1031 Tax Exchange Benefits

Published on 08/26/05
By Todd Burton - Realtor, ABR - Oconee County Real Estate

Section 1031 of the Internal Revenue Code permits investment property owners
to sell a property and defer all capital gains taxes and depreciation
recapture taxes at the time of sale. When executing a 1031/Starker
Exchange, the seller must re-invest 100% of the sales proceeds into a
replacement (like kind) property or properties of equal or greater value to
receive the benefit of full tax deferral.

The
seller must identify replacement properties within 45 days of the close of
escrow and acquisition must begin within 180 days of the close of escrow of
the sold property. If the buyer does not identify and acquire a replacement
property between the specified time periods, he/she will be responsible for
all applicable taxes incurred by the sale.
A
Private Annuity Trust has distinct advantages over a 1031 Exchange
including:

The Elimination of Estate Taxes

In 2004 and 2005, $1,500,000 of a
decedent's estate is sheltered from the estate tax ($3,000,000 for a couple
if titled correctly). Any amount over this is subject to estate taxes
(otherwise known as the "death tax"). For example if a married couple had
$10 million in assets in a marital deduction bypass trust; $3 million would
be exempt from estate taxes, leaving the remaining $7 million subject to a
tax of up to 50% of the taxable estate.

A Private Annuity Trust removes the asset from the estate therefore
eliminating estate taxes on the assets in the trust. A 1031 Exchange does
not. In the example mentioned above this might mean a tax savings of over
$3 million dollars.

The Preservation of Today's High Real Estate Valuations

Many analysts believe that today's real estate markets
have peaked. After a peak comes the inevitable decline. Private
Annuity Trusts lock in today's market values. For
example if your property is worth $5 million dollars today, and the real
estate markets drop in value, that same property may be only worth $3
million in a declining market.

In a Private Annuity Trust, the trust can sell the property or asset and
lock in today's high values. In a 1031 Exchange the owner has merely
shifted the risk, not removed it.

Asset Protection Against the Threat of Lawsuits

All assets that are in a
Private Annuity Trust are considered outside the seller's estate. In the
event of a lawsuit, the assets that are in a Private Annuity Trust have been
considered non-attachable.

A Private Annuity Trust is a valuable tool used for asset protection against
lawsuits and creditors. In a 1031 Exchange the owner still has property and
still has liability concerns.

Do Away With with Property Management
Owning and managing a property can be very demanding. Some
people are looking to ease up a bit and others are seeking to exit everyday
management responsibilities altogether. A Private Annuity Trust
can allow a property owner to relinquish these tasks, lock in today's
property values, and enjoy retirement with a lifetime of income.

A Private
Annuity Trust will allow an owner to retire, relax, and receive a monthly
income fof

the rest of their lives with none of the worries of everyday management. In
a 1031 Exchange the owner still has to manage the properties and its
tenants.