July 26, 2014

Wealth Management

1031s: The Investment-Property Tax Shelter

Amy Keller | 10/1/2006

More real estate investors are becoming familiar with the number 1031. That's the Internal Revenue Code that allows investment- property owners to delay paying taxes on a sale if they buy similar investment properties. Nationally, the volume of 1031 exchanges increased from about $90 billion in property value in 1999 to $210 billion in 2003. The taxdeferral tactic is particularly popular in Florida: Although 1031 exchanges can be used to trade everything from airplanes to artwork, real estate is the top item swapped. After closing on a deal, a seller has 45 days to identify typically three exchange properties and 180 days to complete the transaction.

Once investors "figure out they can build their portfolio of real estate without paying taxes, then they're hooked for life," says Gary Gorman, a retired CPA and founding partner of The 1031 Exchange Experts, which has six offices in Florida and seven in other states. The typical Florida 1031 exchanger sells a lot or vacation home in Florida and buys a bigger unit -- "whether it's in a condo or just a stand-alone house along the beach or a house on a golf course," says Gorman, who's been overseeing 1031 exchanges since 1972. Stephen Wayner, vice president of Miami-based Bayview Financial Exchange Services, says the tax loophole is attracting "all different types of people," everyone from the small condo owner who doesn't want to pay taxes on his profit to the "major investor who bought 500 acres of raw land and is now selling it off to use that money to buy two or three shopping centers."

The Ginn Co.'s $63-million purchase of 4,500 acres between Fort Myers and Naples in July 2005 was a boon for the development company, which plans to build an 18-hole golf course and luxury homes on 334 estate-sized lots adjacent to Florida Gulf Coast University in Lee County. It was also a big win for seller Alico, an agriculture giant in central and southwest Florida. The company avoided a big tax hit on $9.2 million worth of the proceeds by purchasing 291 acres of citrus groves, woodlands and pastureland in Polk County. "I've used 1031 exchanges for a long, long time ... probably close to 30 years," says Alico Chairman and CEO John R. Alexander. "We're into agribusiness and land, and when we trade, we regularly look for a 1031 exchange situation if possible."

In 2002, the government laid out the rules by which investors can use 1031 exchanges to invest in Tenant In Common transactions. TICs provide a way for two or more investors to share ownership in a property -- a setup that gives smaller investors a way of owning a fraction of larger, Class-A properties. Before the ruling, the seller of a $35-million building had to find a buyer who could fork over $35 million. Now, theoretically, that seller can find 35 investors willing to put up $1 million each to own a slice of the building.

Tags: Around Florida, Banking & Finance

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