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Afraid of the capital gains bill you'll pay unloadingbusiness or investment property that soared in value during thereal estate boom? Don't sell--swap. A Section 1031 exchangeallows you to sell a property used for business or investment andreinvest your gains in a second property--also used for business orinvestment--without paying taxes on your profit, says DerrickKinney, senior financial advisor with Ameriprise Financial inArlington, Texas.
Permissible since 1990, 1031 or "like kind" exchangeshave increasingly come into favor, thanks to soaring propertyvalues. "The buzz around these is just beginning," saysKinney, who notes that exchanges offer a way to address the taxproblem highly appreciated property can present.
A 1031 exchange won't enable you to cash out of your realestate investment, nor can it be used for a primary residence. Butit will let you trade in a holding that may have peaked in valuefor one in a more promising location.
The caveat? Satisfying the IRS means meeting multipletechnicalities, among them closing on your new property within 180days of selling your current one and having a qualifiedintermediary handle the sale and purchase. "It's acomplicated process, and you may pay up to 0.25 percent of theselling price in fees [to an intermediary]," says Kinney, whostrongly urges property owners to undertake a 1031 exchange onlywith the advice of a tax consultant. "But the tax savings byfar outweigh the effort and expense involved."
