To qualify as "like-kind" property for a Section 1031 Exchange, the investor's relinquished and replacement properties must be real estate that has been and will be held for productive use in the investor's trade or business or held for investment.
Whether an investor's real estate is owned free and clear or encumbered, the benefits for a tax deferred exchange are significant. The tax dollars saved by doing an exchange can be utilized to purchase additional investment property.
Under Section 1031 of the Internal Revenue Code, capital gain tax may be deferred on the sale of real estate held for productive use in a trade or business or for investment when it is exchanged for "like kind" real estate to be held either for productive use in a trade or business or for investment. To obtain the benefits of this "Safe Harbor" protection of the tax code - to prevent actual or constructive receipt of the exchange proceeds, and thereby disqualify the exchange for favorable tax treatment - prudent investors use the services of a Qualified Intermediary such as Asset Exchange of Oklahoma, LLC. As a Qualified Intermediary, Asset Exchange acts as a principal party to the exchange transactions in both simultaneous and delayed transactions, providing the investor with the necessary reciprocal transfer of properties and the "Safe Harbor" protection against actual and constructive receipt of the exchange funds as required by Section 1031.
Generally, pursuant to Section 1031, in order to avoid paying any capital gain taxes on the sale of real estate, the investor should attempt to:
1. Purchase replacement real estate with a net sales price equal to or greater than the relinquished property.
2. Reinvest all of the net equity in the replacement property.
3. Obtain debt on the replacement property equal to or greater than the debt on the relinquished property.
"Buyer hereby acknowledges it is the intent of the Seller to effect a Section 1031 tax-deferred exchange, which will not delay the closing or cause additional expense to the Buyer. The Seller's rights under this agreement may be assigned to Asset Exchange of Oklahoma, LLC, a Qualified Intermediary, for the purpose of completing such an exchange. Buyer agrees to cooperate with the Seller, and the Qualified Intermediary to complete the exchange."