|
Tax-Free Exchanges: They’re Worth A Look
By Peter M. Gillon and Marvin A. Kirsner
As the brownfield market evolves, many developers and investors have come to
the point of selling their redeveloped properties and need to start thinking
about what to do with their proceeds. Many traditional real estate investors
have used tax-free exchanges as a way of deferring the tax paid on the profits
generated from a sale and they can be viable strategy for brownfield developers
to consider.
The tax code allows for a tax-free exchange, sometimes known as a “like-kind”
or 1031 exchange. This provision allows a real estate investor to exchange real
estate for another interest in real estate without paying income tax on the
gain.
In connection with brownfields, 1031 exchanges may permit a developer to realize
the increase in value of his property due to site development without bearing
the ordinary income tax or, in the case of property held for more than one year,
the 15 percent capital gains tax on its sale.
The mechanics of a like-kind exchange work like this: First, both the property
being exchanged (the “relinquished property”) and the property being
received (the “replacement property”) must be either held for investment
or used in a business. There is great flexibility as to what the replacement
property can be used for, as long as it meets the criteria.