"Door County Real Estate" by: Kevin Nordahl, REALTOR®

Understanding Capital Gains in Real Estate (Part II)
“The 1031 Tax Deferred Exchange”
(Portions reprinted by permission of Realty Exchangers Inc.)

As a Senior Sales Associate I often get asked the question, “So how are real estate investments doing in Door County this year?” When I reply with a vague or nonspecific answer it often appears sly or manipulative until I explain that any “investment” advice must go through an “investment” broker. I work as a real estate agent whose primary duty it is to SELL real estate. Advice on investments is not a specialty to any REALTOR not also licensed as an investment broker.

So what is a 1031 “Starker” exchange and how does your real estate agent incorporate your property into a 1031 “Starker” exchange? Simple, your agent creates a contractual provision in the offer which allows the parties to a transaction the ability to perform this valuable tax tool. According to the Realty Exchangers Inc. website a 1031 “Starker” exchange incorporates some of the following elements (such criteria are by no means exhaustive):

Definition : The §1031 tax deferred treatment of capital gains is one of the best real estate investor vehicles for preserving and building real estate wealth: This provision of the Internal Revenue Code allows property owners to exchange their property for other like-kind property without recognition of capital gains. It makes possible to transfer the financial gain that is realized from the sale of a property into another property without federal capital gains tax at the time of the sale.

Conditions : There are 3 conditions that must be met to accomplish non-recognition of gain under §1031:

The properties exchanged must qualify, and be of "like-kind".
There must be an actual exchange, not a transfer of property for money only.
The time requirements must be strictly followed.

Vacation Homes : A vacation home or second home not held as a rental is classified as real estate held for personal use and does not qualify for §1031 treatment. However, under the rules of §280, a dwelling unit held for both personal use and rental purposes must take a use test each tax year to determine its tax classification for that tax year:

The property is treated as real estate held primarily for personal use and treated as an asset not held for profit if the owner's personal use is more than 14 days or 10% of the total rental days, and the unit is rented for one day or more during the tax year. Does not qualify for §1031 treatment.

The property is treated as rental property if the owner's personal use is no more than 14 days or 10% of the rental days during the tax year and the property is rented more than 14 days during the tax year. May qualify for §1031 treatment. (Internet source: Realty Exchangers Inc. Procedure Manual and Information Booklet: http://www.1031agent.com)

There are MANY aspects surrounding the qualifications and handling of a Starker exchange that are best handled by an accountant, tax specialist or attorney. Real estate agents, without such credentials, should refer you to such professionals prior to including such provisions into any offers to purchase. I have chosen to include the segment on vacation homes as a courtesy to the many inquiries we receive on this matter.

This publication is designed to provide accurate and authoritative information from a third party in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or tax services. If legal advice or other professional assistance is required, the services of a competent professional person should be sought.

Kevin Nordahl is a life-long resident of Door County, a REALTORŽ and a member of the Door County MLS. He is a Past President of the Door County Board of REALTORS® and a Senior Sales Consultant at Coldwell Banker Door County Horizons in Fish Creek. He may be reached online at knordahl@doorcountyrealestate.com or by phone at (920) 493-4004.

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