Even out here in the wild west we do a little horse tradin’. And if you invest in property in or around Ennis, Montana, you can still take advantage of sophisticated financial tools, such as a 1031 Exchange. A tax deferred exchange is a method by which a taxpayer trades property, held for investment or business purposes, for replacement property resulting in a deferral of tax on the transaction. Whenever you sell business or investment property and you have a gain, you generally have to pay tax on that gain. This capital gains tax varies depending upon your particular situation. 1031 Exchanges are often referred to as “tax free exchanges” as the transaction itself is not taxed. Section 1031 of the Internal Revenue Code provides an exemption from current recognition of realized gain, providing that the requirements of the IRC are carefully met. Using an exchange will allow you to use more of your equity to acquire the property you desire by deferring capital gains tax. Generally you cannot go wrong in an exchange if you remember the simple rule that “You must trade equal or up in equity and/or debt.“ You may do a deferred exchange, but you must identify qualified replacement property within 45 days of the date you close on your relinquished property. You must actually close on the acquisition of the identified property within 180 days of the date you closed on your relinquished property.
You can complete an exchange as long as the relinquished property and the replacement property meet the definition of “like kind”. “Like kind” means the properties must be held for investment purposes or productive use in a trade or business (income producing). Basically, “like kind” property is any property not used as a personal residence. “Like kind” property may include leasehold interests of 30 years or more in duration, conservation easements, water rights, timber rights and mineral rights. Personal property exchanges are more specific in what is “like kind”, but can also be successful in completing livestock, equipment and vehicles.
In addition to the basic issues in each exchange, exchanges may have some especially complicated issues or traps for the unwary. Forgotten depreciation may lower the basis even more than originally thought or be subject to recapture. Related party ownership may create additional holding requirements. Property used for both personal residence and business or investment purposes may require some extra thought with regard to deal structuring. The 45 day identification period and the 180 day window for completion of the exchange can require some extra attention to detail. Building improvements on the replacement property may require extra work. Constant changes by the Tax Code regulations and other IRS and Treasury guidance requires that your exchange company be “up to speed” on the changes.
ERA Landmark Arrow Real Estate can help you find more information and resources to aid you in this decision. Or contact an Exchange Accommodator for more information:
Montana Exchange Services, Inc.
1006 W. Sussex Avenue
P.O. Box 549
Missoula, MT 59801
Toll Free: (866) 348-2577
Local: (406) 829-2577
Fax: (406) 541-4005
American Equity Exchange, Inc.
8 South Idaho, Suite C
PO Box 1031
Dillon, MT 59725-1031PH: (406) 683-6886
FX: (406) 683-4304
Toll Free: 800-237-1031