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Thumb of Michigan | Trading revenue producing property for revenue producing property will meet the criteria for a 1031 exchange if done correctly. Not sure how the mis conception began about what "like kind" means, but a lawyer I used to hire (passed away now) once did a 7 sided 1031 which included farm land, mineral rights, and a income producing rental condo on the water. The key on all was that they were income producing assets. There is more than likely a better legal description to what I'm describing, that's why I'd always hire a qualified intermediary to do a 1031.
Another misconception I see regularly mis stated here is the belief that a buyer using a 1031 exchange can pay ANYTHING to make his exchange work- the price of the new asset doesn't matter, its all about avoiding the tax. That's just plain bull crap. If the value of the replacement asset is (just for example) $100, as determined by whatever means, the buyer can pay AT MOST $115 for the new asset. Yes, that's 15% more than the worth of the asset, but the buyer is going backwards if he goes to $116. The capital gains tax is 15%, if the asset is selling for 16% more than its true value, the buyer would be farther ahead just paying the tax. Walk away, the tax isn't deferred as it would be with a 1031, the deal is clean and cash is in hand. Too often I see references made that some 1031 money bought a $500 farm for $5000, it just ain't so. Unless the buyer is really using some bad info or there's another extenuating circumstance that I can't really think of right now.
I think a lot of problems concerning 1031's would be solved if income producing property (farm land in this case) was treated the same as a house is when sold, and the capitol gains are offset by the purchase of a different house. A home seller can receive the cash and take (I think, again check the rules) at least 6 months to identify a house of equal or greater value, don't remember now when the actual sale has to be completed. It would really be nice if all property was treated the same. Think of the possibilities if a 1031 could be used to trade into paper assets rather than real estate. I mean as long as we're wishing for something. | |
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Someone explain to me how a 1031 exchange is good for farmers...
