Your Money: August 2006

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In Real Estate, "Like Kind" Is a Strategic Option

By Nicole De Santis

In the greater Sacramento Metro Market, the number of 1031 exchanges has grown exponentially in the last few years, in large part spurred by the relatively weak stock market and the Sacramento region’s hot real estate market. The market may now be slowing a little, but the 1031 exchange still remains an attractive option for investors.
    Internal Revenue Code Section 1031 applies to “property held for productive use in a trade or business or for investment,” and it allows real estate investors to sell an investment property (“relinquished property”) and defer paying capital-gain tax or depreciation-recapture taxes at closing, if the equity from the sale is reinvested into more “like kind” real estate (“replacement property”) of equal or greater net value.
    If you keep “rolling over” your equity from real estate sales into more real estate throughout your lifetime (and then your children inherit your real estate portfolio when you pass on), you may never have to pay capital-gain taxes.

Like Kind
As long as an investor wishes to sell real estate and buy real estate, the term “like kind” provides many strategic options. It encompasses residential investment, commercial investment property and improved and unimproved property throughout the United States. For example, if you have $500,000 in equity in three time-consuming single-family rentals in Sacramento, you can sell them in a 1031 exchange, pool the equity and purchase a hassle-free 5 percent tenancy-in-common interest in a $20 million retail center in Texas, co-owned with 19 other investors.
Continued...

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