Section 1031 Exchanges and the Auction Industry (Part 1)

In the summer of 2008, I was honored to be asked to author an article for The Auctioneer, the official publication of the National Auctioneers Association, on the subject of Section 1031 exchanges and their application within the auction industry. The article was published in the September 2008 issue. If you would like to access the article online, it can be found on pages 62-64 of this link: The Auctioneer. The article is reprinted in three blog entries; this is the first of the three:

The purpose of this article is to provide basic information about Section 1031 exchanges and discuss some particular matters that apply to exchanges and the auction industry. Ultimately, the idea is to supply you with another arrow in your quiver to distinguish your company from your competitor who is not familiar with the benefits that Section 1031 exchanges offer.

What is a Section 1031 exchange? Section 1031 of the Internal Revenue Code was made a part of US tax code in the early 1920’s, shortly after our modern income tax code came into being through the ratification of the Sixteenth Amendment in 1913. Section 1031 allows the owner of property held for investment or used in a business to dispose of that property through a sale and reinvest the sale proceeds in new property that will be held for investment or used in a business and defer any taxes on capital gains. (A taxpayer can exchange either real estate or business personal property or both.) The net effect of this tax savings is that more money is available for the purchase of the new property; sometimes a lot more money. There are a number of factors that determine the taxes owed on a sale when an exchange is not utilized, but in some cases taxes can represent a very sizable portion of the client’s proceeds. In extreme cases, more taxes might be due than proceeds received!

Over the years since Section 1031 was added to the US tax code, the IRS has made many aspects of exchanges much clearer as to what is allowable and what is not. Today, while there are still areas of gray, in most cases a knowledgeable exchange expert can offer a quick assessment of the viability of an exchange in a given situation.

When you are involved in selling property that has been held as an investment or used in a business and your client is considering reinvesting the proceeds in new property, it will demonstrate your concern for your client’s best interests if you bring up the possibility of a Section 1031 tax-deferred exchange. You do not need to be an expert in exchanges; you merely need to know an expert whom you can call on for help. Back in 1991, Treasury Regulations established the use of an entity known as a Qualified Intermediary to handle exchanges. Qualified Intermediary companies come in a wide variety of sizes, much like auction companies. Find out who handles exchanges in your area. One way of doing that is to visit the web site of the national association for the industry, the Federation of Exchange Accommodators, at www.1031.org, and use the Member Locator for your area. Many QIs, including my company, work nationwide. Establish a relationship with a QI or two so you can call on them for assistance when one of your clients might benefit from an exchange.

The diagram below illustrates the basic structure and requirements of an exchange.

(Article is continued in Part 2.)

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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange

Ken Tharp

800-805-1031 toll free

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges and the Auction Industry (Part 1) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.