Tax-Deferred Exchanges - The Last Tax Shelter!
Tax deferred exchanging is an investment strategy that should be considered by anyone who owns investment real estate. The Internal Revenue Code Sec.1031 provides investors with one of the last available tax shelters by allowing them to avoid paying any taxes when an investment property is exchanged.

The general rule is that if property is sold in a typical sales transaction, gain or loss may be recognized. However, Section 1031 basically provides an exception to the general rule by providing that gain or loss will not be recognized on the exchange of business or investment property if it is exchanged for "like kind" property. The gain is not forgiven, but is simply rolled into the new property and may be recognized later when a typical sale takes place.

"Like kind" property refers to the nature, character, or class of the property, not to its grade or quality. This definition would include an exchange of real estate for other real estate. As long as both parcels are in the U.S., the specific location of the property does not matter. The non-recognition provisions do not apply to stock in trade (inventory), stocks, bonds and notes, interests in partnerships, or other securities.

How an Exchange Works
Two property owners rarely want each other's properties. In reality, most exchanges involve three parties: the taxpayer who wants to dispose of his property but delay taxation, the buyer for that property, and a seller who has property that the taxpayer wants to acquire. If the taxpayer sells his property, then re-invests the proceeds into the new property, he will have to pay taxes on the gain on selling his property, and will not have the full value to invest. By exchanging, he is dealing with the full property value and not one reduced by taxes.

In concept, the buyer purchases the property the seller wants to acquire and then the buyer exchanges it with the seller. The seller disposes of his property and gets a replacement property without paying taxes, the buyer parted with his money and got the property that he wanted, and the third party simply sold his property. In reality, all three parties normally have a closing on the same day in which they come in with the properties that they have, and leave with the properties or cash they want.

With careful planning and a sharp eye toward timing, the above transaction can be expanded somewhat. The above example assumes that the three parties can come to the same closing table to conclude the transaction. However, the taxpayer can defer the selection of his new acquisition for 45 days and the actual taking of it for 180 days if he is careful. Thus, if Taxpayer has a potential buyer ready to deal today, but Taxpayer has not yet found the property that he wants to acquire in the exchange, he can proceed with a transfer of his own property to Buyer and have the proceeds placed in an escrow account. He must then select the property he wants to acquire within 45 days, and must actually take title within 180 days of the disposition of his own property. This delayed exchange can be tricky, and should not be undertaken without professional advice for the specific facts involved.

What Is Like-kind Property
Like-kind property refers to the nature, character, or class of the property, not to its grade or quality. Thus an exchange of real estate for real estate is a like-kind exchange. It doesn't matter where the property is located or whether it is improved or unimproved. This means not only exchanging an apartment building for an apartment building but also exchanging an apartment building for a farm, vacant land, a cranberry bog, or any other real property, as long as the new property is not the investor's personal residence. The requirement in the statute that the exchange is only available for "business or investment property" eliminates an exchange of the Taxpayer's residence under this section. Further, he must intend to keep the newly acquired property for at least a year. To sell it sooner may classify the Taxpayer as a dealer, since these provisions only apply to exchanges of property for productive use in a trade or business or for investment purposes.

"Boot" or Liabilities in Exchanges If a Taxpayer receives boot (money or other non-exchangeable property) in the exchange transaction, gain will be recognized to the extent of the boot received prior to recognizing the tax deferral provisions of the exchange. Thus, gain will be recognized and taxes will be paid on the cash received. To avoid this problem, make the exchange so that cash is not received. Liabilities transferred to the Buyer will be treated as boot received.

If boot is given in the exchange, the amount of the boot simply increases the Taxpayer's basis or cost in the property acquired. Liabilities assumed will be treated as boot paid. However, liabilities transferred will be netted against liabilities assumed to determine the net amount of any boot.

Basis in Exchanges
In tax terms, basis refers to the net, adjusted cost of a property. In real estate, it is common to depreciate the improvements in a property over its useful life. Thus, a parcel that costs $60,000 may be depreciated down to a current tax basis of $50,000.

However, the actual property could have gone up in value to $200,000 due to location, inflation, etc. The Taxpayer will be exchanging his property for other property worth $200,000. In acquiring the new property, his old net depreciated basis of $50,000 would be transferred to the new property. In essence, the basis for the old property simply becomes the basis for the new property. Thus, if he later sold the new property, he would have a gain on the difference between the sales price of the new property and the $50,000 carryover basis. Future depreciation on the new property would be limited to the basis figure of $50,000 also.

