2 CB 333; Wagnesen v. Comm., 74 TC 653 (1980)].
   
   See Asset Preservation's flyer titled "Property Held for Sale" for a more exhaustive list of factors the IRS reviews
   to determine if a taxpayer is holding a property primarily for sale.
   
   
2. 
   Stocks, bonds or notes: Although stocks can be exchanged in a corporate reorganization
   under IRC 1036(a)and certain United States bonds under IRC 1037, none of these types of transactions
   qualify for tax deferral under IRC 1031.
   
   
3. 
   Other securities of evidences of indebtedness or interest: The scope of this category is not clear because
   most of the court cases addressing this category are obsolete after the 1984 amendment excluding partnerships
   interests from 1031 deferral. Check with your tax and/or legal advisor.
   
   
4. 
   Interests in a partnership: In 1984, the exclusion of an interest in a partnership was added to the Internal Revenue Code.
   [Tax Reform Act of 1984, Pub. L. No.98-369, 98 Stat.494: IRC 1031(a)(2)(D)].
   
   Although a partnership or limited liability company (LLC) can perform an exchange at the entity level,
   the individual partnership interest or LLC member interest is excluded. However, an interest in a partnership
   that has made a valid election under IRC 761(a), to be excluded from the application of subchapter K,
   is treated as an interest in each of the assets of the partnership and not as an interest in a partnership.
   A thorough discussion is beyond the scope of this article and taxpayers should get guidance
   from their tax and/orlegal advisors regarding timing and other issues involving exchanges where
   property has been held in a partnership or LLC.
   
   
5. 
   Certificates of trust or beneficial interests: These represent a right to an interest in the stock or
   a corporation and are not considered real property.
   
   
6. 
   Choses in action: A chose in action is a right to recover or receive money or other consideration or property,
   but a chose in action is not considered property in itself. Courts typically look to state law for
   the definition of a chose in action.
   [See Miller v. United States, 63-2 USTC & 9606, SD Ind 1963].
   
   The chose in action exclusion is vague due to the difficulty in defining the term itself and it has rarely
   been used to disallow non-recognition treatment in an exchange.
   Some major league player contracts have been considered a chose in action and denied exchange treatment.
   [Ltr Rul 8453034; Heltzer v. Comm., TC Memo 1991-404, 62 TCM 518, 537]
   
   

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