Tips for Investors
Part 1 of 1031 Exchanges for Resort Real Estate
By The Walsh Group

Ever thought of using the significant tax advantages of a 1031 exchange for Keystone CO or Breckenridge CO real estate transactions?  Some shy away from trying out something different; other buyers and owners in the Breckenridge and Keystone CO real-estate markets have saved millions!  Often overlooked, a 1031 exchange is considered one of the best-kept secrets in the Internal Revenue Code.

Who should consider a 1031 exchange?  If a real property of Breckenridge real estate or Keystone real estate will net a gain upon sale, then the owner is in a prime position to consider a 1031 exchange.  Generally, this type of property has been substantially depreciated for tax purposes and/or has appreciated in fair-market value.

Under section 1031 of the Internal Revenue Code, a real-property owner can sell his property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains taxes.  To qualify as a like-kind exchange, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations. 

It helps to know that there are five tax classes of property.  1) Property used in taxpayers trade or business, 2) Property held primarily for sale to customers, 3) Property used as your principal residence, 4) Property held for investment, and 5) Property used as a vacation home.  Section 1031 applies to #1) and #4).  It potentially applies to #5). 

Some tricky definitions will help owners get a sense of their qualifications.  Business use is defined as, "To hold property for productive use in trade or business."  Therefore, property retired from previous productive use in business can be qualifying property.  Investment purpose defined as real estate, even if unproductive, held by a non-dealer for future use.  Or it could be an investment held for an increment in value and not primarily for sale.  Investment is the passive holding of property, for more than a temporary period, with the expectation that it will appreciate.  Property held for sale in the immediate future is not held for investment.

Why consider a 1031 exchange?  Primarily to defer paying capital gains taxes and to use as leverage.  A properly structured exchange can provide real-estate investors with the opportunity to defer all of their capital gains taxes.  By exchanging, the investor essentially receives an interest-free, no-term loan from the government.  It provides relief from property management as the lessee takes the responsibility to sublet and maintain the property allowing real-estate buyers to avoid most of the day-to-day management headaches.  It can also help to upgrade or consolidate property, create diversification when the owner can own multiple properties rather than just one, and create an avenue for relocation to a new area.  The 1031 can accommodate differences in regional growth or income potential and change property types among residential, commercial, and retail, etc.  (Continued in 1031 Exchange, Part 2.)