Exchanges with Related Parties
If an exchange occurs between related parties, and if either party disposes of the exchanged property within two years of the last transfer of the exchange, then gain or loss not recognized in the exchange will be recognized and taxed. The term "related parties" includes a Taxpayer's family, brothers, sisters, ancestors, lineal descendants, and corporations with more than 50% control by related parties.

Identity Theft - A Growing Problem
Identity theft causes problems for adults and teens! "Identity theft happens when an opportunity arises and thieves are not very particular to one's age, if there is a credit/debit card number to be had. Identity theft, including, but not limited to, Social Security (SS) number, driver's license, bank accounts, PIN numbers, credit/debit card numbers is one of the fastest growing crimes against consumers, both young and old," says the nonprofit Institute of Consumer Financial Education (ICFE), a San Diego-based group.

If your wallet has been lost or stolen, usually within hours, thieves may order expensive monthly cell phone service, apply for other credit cards, get credit lines approved, receive a PIN number from the DMV to change your driving record information online, and more, unless you make a few very important telephone calls that will limit the damage.

First call the three major credit reporting agencies (Equifax:1-800-525-6285, Experian:1-888-397-3742 and Trans Union:1-800-680-7289) and ask them to immediately place a Fraud Alert on your name and SS#. The alert means any company that checks your credit knows your information was stolen, and they have to contact you by phone to authorize new credit.

Next, notify the SS national fraud hotline at 1-800-269-0271. Then, cancel your credit cards immediately. Be sure to keep the toll free numbers and your card numbers handy so you know whom to call. If you have not made a list, a simple way is to photocopy the contents of your wallet (do both sides of each license, credit card, etc.), then add their toll free phone numbers to the list

Last, but not least, file a police report the same day, if at all possible, in the jurisdiction where it was stolen. This proves to credit providers you are diligent, and is an important first step toward an investigation.

In addition to safeguarding your wallet, you need to play it safe on the Internet. There are plenty of commonsense rules and take-charge tips for safeguarding your privacy online.

Bulletin Boards/Chat Rooms | Be aware that when you provide your name and/or messages to others online through a bulletin board or chat group, they'll probably be able to find out how to communicate with you - whether you want them to or not. When participating in online chats or bulletin boards, consider using a screen name that doesn't directly identify or reveal information about you (gender, location, etc.).

Children | It is now the law for Web sites to put added protections in place to protect the privacy of children under 13. One of the main parts of the law is that Web sites must get verifiable parental consent before engaging in ongoing communications with a child. Teach your children not to give out their names or other personal information online without your permission - just as they should not talk to strangers! Tell your children to get your permission before responding to online surveys or to games, clubs, or prizes that require personal information for eligibility. If a Web site tries to get your child's personal information without your okay, you should report that site to the Federal Trade Commission (www.ftc.gov).

Credit Reporting Agencies | Remove your name, and everyone else in your household, from credit reporting agency mailing lists to stop receiving unsolicited "pre-approved" credit card offers. Under a new law, the three national credit reporting agencies provide a toll-free number for you to call to be removed from their mailing lists: For Equifax, Experian, and Trans Union: 1-888-567-8688.

Credit Cards | Don't send your credit card number or other sensitive, personal data by email unless you're assured that the data is encrypted with the latest software technology. Encryption technology scrambles the information you send online. If in doubt, request an alternate payment method for your online transaction. Don't believe Web sites that tell you that your credit card number, or other personally sensitive data, doesn't have to be encrypted.

Direct Marketing | Scale back on grocery purchases with a credit card or savings club card. Once they have scanned your card, marketers know your buying habits and may target you for solicitations. Remove your name from national mailing, telemarketing, and e-mailing lists with the help of the Direct Marketing Association (www.the-dma.org). The site's consumer section tells you how to delete your name and provides forms that can be down loaded.

Guard the home | Avoid, if possible, giving out any information that can be linked to your home address. Avoid putting your address and driver's license number on personal checks, if possible. Keep your mother's maiden name private, as it's often used by companies to verify your identity. Shred financial, medical, and other personal private documents before discarding them. Be especially cautious about giving out your social security number. Employers, banks, and other businesses that are required to report your income to the IRS have legitimate need for your social security number, but very few other businesses do.

Passwords | Don't create a password that's similar to your real name, commonly used nickname, or online screen name. Also, never use your social security number as your password. Guard your online password vigilantly. Never offer it to anyone who asks for it, even to someone who says they're calling on behalf of your Internet service provider. Don't store your password near your computer, or in your desk.

For more information about protecting yourself against identity theft, visit the U. S. Government's Web site on ID fraud: http://www.consumer.gov/idtheft/ and the National Fraud Information Center at http://www.fraud.org/.